Building costs soar – the impact.
As I said in my last post, building costs in Australia have jumped 20% to 25% in a year. That is laying to ground for some significant challenges ahead.
Developers are getting squeezed.
With costs rising rapidly, builders are likely to baulk at an increasing number of projects which don’t look profitable for them.
This impact will fall heavily on smaller house builders. These companies need an asset to use as security for their insurance, and many use their own home.
With costs rising rapidly, their insurance cover need is growing too, resulting in an “insurance gap” which limits the number of projects they can take on.
Builders are also now reluctant to offer fixed priced contracts fearing escalating expenses will swallow their profit margin. This is making it increasingly difficult for banks to lend to people who want to build a new home.
ABS Housing Approvals
All of this leaves the supply of new homes falling right at the time we need more to address Australia’s chronic housing affordability issue.
Politics, politics.
As if the market dynamics weren’t challenging enough, enter politicians.
The ALP has announced a new policy where they would help up to ten thousand home buyers by taking an equity stake in their home.
This comes after years of on-again, off-again first home buyer grants, allowing buyers to draw money out of super, save for a deposit in super and a range of other concessions and grants.
All these schemes have one thing in common: total ineffectiveness at addressing the actual problem.
The market impact.
Unfortunately for aspiring home buyers and renters, the cumulative effect of the soaring building costs is not great.
While the numbers of new homes being built has been strong, a significant downward trend has started with developers becoming choosier about which projects they take on.
For investors however, there is a silver lining.
While the residential property market is likely to fluctuate a bit over the next year, a slowdown in new home supply will act in two ways
First, it will help limit any price contraction and secondly, the shortfall in new properties will assist in driving rents up.
But it does illustrate one point: property investors need to be highly disciplined in choosing where to invest their hard earned money.
Author; Miriam Sandkuhler
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