Date: 31 July 2023
The March quarter was the first in three years where the total number of houses ‘under construction’ fell. The modest 0.6% fall in work in hand (651 houses less than in the December quarter) is welcome news, but barely puts a dent in a vast pipeline that totalled 103,778 separate houses waiting to be completed.
The Building Activity quarterly data series has a lag of 3.5 months but it is the benchmark for knowing what is happening across residential and non-residential construction. The reason the gentle turndown in the pipeline of work is such good news is there was a welcome and long-awaited uptick in completions that coincided with a decline in commencements.
In the March quarter, new house commencements totalled 26,265 down 5.5% on the prior quarter, while completions lifted 3.8% to 28,094.
The likelihood is that a little more labour and a little more material and a little more effort went into finishing houses than went into starting them. The house building industry has a long way to go before it settles its liabilities with the nation, but it is starting to get on top of the backlog.
The changing ‘value of work’ in the pipeline shown in the next chart lends itself to this same conclusion.
Commercially, improvements in the completion rate and a drawing down of the work in progress places the industry on a better footing.
Tim Lawless at the HIA has stated the insolvency cycle in the sector is largely over. More importantly, the time taken from signing a contract to starting work has fallen to about three months (pretty close to normal conditions), down from twelve months, meaning there is less scope for price overruns and ensuring that the value of contracts is not eroded by inflation.
If a builder’s margin is 7% on a house and inflation is 7%, the delay of a year to get started pretty much guarantees they make no money on a job. We can be relatively certain that the traditional way we build houses with so many dependencies and delays isn’t going to change anytime soon, so at least starting sooner protects what little value builder seem capable of extracting.
Progress on completions was also expected to result in the time taken to complete houses reduce, given the slight reduction in houses under construction. However, the completion time for new houses during the quarter was 9.48 months. This is a continuation of the cycle which commenced in December 2020 when the time taken to build a new house was a still fairly lengthy 6.45 months.
We will have to wait for June quarter data to see if this further rise in the time to complete a house is a result of a lag effect. On face, that seems likely, but the data will tell the story.
To address the capacity constraints experienced in the recent housing boom further evolution in the building system of work will be needed. A house completion time above 9 months, whilst an industry average, makes no sense in economic terms for the builder, materials suppliers, tradespeople and most importantly the home buyer. The Stats Count team is currently considering a major contribution from the Australian Housing and Urban Research Institute (AHURI) to this important agenda which will be covered in the next edition of Stats Count.
