Construction Capacity

Contributing to the housing crisis is the capacity crisis happening in Australia’s construction industry.

The price of construction is high and there are fewer new homes being built. Regional and rural areas have been particularly hard hit.  This is due to a combination of factors: 

• Rising material costs, 
• Labour shortages, 
• Low productivity, 
• Higher financing costs, and, 
• Increased demand for non-residential construction.  

Builders and developers report that increasing costs and complex regulations reduce profit margins and put pressure on their businesses. In fact, 236% more construction companies entered administration in the 2023/24 financial year compared to 2021/22.

The Rising Costs of Construction  

In 2024, the cost of building a new house is around 40 per cent above pre-2020 levels and more than 20 per cent above the broader increase in prices. Several factors contribute to this.

Building material costs rose substantially in early 2023, however, this cost pressure has reduced over the last year. Much of the materials and equipment used in Australian home construction are either imported or rely on imported components, making construction costs sensitive to global supply chain disruptions.

Interest rate rises mean it’s more expensive to borrow the money needed upfront for development. Banks now apply additional requirements before lending, for example, the need to secure 100% pre-finance. Combine these two factors with lower buyer demand and challenges in securing foreign buyers purchases, and it’s hard for many projects to be financially viable.

Increased labour costs is another contributor to higher costs of construction.

The Sinking Levels of Skilled Labour  

A critical challenge in the construction industry today is the shortage of skilled workers and increased labour costs.

In 2023, Master Builders Australia projected that the sector would need an additional 486,000 workers by the end of 2026 to meet demand. For New South Wales (NSW) alone, the NSW Productivity and Equality Commission estimated a need for approximately 30,000 more construction workers to reach the targets set by the National Housing Accord.

However, the workforce required to meet these housing targets is further overshadowed by the labour demands of governments’ extensive infrastructure pipeline. As of July 2024, Infrastructure Australia reported that an additional 193,000 construction workers are needed nationwide, with NSW requiring about 96,000 more to support ongoing infrastructure projects.

Private sector construction wage rates grew 4.2 per cent in the year to December 2023 and job vacancies continue to be high across a range of building trades.

Skilled migration could partially alleviate the shortage. In 2022–23, over 4,000 temporary skilled visas were issued for construction workers, the highest number since 2013–14. However, this influx accounts for less than 15% of the current job vacancies, highlighting the ongoing gap in skilled labour.

Sluggish productivity  

By some metrics, productivity in Australia’s construction industry is now lower than it was in the 1990s, indicating that building a house today may require more labour and equipment than it did 30 years ago.

Since 1989–90, construction industry productivity has declined by an average of 0.2% per year, even as other industries have experienced growth. Over the past two decades, labour productivity growth in construction has remained low, at just 0.3% per year—a figure notably behind sectors like transport and manufacturing.

Modern methods of construction (MMC) offer innovative techniques that can boost efficiency, quality, and sustainability in construction. While increased adoption of MMC could improve productivity, scaling these innovations involves financial risks and faces resistance from some within the housing sector.

Fewer Homes Being Built  

With higher material costs, more expensive financing, limited skilled labour and low productivity, fewer homes are financially viable to build.

Housing completions were around 11% below the 10-year average in the December quarter 2023 and incomplete construction was around 30 per cent higher than the pre-2020 average. The pipeline of new housing is shrinking too, with housing approvals running at 20 per cent below their 10-year average and project abandonments higher.

Building a Case for All Sides 

The private sector plays a vital role in creating jobs, generating profit, and, in the construction industry, building homes. Businesses are driven to maximize profits for owners and shareholders, achieving success when property prices are high, and construction costs are kept low.

In contrast, the government and communities prioritise sufficient housing options that offer people choice, security, and affordability. Additionally, the government aims to foster a thriving economy, where successful companies create more jobs and boost overall prosperity.

Regulation plays a key role in aligning these interests, as the government works to bring industry goals closer in line with public objectives. However, achieving this balance remains a work in progress.

Policy Personified  

Dave owns a small to medium residential construction company, typically building around 15 houses a year in a growing suburb outside Brisbane. However, this year has been challenging; material costs have soared, and labour shortages are making it difficult to keep projects on track.

Penny and Kristian, a young couple with two children, are hoping to buy a home in the same area. Although they thought they could afford it, the supply of new homes has dwindled, and prices continue to rise, putting their plans in jeopardy.