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Rate Hikes Take a Toll on Home Building, Resulting in a Slump

A lacklustre pace of home building is expected to continue over the next two years and keep upward pressure on rents and house prices.

A string of interest rate hikes and a shortage of workers and materials have been keeping a lid on new home building, and fresh forecasts from the Master Builders Association show challenges intensifying rather than easing.

Compared to the last set of forecasts in February, interest rates have ticked higher than first imagined, and key legislation expected to boost housing supply has been delayed.

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Even with the Labor government’s signature $10 billion Housing Australia Future Fund finally set to pass parliament, new starts are likely to stay below the MBA’s 200,000 dwelling yardstick used to ensure enough homes are being built to keep up with population growth.

In the 2023/24 financial year, the industry is set to hit a low of 170,087 new starts.

Home building is expected to recover throughout 2024/25, but is not expected to crack the 200,000 threshold until 2025/26.

By 2027/28, home building is expected to hit a peak of 241,017 new starts.

The end of the interest rate hiking cycle will help underpin the recovery, especially for higher-density developments that have a lower risk appetite.

Recovery in home values would also likely attract more individuals and investors into the market after they sank over much of last year.

Bottlenecks holding up projects, namely labour and materials shortages, are also expected to clear and support a recovery in the coming years.

Residential builder Robert Shaw said the labour market was already starting to free up, but it was still a long way from pre-COVID levels, especially for subcontractors.

West Australian-based Daly & Shaw Building was also finding it easier to access materials, but there was still patchy availability, which was leading to delays.

“Before COVID, you were always dealing with something, but you could guarantee timelines and guarantee fixed prices,” Mr. Shaw told AAP.

“But now, I can’t fix timelines and total fixed price contracts because there’s still a lot you aren’t in control of.”

A wave of infrastructure projects is also expected to keep the construction industry busy while home building tapers off.

A healthy pipeline of transport and other major projects is tipped to keep the total value of building and construction activity growing over the next three years.

Total activity is expected to peak at $246.2 billion (US$158.3 billion) in 2026/27.

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