What’s happening in the Australian construction industry?

Lets Review the Challenges facing Australian housing construction

We think it’s fair to say that nobody will be surprised to hear of the tumultuous couple of years we’ve experienced in the housing construction industry here in Australia. It seems like every few weeks we’re hearing of another construction company going under. And the stats show the sector is sadly still suffering the highest rate of insolvencies of any industry. The corporate watchdog Australian Securities & Investments Commission (ASIC), reported 2832 construction industry insolvency appointments in the 2024 financial year. A depressing 28% more than the previous year.

It’s why the Albanese Labor Government has focused on housing in the 2024–25 Budget with its promise to invest $90.6 million in the construction and housing sector. In this housing construction industry update, we’ll explore recent trends, challenges, and opportunities for investors, particularly those in the Australian Defence Force (ADF).

As property investment specialists, the team at Capital Properties know how vital it is to support the construction industry and educate investors on how to navigate this tricky market. It’s our job to make sure you know how take advantage of property investment opportunities to secure long-term financial future.

Book your Capital Properties Discovery Session to meet with our expert team and make sure you’re primed for investment opportunities. And remember, Capital Properties clients have access to our Property Investment Tools & Apps and Pinnacle Support Program.

On the go? Here’s 30 seconds of take outs:

• 2024 saw an increase in construction industry insolvency
• The government promised $90.6 million for the construction & housing sector in the 2024–25 Budget.
• Out of$258 billion worth of work in 2023, only $81 billion was in housing construction.
• Experts say that that 205,000 new homes per year are required but less than 175,000 new homes were built in 2023.
• Opportunities in the market:
  • Housing shortages means increased demand
  • Population growth
  • Net zero targets
• Issues facing the market:
  • Supply chain disruption
  • Higher material costs
  • Skilled labour shortages
  • Inflation and the cost of living
  • Lower housing approvals & net zero

Keep reading >>

Current housing construction situation

It might sound counterintuitive to hear that Australia’s overall construction industry is actually experiencing growth. The engineering sector, which focuses on building infrastructure for transport, energy, industrial, etc., has grown by 8.3% this year, and accounts for around half of all construction activity in Australia. However, home building isn’t following the same trend.  Out of $258 billion worth of work in 2023, only $81 billion was in housing construction.

This stalemate in housing construction, combined with other factors like increased population growth, has led to a significant shortage of rental accommodation which many are calling “the housing crisis”. Economists at the Housing Industry Association (HIA) have said that 205,000 new homes will be required each year to meet demand. With fewer than 175,000 new homes built in 2023, we’re falling well short of what’s required.

On the 8^th of May 2024, Julie Collins, the Minister for Housing, Homelessness and Small Business said: “Our Government knows that building more homes is the best way to address Australia’s housing challenges, which is why we have an ambitious national target to build 1.2 million homes.”

Issues and opportunities in Australian housing construction

So, let’s take a closer look at the current housing construction situation. Firstly, there are great opportunities for growth due to:

• Housing shortages = increased demand
• Population growth
• Net zero targets

But the industry is facing significant issues, including:

• Supply chain disruption
• Higher material costs
• Skilled labour shortages
• Inflation and the cost of living
• Lower housing approvals
• Net zero (yes, it’s an opportunity and an issue)!

We’ll examine each of these further below.

FACTORS DRIVING HOUSING CONSTRUCTION DEMAND

At the time of writing (October 2024) it’s projected that 167,000 new homes will have been built this year.  And the expectation is that it’ll average out to approximately 180,000 per year thereafter. This falls well short of the recommended 205,000 homes required to meet demand. Of course, this varies across different states and territories, but some states like Queensland are feeling it the most.

Source: https://www.amp.com.au/insights-hub/blog/investing/econosights-state-housing

Population growth

The Australian Bureau of Statistics (ABS) confirmed that Australia’s population reached a record 27 million earlier this year – and it shows no sign of slowing down. Almost 650,00 people arrived in Australia in the 12 months to March 2024. Australia’s population grew by 164,635 in the first 3 months of the year alone – 133,802 of those from overseas migration. This has led to a severe housing shortage, particularly in urban rental accommodations, driving rental prices higher and putting immense pressure on the housing market.

The ABS have predicted that overseas migration could continue to increase Australia’s population from 27 million in 2024 to somewhere between 34.3 and 45.9 million people by 2071.

Net zero targets

The Australian Government has developed an ‘Infrastructure Net Zero’ Initiative, working with government and industry stakeholders to create policies and encourage innovation to achieve the decarbonising of infrastructure. With support from organisations like the Australian Contractors Association and researchers from the University of New South Wales (UNSW), a national reference guide has been created to help move Australia towards its net zero target.

This innovation will of course come at a cost (estimated at $1.3m) to achieve new emissions targets, and specialist knowledge will be required. So, yes, this offers an opportunity for innovation and growth. But, in an already struggling industry these new challenges will be another obstacle to surmount.

