At a time of surging population and strengthening housing demand, there is a more urgent requirement to deliver on the supply pipeline. However, that pipeline is clearly faltering in 2023.
There are fewer projects in the development pipeline, taking longer to complete. Already, residential building approvals are tracking to their lowest levels in nearly 12 years. What was a 9-month timeframe from approvals to completions has blown out considerably to two years plus. In our view, there are many diverse reasons for this slower pipeline.
- More expensive inputs. Building input costs have surged 32% in the three years to early 2023, and most dramatically in fuel, timber, tiles, sand and steel, adding considerable uncertainty to contract pricing. Timely delivery is also a concern, given lingering supply chain delays.
- Fewer available workers. Buoyant employment growth (May: +3.1% p.a.) and a rock-bottom unemployment rate (May: 3.6%) speak to the extremely tight labour market in Australia and the escalating challenge of finding and keeping skilled construction workers on the building site.
- Wet weather. Warmer Pacific Ocean temperatures since 2020 (known as La Niña) have produced increased rainfall in Eastern Australia. In turn, construction days lost to rain have risen noticeably, sufficient to drive increased contract allowances for inclement weather.
- Higher funding costs. The aggressive hikes in interest rates are impacting consumers and builders in equal measure. Development project feasibilities need to clear higher funding cost hurdles, often with more stringent cost management, increased equity and lower leverage.