How increased construction costs are impacting the property market

How increased construction costs are impacting the property market

July 13, 2023 | by DiJones

Australia’s real estate market has experienced significant shifts in recent times. Following a sharp decline in housing values, the market has started what appears to be a healthy rebound, with two consecutive months of positive growth.1 As we embrace winter, the outlook for the market remains optimistic, driven by factors such as low competition, rising property prices, high clearance rates, and buyer motivation.

Here we delve into the current state of our property markets and take a look at some of the opportunities and challenges particular to the winter season.

So far, 2023 has been a strong year for Sydney real estate.

The median house value has risen 6.7% since the end of January, according to CoreLogic. That includes a 4.9% rise in the June quarter alone.

Here on Sydney’s Upper North Shore, we’ve noticed that in many instances, demand has been exceeding supply – often by some way. However, it isn’t across the board, with the value of certain property types – including premium apartments and houses – rising much faster than others.

And one of the factors driving the current patterns is rising construction costs.

How much have construction costs risen in Sydney?

The Australian Bureau of Statistics (ABS) collects data about the cost of building inputs, which it notes rose 12.3% in Sydney in the year to March 2023. This came on the back of 15.4% growth in the year to March 2022.

The good news is that the pace of growth in construction costs has slowed, rising just 1.9% in Sydney across the March quarter. But it is still almost 30% more expensive to get building work done now than it was two years ago.

This is having an impact on the property market in several ways.

The lifestyle trend in the pandemic

During the pandemic, lifestyle became important for many property owners and buyers. This meant a lot of people chose to upsize into a family home. Our area was one of the main beneficiaries, with prices in the traditionally family-friendly suburbs of Killara and Lindfield being among Sydney’s top performers. We also saw a lot of people moving to Hornsby Shire to take advantage of living near the Hawkesbury River and Ku-Ring-Gai National Park.

As part of this trend to enjoy the perfect lifestyle at home, we also saw a lot of renovations taking place. Many people chose not to move but instead renovated their own homes, adding home offices, extra living areas and more. In fact, the pace of renovations grew by 30% a year during the pandemic.

One group of renovators was people who chose to ‘buy small and build big’. In other words, they deliberately looked for ‘fixer uppers’ that they could extensively renovate or even knock down and rebuild.

This meant that many basic homes on good blocks in the Upper North Shore were selling for a premium as people looked for properties that could transform into their dream home.

People often looking for the finished product

We’ve noticed far fewer people looking to buy a property with a view to carrying out their own major renovation this year. Instead, they’re often limiting their search for a home they can move straight into.

This isn’t only because of the rising cost of construction. It’s also due to the fact that most tradespeople are busy right now, so there can be a major wait on getting your preferred trade to work on your home.

This is affecting the price of larger and fully renovated homes, which are in far greater demand than basic or dated properties. For instance, according to Domain data, the value of five-bedroom houses in Wahroonga has performed more than 14% better than four-bedroom houses over the past year.

Developers impacted too

There has been some media about rising costs causing developers to go bankrupt or making projects less viable. More than that, we’ve noticed developers holding off from beginning projects. We’ve also noticed different types of construction taking place.

When construction costs go up, it tends to hit larger developments with tighter margins more than it impacts smaller, prestige projects in affluent areas. That’s because the cost of inputs rise more-or-less evenly across the city. However, these costs are easier for developers to absorb on more expensive homes.

This means we’re seeing less of the mass-market high-density homes and more of the smaller, prestige developments. We expect more developers to look at this kind of project.

This could actually benefit many homeowners we speak to who are looking to downsize locally but find there aren’t enough suitable properties to move into.

Housing shortage to intensify?

One final way that rising construction costs could impact the local property market is to intensify the current housing shortage. With Australia set to absorb as many as 700,000 new migrants by the end of 2024, this could pose a real issue.

This won’t just be reflected in demand outpacing supply in the sales market. The rental market will be impacted too.

