High rates and crippling costs are making the housing shortage worse
The fast-paced and steep increase in interest rates, the tripling in the cost of hiring tradies and skyrocketing prices of building materials have all collided to raise the spectre of a house construction and renovation cliff by the middle of this year.
That’s despite the extreme shortage of housing in Australia, which has resulted in a rental crisis.
Lindsay Partridge, who runs the country’s largest brick manufacturer, Brickworks, isn’t mincing his words. He reckons a lot of the blame lies with the Reserve Bank. And he joins a long queue of critics who believe the RBA waited too long to raise rates and as a consequence has had to push them up further.
“If they [rates] hadn’t been so low they [the RBA] wouldn’t have had to be so aggressive on the increases. So, they have been caught in their own trap there.”
And he is a strong proponent of the argument that the RBA needs to take a pause and assess the effects of the rapid rise to date.
“The RBA has put the brake on [the economy] before they have seen the result of what has been done already. There is quite a long lag. It could be another six to 12 months before we see the result of the interest rate rises they have already announced.”
Brickworks is at the coalface of the residential building market and has first-hand experience of issues with raw materials costs, elevated wages, electricity costs and interest rates that have been fed into the economics of building homes to make it so unattractive.
Partridge cites the cost of an electrician. “Previously we had been paying an employee electrician $30 an hour, and now we are paying $90 as a contractor – that’s a tripling of the cost and that doesn’t necessarily mean you are going to get someone.”
Brickworks pushed through price increases on its products of around 9 per cent in the half year to January, supporting an underlying increase in net profit of 24 per cent. It will add another 7 per cent to those prices before the middle of this year.
The company has been able to ride the wave of building approvals that spiked during COVID in parts thanks to the federal government’s HomeBuilder program.
Once this pipeline is exhausted, house construction activity dries up. Victoria has the longest pipeline and Western Australia’s building from a wave of earlier approvals is about to evaporate.
Partridge said Australia’s detached housing starts fell 18 per cent in the six months ending January 31 compared with a year earlier. So, it’s clear that the music is winding down at this building party and the mood and risk appetite has turned.
Put simply, cost inflation and interest costs have hit affordability and confidence.
“People don’t want to make a commitment [to build housing] when they don’t know where interest rates will finish. If interest rates stop climbing and the environment becomes more of a ‘known’, I’m pretty sure demand will surge back,” Partridge says.
If the queues of people waiting to inspect rental properties are any gauge, there is plenty of incentive for investors to start building residential properties.
The rental market is as tight as it has ever been, according to Partridge, who has been in the industry 40 years.
But how long will this strike on new housing last? Partridge thinks it will be short-lived and turn when there is some clarity on interest rates. “It might be a short, sharp downturn,” he said.
There is quite a long lag. It could be another six to 12 months before we see the result of the interest rate rises they have already announced. But some building costs remain stubbornly elevated including labor, says Partridge, who bemoans that Brickworks can’t even get people to maintain its factories.
“There is not much use having an immigration policy bringing in doctors, nurses and IT specialists when they have nowhere to live. We need electricians, bricklayers and carpenters.”
He says the parents of Australia’s younger generation want them to be a lawyer or a doctor, but they don’t want them to be a tradesperson. “You can offer all the training in the world, but younger people are not interested in trades.”
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Source: Thanks smh.com