Surge in demand for new homes as construction cost pressures ease

Demand for new homes is surging after a lacklustre year – and one property type is proving particularly popular among would-be buyers.

The latest New Homes Report from research firm PropTrack shows a 16 per cent increase year-on-year in search enquiries for new developments on realestate.com.au in July.

Boutique luxury apartments are especially in-demand, data shows. Enquiries for unit projects in inner Melbourne are the highest in the country.

The Victorian capital accounts for 34 per cent of all current residential construction projects in the country, with most underway in the inner-city.

Enquiries are the second highest on the Gold Coast, home to nine per cent of all current apartment developments.

Adelaide’s central and Hills regions have the most enquiries per development, but the number of projects underway in the city are particularly low, meaning more would-be buyers for fewer listings.

Analysis of demand shows premium unit complexes with rooftop swimming pools, wine rooms and gums are popular.

In July, Elysian Residences in Sherwood in Brisbane’s inner-south saw the most enquiries, followed closely by Murcia in Wollongabba in the inner-city.

The Walmer project in Melbourne’s Abbotsford came in third for the most enquiries sent by property seekers on realestate.com.au.

The New Homes Report also reveals the pace of building cost increases has slowed over the past year, with prices stabilising as supply chain issues improve.

Input prices rose by 0.6 per cent in the June quarter, which is the lowest increase in 18 months, Australian Bureau of Statistics data shows.

The cost of certain essential building materials, like concrete and plumbing products, has risen. However, the extent of those increases has been offset considerably by a slump in steel prices.

It marks good news for the construction sector, which has struggled through a tough period of time.

PropTrack senior data analyst Karen Dellow said the development of new dwellings slowed significantly over the past few years.

“The pandemic caused supply chain issues, increasing the price of essential building materials, which increased building costs, while labour shortages have also been a growing problem,” Ms Dellow said.

Frequent construction site shutdowns during Covid-19 stalled work and slowed down new home completions, she added.

“As a result, the higher cost of new properties led to decreased demand, compared to its peak in September 2021, when the government’s HomeBuilder Grant drove many property seekers to build houses to take advantage of the government subsidy.

“The combination of labour shortages and increasing prices has led to a backlog of work impacting the approval and commencement of future developments.”

However, ABS data shows easing construction costs might be helping to get work out of planning phases and into production.

There was a 14 per cent increase in new commencements in the March quarter, the latest figures reveal, totalling 46,546 dwellings. That has been driven by a whopping 57 per cent increase in apartment and townhouse commencements.

The Reserve Bank had little choice but to raise interest rates again this week.

Inflation was already proving stubborn before the latest Middle East instability added further pressure to energy prices and supply chains.

Housing inflation alone has averaged six per cent over the past year, remaining one of the single biggest contributors to CPI.

But while the focus remains on rates, the deeper problem is structural and far more dangerous.

Australia is not building enough homes, and the conditions required to fix that are deteriorating simultaneously.

Construction costs remain elevated. Builders are increasingly unwilling to absorb contract risk. Labour shortages persist.

Capital is becoming more expensive. And as borrowing capacity weakens and sentiment softens, fewer projects are becoming financially viable.

The result is a self-reinforcing cycle.

The RBA raises rates to fight inflation. Higher rates reduce development feasibility. Fewer projects start. Housing supply tightens further. Rents rise. Inflation persists. The RBA raises rates again.

The only long-term solution is supply, yet Australia remains nowhere near the National Housing Accord target of 240,000 new dwellings a year.

Completion continues to lag approvals, meaning many projects approved on paper are simply never making it out of the ground.

That gap matters enormously because housing is not just another sector of the economy.

Around two-thirds of Australian household wealth is tied to property, while the sector underpins millions of jobs and related industries. Weakness here quickly spreads beyond real estate.

We are already seeing signs of stress. Auction clearance rates in Sydney and Melbourne have softened, borrowing capacity has declined, and parts of the market are experiencing price corrections as confidence weakens.

At the same time, policymakers continue to debate tax measures such as changes to negative gearing and capital gains tax discounts, despite fears that such reforms could drive private capital out of the rental market at precisely the moment when supply is most constrained.

This is the paradox at the centre of Australia’s housing crisis.

Demand for property remains extraordinarily high, yet the economic conditions required to actually build new housing are worsening.

The Reserve Bank cannot solve that problem alone.

Monetary policy cannot accelerate planning approvals, reduce construction costs or create more tradies. It can only raise the cost of money until something eventually breaks.

And increasingly, that “something” looks like the development pipeline itself.

Paul Miron is the Co-Founder & Fund Manager of Msquared Capital.

Surge in demand for new homes as construction cost pressures ease

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