Home Building Hits Six-Year High

The total value of home building work surged by 5.1 per cent to $18.95 billion in the first quarter of 2021—the biggest lift in six years—with construction of detached houses and renovations leading the way.

According to the Australian Bureau of Statistics, building construction as a whole lifted by 2.5 per cent in the March quarter but remained 1.8 per cent lower than for the same period last year.

Work on new detached houses rose by a strong 10.2 per cent while alterations and additions (renovations) climbed by 10.8 per cent in the March quarter—the most in almost 21 years—to record highs of $2.84 billion.

All states except Victoria, which was down 2.7 per cent, recorded a lift in residential construction in the quarter with home construction surging by 14.4 per cent in Western Australia and 10.2 per cent in Queensland.

The lift in home building comes after a 17.4 per cent rise in dwelling approvals in March and after the total number of dwellings approved surge by 20.1 per cent in February.

Commsec senior economist Ryan Felsman said the federal government’s policy stimulus, record low borrowing costs, and strong demand for new houses and renovations had continued to support the earnings of Australian building materials companies and property developers.

“Construction companies are likely to benefit from the federal government’s additional $15.2 billion spend on infrastructure projects, also announced in the [recent] budget,” Felsman said.

“Big builders, developers and engineering services companies could see an uplift in earnings on project wins amid an upswing in infrastructure work yet to be done.”

The surge in demand has also increased construction costs which rose by 0.2 per cent in the March quarter, with building costs up 0.4 per cent and engineering costs down by 0.1 per cent.

During the year, construction costs rose by 0.5 per cent, while home building costs went up 0.8 per cent and engineering costs were broadly flat.

“Although construction costs rose at a slightly slower-than-average pace last quarter, it’s likely future quarters will record a more substantial lift in construction costs as shortages of both materials and labour add some upwards pressure on prices,” Corelogic head of research Tim Lawless said.

BIS Oxford Economics senior economist Nicholas Fearnley shared the sentiment.

“With both labour and material capacity constraints in play, project delays and cost overruns can be expected,” Fearnley said.

“The considerable backlog of work that has developed should sustain an elevated level of activity for home builders deep into 2022.”

Commercial (non-residential) construction fell by 1.6 per cent in the quarter to be down 10.4 per cent on the year—the biggest annual decline in nine years, while construction of multi-units was down by 4.4 per cent.

“As foreshadowed, business construction (infrastructure and non-residential building) continued its downward trend, tracking the decline in approvals and commencements,” Westpac senior economist Andrew Hanlan said.

“A sharp fall in non-residential building outweighed a lift in infrastructure activity.

“The private non-residential building sector has been hard hit by the Covid-19 shock—activity in the sector slumped by almost 18 per cent during the past year.”

While the outlook for building and construction is much stronger than generally expected, the recovery remained uneven as the pandemic continued to weigh on some industry sectors and regions.

According to the Australian Construction Industry Forum’s May 2021 forecasts, the construction sector will grow by 2.7 per cent in 2021 bringing the level of building and construction work up to $243 billion in 2021.

Despite this, the forum has cut its outlook for new office development, after $8.9 billion in 2020, expecting the total to now drop to $6.6 billion in 2022.