Rents across our area have been rising exponentially over the past year, with SQM Data showing the median apartment rent on the Upper North Shore lifting almost 30% since this time last year.

While the new NSW government has announced measures aimed at alleviating the housing shortage (including fast-tracking many developments with at least 15% social housing), we expect that the pace of building is unlikely to meet the growing demand.

The result is likely to be that house prices and rents may climb further, even in the face of rising interest rates.

Want more?

Thinking of buying, selling or renting on Sydney’s Upper North Shore, including Ku-Ring-Gai and Hornsby Shire? Get in touch.

Limited supply spurring competition among highly motivated buyers

The current NSW property market presents vendors with a notable advantage due to historically low listing numbers. With high demand driving buyer competition, selling conditions have strengthened, evident through above-average clearance rates, faster selling times, and reduced negotiation. Nationally, the total number of homes for sale is tracking 28% below the usual levels, creating an opportunity for potential vendors to list their properties now rather than waiting for the traditional spring surge in activity.2

Although we’ve yet to see full confidence return to the market, certain buyer demographics are still highly motivated to enter the market. With low levels of advertised stock, rising clearance rates, and higher property values, buyer concern about missing out on great opportunities could become more pervasive. Additionally, as demand grows due to strong overseas migration and tight rental markets, some renters are expediting their purchasing decisions. The pool of available properties for buyers is currently the smallest it has been in over a decade, amplifying the sense of urgency.

Clearance rates remaining high

We’ve seen auction clearance rates consistently hitting 70% or higher in recent weeks, and property volumes are gradually increasing when they would typically start to decline. These trends, coupled with the upward pressure on housing values, suggest that the market is gaining momentum as we head into winter, rather than slowing down as it normally would. Stronger clearance rates, along with faster selling times for private treaty sales and reduced discounting rates indicate that sellers are regaining leverage in negotiations.

Interest rates and consumer sentiment are still a challenge

However, prospective buyers will continue to face hurdles this year, with relatively high interest rates and stringent loan assessment criteria. Moreover, low consumer sentiment levels may dampen the current exuberance of the market, and a significant lift in property activity may not occur until there is a broader improvement in consumer sentiment.

Economic uncertainty may lead to wavering confidence

Mixed forecasts by economists regarding interest rates contribute to uncertainty and lower consumer confidence levels. Some suggest there may be another pause in interest rate hikes, which could boost consumer spirits and drive an increase in buyer and selling activity, as lower interest rates typically serve as a catalyst for a further uptick in housing values. However, rate cuts are not anticipated in the near future, and there is even speculation of at least one or two further rate increases before the year is out. Nevertheless, any perceived economic stabilisation is likely to prompt increased buyer and seller activity.

Mortgage repayments expected to remain stable

While many economists are anticipating an increase in motivated selling and mortgage arrears in the short to medium term, most homeowners are expected to firmly prioritize mortgage repayments as economic pressures mount. Coming off record-low rates, banks reported 90-day arrears rates of around 0.5% to 0.6% by the end of 2022.3 Although this benchmark is projected to rise, most pundits predict that homeowners will cut back on discretionary spending rather than miss mortgage repayments or resort to selling their homes.

Looking ahead

While spring is historically a season marked by new listings and sales transactions, last year did not see the usual surge in activity and there appears to be a marked shift towards a strong winter season. Despite the current economic climate, our property markets continue to show resilience and promise for sellers. Limited competition, rising prices, high clearance rates, and buyer motivation contribute to a favourable selling environment, and we may see further activity as accumulated supply from potential sellers who have been holding back enters the market.

Such an increase in advertised supply could put pressure on property values and clearance rates as more homes become available, and high interest rates and low consumer confidence are also likely to have a continued impact on our markets. But by leveraging the opportunities open to them, understanding market dynamics and seeking expert advice from their trusted real estate agent, I believe vendors can make well-informed decisions and maximize their chances of success in the current winter market.

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