Australia’s system of housing construction is in serious trouble, if the latest building activity data is anything to go by. In the June quarter of 2023, far from reducing as more houses were completed, the average time it takes to complete a house actually increased by mid-year it was taking 9.96 months to complete the average house. Source:Eric Hansnata FWPA Statistics & Economics Manager
The gold standard for tracking what is happening with housing construction, the quarterly Building Activity Measures data and reporting, has just been released for June. While there is a four-month lag in the data, it displays an unsurprising continuing decline in all activity.
In June, new house commencements were down 6.6% at 25,386 for the quarter. The other side of the coin is that new house completions were greater at 27,500 resulting in a 3.0% reduction in houses under construction, meaning they tilted south to a still stonkering 101,820.
While any reduction in houses under construction (effectively work in progress, in lean manufacturing terms) might appear positive, the reality is building capacity is still dreadfully constrained and utterly incapable of moving beyond its historic quarterly limits.
It is nice that completions out-stripped commencements for a change in the June quarter, but the marginal change is disappointing against a backdrop of more than 100,000 houses still being under construction.
Completions are simply taking way too long to build and deliver to the homeowner. The risks for builders, bankers, suppliers and home buyers alike is that time brings into play many other uncertain variables: cost increases, re-work, interest rate rises, defaults and so on are all exacerbated by the passage of too much time.
In the December quarter of 2022, it was taking 9.15 months to complete a house on average, with houses under construction of 104,429. Six months on, it is taking 9.96 months to complete a house with 101,820 houses under construction.
In aggregate, the residential sector saw the value of building work commencements decline 5.5% in the June quarter and the non-residential sector was 10.3% lower. That may translate to less building work (for example, smaller houses should be faster to build), but it’s hard to bet on the Australian home building system right now.
The chart below shows however, that the period over which the housing pipeline and time under construction has grown so significantly coincides with expenditure on residential building work declining. Few answers may lie in reduced spending on housing, perhaps?
Answers definitely lie in the growth in the value of the non-residential building pipeline, which expanded to a record $57.94 billion year-ended June 2023, despite the softness in the June quarter. The chart here shows there has been – for the most part – solid growth in the value of the non-residential building pipeline.
With this activity comes work that must be performed by people who otherwise – in many cases – would be engaged in the housing sector. This will not universally apply, but the total available labour force, equipment and materiel is limited and must be divided across the total available work.
Could it be that the buying power of the non-residential sector (for example, the vast road and rail expansions now underway above and below our major cities) is greater than the buying power for building houses in paddocks at the extremities of our vast urban sprawls? If so, little wonder there is a slowing of the rate of completion of houses.
The speed of building is important for everyone, as we set out above. No one is deliberately ‘dragging the chain’, so it is difficult to find a culprit and more fruitful to find an addressable cause or causes.
As well as the obvious time vale of money, the reality is, the longer it takes to build under fixed price contracts the more exposed the builder is to changes in material prices, labour availability and general market conditions. It is not builders who are slowing the pace of building completions!
Given that historically, houses under construction have generally totalled around 60,000 houses, the ramp up in the current cycle to over 100,000 suggests in the absence of more capacity (including labour) in the home building system, there will be more pain ahead.
