Australian Home Builders Face Capacity Constraints, Rising Costs

By James Glynn

SYDNEY–Australia’s home-building boom is set to continue for some time even as construction firms operate at capacity and battle supply constraints to complete an unusually large pipeline of orders.

The time to construct a home has increased to an average of about nine months from six months, as domestic capacity constraints are compounded by global shipping bottlenecks that have affected the supply of timber and steel, Reserve Bank of Australia Assistant Governor, Luci Ellis, said in a speech on Wednesday.

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

The RBA is facing a surge in inflation, prompting it to raise official interest rates for the first time in over a decade at the start of May. A key factor driving inflation to its highest level in 20 years is household construction costs.

The outlook for dwelling construction suggests cost blowouts will continue for some time.

According to the RBA’s business liaison process, which helps inform decisions on interest rates, around one fifth of firms are reporting that the availability of materials is a significant constraint on their output.

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

Availability of labor is also an issue, especially in Western Australia, but this 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 wages growth to accelerate by the end of the year.

Ms. Ellis said that capacity constraints are also evident in non-residential construction, where the pipeline of work yet to be done is at the upper end of its normal range. The pipeline of planned public infrastructure projects also is quite large.

“It seems that all segments of the construction industry are making a relatively large call on the same material and labor resources at the same time,” Ms. Ellis said. “It is therefore not surprising that the pipeline is remaining large, cost pressures are squeezing margins, and delays are longer than usual.”

The Housing Industry Association, an umbrella group for housing construction firms, said Tuesday that the boom in residential construction will stretch until mid-2023.

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 approved and awaiting commencement, HIA said.

Soaring housing construction costs have added significantly to Australia’s inflation problem, but they are unlikely to ease soon, HIA said.

Write to James Glynn at [email protected]