Login
ISCOVER
Weak dwelling approvals have presented several hurdles for the construction financing industry.
The latest data released by the Australian Bureau of Statistics (ABS) has revealed a further drop in the number of total dwellings approved by 1.9 per cent during February 2024.
This decline in approvals was despite an increase of 10.7 per cent for private house approvals and followed a 2.5 per cent decline the month prior.
Speaking to The Adviser, Dan Holden, principal of construction finance specialist HoldenCAPITAL, highlighted some of the challenges low building approvals have had on the construction lending space.
“There seems to be little doubt that the slowdown in approvals is due to buyers struggling to secure finance which in turn means that developers are struggling to achieve satisfactory project returns as their building costs continue to increase despite inflation slowing, underlying land values remaining high, and they are unable to pass these increased costs on to the end buyers by increasing their prices,” Holden said.
In terms of how HoldenCAPITAL is navigating this challenging environment, Holden told The Adviser: “Firstly, we are focused on developers with experience, and the financial capacity to meet any unforeseen costs associated with the delivery.
“By being selective in who we deal with we try to ensure our [investors’] risk return appetite is being met through well-conceived projects.
“We also undertake detailed due diligence on the [developers’] track record, and have our consultants carefully assess the project viability from all [angles] such as cost, markets demand, end product suitability and value.”
Housing Industry Association (HIA) senior economist Tom Devitt said that buyers looking to finance a construction project have “certainly had a hard time over the last few years”.
“Home building material and labour costs have increased by around a third since the pandemic began, contributing to the value of a newly approved house in Australia increasing by about $140,000 since the pandemic began,” Devitt said.
To continue reading the rest of this article, please log in.
Looking for more benefits? Become a Premium Member.
Create free account to get unlimited news articles and more!
Looking for more benefits? Become a Premium Member.
“And of course, interest rates have increased dramatically, the steepest rate hiking cycle in a generation, making it harder for buyers to qualify for a mortgage in the first place.
“And because of the financial regulator’s (APRA’s) restrictions on banks, buyers are often being assessed against interest rates of 10+ per cent, and banks have to hold a tremendous amount of capital in reserve against their mortgage activities (new regulations that are a legacy of the GFC).”
According to Devitt, these factors have resulted in a large number of sold home building projects being cancelled, as banks became “increasingly unwilling to lend to projects where construction costs had blown out so much, and buyer borrowing power diminished so much”.
“And of course, new sales plummeted and have yet to recover, especially in the larger states,” Devitt added.
What does the future hold for the industry?
While many of these challenges still persist, Holden expressed optimism in his outlook stating that he expects conditions to “gradually improve”.
“[B]ut it’s not something that can be turned around quickly,” he added.
“Smart builders and developers are not going to risk their capital unless they can see satisfactory returns and that will only come once the market rebalances which is likely to take some time.”
Similarly, Devitt told The Adviser: “Fortunately, the industry has mostly got through that pipeline of earlier less profitable projects. The challenge now for builders is the lack of new work entering the pipeline (as evidenced by today’s [04 April] approvals data).
“Whether builders get through 2024 will depend on how much work they still have under construction to keep them busy, and how quickly they can attract new work.
“Builders who are able to specialise in the higher-end of the market, in custom/bespoke home builds, knockdown-rebuilds or larger renovations, also have a brighter outlook.
“There are potentially a lot of wealthier households and investors, with a lot of savings and assets accumulated during the pandemic, just waiting for a catalyst to re-enter the market later this year.”
Devitt added the challenge is for the increasing number of households whose “financial situation has not kept pace with home building costs”.
“For them to be able to enter the market any time soon, will require policy reforms to reduce the costs of construction (taxes, land release, planning, financial regulations, interest rates). This is the only way the government’s 1.2 million homes target over five years would be achieved,” Devitt said.
[RELATED: Brokers see surge in tiny home demand]
JOIN THE DISCUSSION