Australian Home Builders Face Capacity Constraints, Rising Costs

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by James Glynn

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Sydney-Australia’s home-building boom is set to continue for some time, even as construction firms work over capacity and battle supply constraints to meet an unusually large pipeline of orders.

The Reserve Bank of Australia’s assistant governor, Lucy Ellis, said construction time has increased from six months to an average of nine months, as domestic capacity constraints are exacerbated by global shipping constraints, which have hit lumber and steel supplies. . In a speech on Wednesday.

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“There is now an unusually large pipeline of detached homes that has yet to be completed,” said Ms. Ellis. “All signs point to the fact that the residential construction industry is at capacity and cannot get this pipeline working any faster.”

The RBA is facing rising inflation, which prompted it to raise official interest rates for the first time in a decade in early May. A major factor driving inflation to its highest level in 20 years is domestic construction costs.

The housing construction perspective suggests that cost reduction will continue for some time.

According to the RBA’s business liaison process, which helps decide on interest rates, about a fifth of firms are reporting that material availability is a significant constraint on their production.

“This is far higher than has been reported in the past three decades,” Ms Ellis said.

Labor availability is also an issue, especially in Western Australia, but it is not specific to construction, she said.

Australia’s unemployment rate has fallen to its lowest level since 1974, with job vacancies jumping to record levels. The RBA expects the wage hike to pick up by the end of the year.

Ms Ellis said the capacity deficit is also evident in non-residential construction, where the pipeline of work is still at the upper end of its normal range. The pipeline of planned public infrastructure projects is also quite large.

“It seems that all segments of the construction industry are making relatively large calls on the same material and labor resources at the same time,” Ms Ellis said. “It should therefore come as no surprise that the pipeline remains large, cost pressures are driving down margins, and delays are longer than usual.”

The Housing Industry Association, an umbrella group of housing construction firms, said on Tuesday that the boom in residential construction would last till mid-2023.

The HIA said there were 75.7% more detached homes under construction at the end of 2021 than in the pre-Covid period, and a record number of homes were approved and waiting.

The HIA said rising housing costs had significantly added to Australia’s inflation problems, but they are not likely to subside any time soon.

Write to James Glynn at [email protected]

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