AUSTRALIAN HOUSING CONSTRUCTION CHALLENGES

Supply chain disruption and higher material costs

The pandemic highlighted major issues with Australia’s construction supply chains. Customers were more understanding of the delays and shortages of critical materials in 2020, but the recovery isn’t happening as quickly as anyone would like. With global economies still reeling, the supply chain disruptions look set to continue for some time yet.

Materials like timber, steel, and concrete are still harder to come by, and higher shipping and production costs are continuing to drive up prices. The Hays Construction Industry Report Australia FY24/25 reported a 5.9% increase in overall construction prices in last year. These rising costs affect project timelines and budgets, making it difficult for developers to maintain a profit.

Skilled labour shortages

The Australian construction industry is facing a severe shortage of skilled workers. The above-mentioned Hays Construction Industry Report states that Australia will need 90k new construction workers – immediately – in order to meet the government’s housing targets. Build Australia puts the figure closer to 130,000​.

In the Feb 2024 ABS ‘Job Vacancies Survey’ construction businesses reported almost 280,000 job vacancies across the sector. That’s why the government announced a spend of $90.6 million in the 2024-2025 budget to increase the number of skilled construction workers. This includes a program for incentivised (or free) TAFE training and encouraging migration of skilled workers.

Interestingly the Irish Government had launched an expensive advertising campaign aimed at encouraging skilled labour to “build back home” to fill a shortfall of 50,000 jobs in Ireland. So, it will be interesting to see if our government’s plan to encourage migration of skilled workers will work.

Either way, these solutions certainly seem like long-term fixes to an immediate problem.

Inflation and the cost of living

Many Australian households are barely coping after 13 (almost) consecutive interest rate hikes in 15 months since May 2022. Rents are at an all-time high and essential items such as food, utilities and mortgage repayments have almost doubled in some cases. That means that people are more likely to stay in their existing homes, rather than risk applying for mortgages at higher rates. And many would-be homeowners have been priced out of the market.

Elevated borrowing costs also means that some developers have been cautiously awaiting more favourable interest rates before investing or re-investing.

Lower housing approvals

The combination of higher material costs, labour shortages and high interest rates result in less developers applying for new housing (dwellings). In fact, new dwelling approvals in Australia are at the lowest they’ve been for 12 years. For the year to June 2024 almost 163,000 houses and apartments were approved. That’s a drop of 8.5% on the previous year and the lowest we’ve seen since 2011-12.

Michael Bleby, Deputy Property Editor from Australian Financial Review (AFR) wrote in September 2024 that Labor’s hopes of building 1.2 million new homes in five years are fading fast. Master Builders Australia (MBA) estimates that only 1,033,962 new homes will be built over the five years to 2029, which is down more than 53,000 from the 1,087,325 total it predicted in April.

Outlook for Australian housing construction

In the Housing Industry Association (HIA) “Housing Australia’s Future 2024 Report”, they say: “this analysis has defined a range in which building activity will need to sit over the next thirty years. This is to account both for population growth and for the various factors defined throughout this report that influence housing demand. At an Australia-wide level, it is estimated to be between 190,000 and 275,000 new homes per year.”

The government is under pressure to relieve the current ‘housing crisis’ and the budget reflects this. With the Housing Australia Future Fund and the National Housing Accord they’ve allocated more than $9.5 billion to housing in this financial year. The good news is that economists predict this will start paying off. It’s predicted that there will be solid growth from 2026, with total building increasing to $130.4 billion – an increase of 9%.

Opportunities in the Australian housing market

To meet the escalating demand, the housing construction industry will need to invest in building innovation and sustainable practices as well as skilled labour. Builders are forced to offer more attractive workplace benefits, including competitive salaries along with training and development programmes that allow for career progression. This investment will pay off in the long term with more economical and efficient practices and better retention for skilled workers.

This housing construction industry update shows that changes are necessary to facilitate increased construction and they can’t come quick enough. Both state and territory governments are under pressure to streamline building approvals, and grants are available to encourage the adoption of innovative construction methods such eco-friendly buildings or prefabrication as well as investment in technology.

High rents and rental yields mean that many investors are taking advantage by putting money into new builds. The Australian Bureau of Statistics (ABS) show investor loans for new home construction increased by 7% before seasonal adjustment from June 2024 to $1.6 billion.

For ADF property investors, the changes in the housing construction industry presents challenges, but also opportunities. The team at Capital Properties are keeping a close eye on market trends and government initiatives aimed at boosting housing supply. It’s our mission to help you understand these dynamics so you can make informed decisions on when and where to invest to meet your long-term financial goals.

To make sure you’re perfectly poised to take advantage of any investment opportunities, we recommend that you book into our FREE Capital Properties Discovery Session and/or our Switched-On Strategy Series.

Note: This information is general advice only. Always do your own research and seek independent financial advice