07.26.2023 Local News

4 Ways The Property Market Is Being Impacted By Rising Construction Costs

4 Ways The Property Market Is Being Impacted By Rising Construction Costs

How are rising construction costs affecting the Eastern Suburbs property market in 2023?

Late last year, we looked at some of the many factors behind why construction costs were rising. This was prompted by the staggering fact that residential construction costs increased by 11% over the year to September 2022 – their biggest ever jump since the GST was introduced.

In 2023, the trend of rising construction costs has continued, although CoreLogic’s Cordell Construction Cost Index (CCCI) showed the pace of growth has slowed to its lowest rate since September 2020.

In the June 2023 quarter, costs rose just 0.7%, following on from a 0.9% rise in the March quarter.

While this sounds modest, prices were charging along so much in 2022 that the CCCI still revealed an annual rise of 8.4% to June 2023.

Meanwhile, separate data from the Australian Bureau of Statistics (ABS) reveals that the cost of building inputs rose 12.3% in Sydney in the year to March 2023. That’s on the back of a 15.4% increase in the year to March 2022.

This means that it’s almost 30% more expensive to have building work done now than it was just two years ago.

With such a hefty increase, there’s little doubt that this will have some flow-on impact.

Here’s how we’ve seen rising construction costs impact the Eastern Suburbs property market.

1. The finished product sells for a premium

During the height of the pandemic, every second home in the Eastern Suburbs seemed to be undergoing renovations. However, if it costs more to do building work, buying a property that needs major renovation work or a knockdown rebuild suddenly becomes less appealing.

On top of this, the sheer volume of building work going on has seen wait times for tradespeople spiral out to years in some instances.

These factors and rising interest rates are forcing some prospective renovators to put the brakes on their building plans.
While not everyone has been affected equally, by late 2022, we’d observed buyers of entry-level or mid-range properties had especially become less willing to invest in a property that needed significant or costly building work.

This has led to increased demand for the “finished product”, or already renovated homes, which now tend to sell for a premium.

2. Some builders feeling the pinch

Sadly, we’ve all seen the headlines about building companies becoming insolvent lately. Last month Channel Nine reported that every day, two building companies are collapsing due to economic factors putting pressure on already tight margins.

In fact, data from ASIC shows that 2,023 Australian building companies have gone into liquidation since mid-2021 – roughly double the rate of most other industries.

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While many of the builders going under are large-scale companies building project homes, the residential market for alterations and additions is being affected too.

3. Developments being put on hold

Property developers are staring down the same rising construction costs and interest rate increases as homeowners. This means that it has become financially difficult for an increasing number of developers to proceed with their projects.

Some developers are sitting on development sites, having paused a new development or removed it from sale, with the hope that when market conditions change, it will become viable again.

The Guardian recently reported that in NSW, 16,400 dwellings with building approval had failed to materialise by the end of March 2023.

We’re relatively insulated here in the Eastern Suburbs because rising construction costs are easier for developers to absorb on more expensive, prestige properties in affluent areas. Larger developments with tighter margins tend to be impacted more.

However, the pipeline of future development is looking relatively dry, with the AFR reporting that just 298 new homes were approved in the Eastern Suburbs in the year to April 2023. With population increases and migration, it’s likely that we need many more than this.

4. Supply of housing will impact the sales and rental market

Property prices are set by the laws of supply and demand. Because higher building costs slow down the supply of new homes, this impacts where the supply and demand curves intersect.

In Sydney’s case, there are already serious supply issues, with not enough homes to accommodate our growing population. This is likely to become worse over the next couple of years, with 700,000 new migrants anticipated to arrive in Australia by the end of 2024.

Sydney house prices have already risen 5.3% this year, including 4.9% in the June quarter. An imbalance between supply and demand could well push prices much higher.

That said, most new arrivals tend to rent their homes before buying, and SQM data shows that rents have risen 19.6% in the past year across Sydney. Meanwhile, realestate.com.au data shows that, in Paddington, rents on houses are up 13%, and rents on units have risen 16.5% over the last 12 months.

Any slowdown in the delivery of new housing stock has the potential to impact the already tight rental and sales markets.

Thinking of buying or selling in Sydney’s Eastern Suburbs? Get in touch with my team today.