If you’re planning to build a home in Perth, chances are it will take some time. It will certainly be longer than the average 6-8 months it traditionally takes to build a single-storey home.
Now on its face, this should seem surprising to you. It certainly was to me when I heard media reports stating it may take up to 3 years to build a home. I couldn’t reconcile the residential construction shortage with the fact that we just went through a global pandemic. Call me crazy, but I fail to see how economic slowdown translates to flourishing housing demand.
It was not until I stepped out of the shadow of the current economic landscape that I realised the simple truth. The current shortage is due to a perfect mix of supply and demand challenges, the most notable I’ve outlined below:
Demand factor: a comprehensive housing stimulus
Despite all the obvious downsides, 2020 was a decent year for the average would-be homeowner. This was in large part due to considerable government investment and favourable monetary policy.
The West Australian government introduced a $444 million housing stimulus package in June 2020. This package includes $117 million of new residential construction bonuses. These grants were $20,000 for each homebuyer wishing to build a home as opposed to buying residential. This supplemented the existing First Home Owner Grant (FHOG), which puts up to $10,000 in the pockets of first home buyers.
Furthermore, the First Home Loan Deposit Scheme (FHLDS) allowed home buyers to obtain loans with only a 5% deposit. The remaining 15% that is typically required to secure a mortgage was underwritten by the National Housing and Finance Investment Corporation (NHFIC). As such, lenders mortgage insurance is not required under these circumstances.
Finally, the easing of monetary policy also benefited home buyers. In November 2020, the Reserve Bank of Australia cut the cash rate to a historic low of 0.10%. Australia’s big banks passed on these cuts shortly thereafter. Three of the Big 4 banks went so far as to offer 4-year, fixed-term loans under 2%.
After viewing these factors in combination, it should be no surprise that the Australian property market recorded one of its most significant years for new construction.
Supply factor: materials slowdown and labour shortage
The new residential construction market was not immune to the effects of the global pandemic. Timber and steel have incurred material shipment delays. This has been a combination of slowing manufacturing/production time along with transport issues resulting from COVID-19.
Additionally, there isn’t enough skilled labour to meet the heightened demand. Contrary to popular belief, most residential building companies don’t have a builder labour force on payroll. While most building companies are content with the rising demand, I doubt many have accounted for the limited skill-force or the frequency of lockdown measures.
Most builders also complete jobs based on a fixed margin. That margin is predicated on a fixed schedule for completing the build. If the timeframe for the build gets pushed out, not only will their margin decline but they may not be able to recover their full costs.
End result: a disappointing outcome for home buyers
Now it has been some time since I studied economics in college. However, I do know that rising demand and falling supply is damaging to one party in particular: the consumer. The price of materials and labour increases until supply has a chance to catch up with demand. Sadly, the home buyers, who hoped to benefit from the government stimulus, may potentially receive variance orders and additional invoices.
Now housing is crucial to Australia’s economy, so I’m quietly confident there will be further government intervention to address the supply concerns. Sadly, I don’t believe that provides comfort to the countless Australians waiting for their dream home to be built.
The content outlined above was written, edited and published by the Lost Realtor. The author has over 20 years or real estate sales and investing experience in the Australian property market. He has held senior positions in Australian building companies, including being the General Manager of the residential sales division of Collier Homes. His qualifications include a Bachelor of Commerce degree and a Graduate Diploma in Building and Construction Law.