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Pipeline of building work continues to grow: system of work failing the nation

As new dwelling approvals plummeted in the December quarter, Australia’s pipeline of houses under construction expanded to a new record 105,111 houses. Even though commencements declined to 28,586 (-2.4% for the quarter), completions fell to 27,076 dwellings (-5.4% for the quarter).

For an economy with insufficient housing for current needs, high rents and an influx of migrants desperately needed, the system of work used to build houses is failing the nation, with completion rates – see below – never having lifted above 32,000 in a quarter and continuing to slow.

The value of the work in the housing pipeline was $29.08 billion, up 1.8% for the quarter. Taking into account all work in the pipeline (All Residential and Non-Residential) the total value of the construction pipeline was $110.39 billion at the end of December 2022.

If there is a bright spark in the data, it could be the value of residential commencements for the quarter was $16.3 billion. The December quarter was the sixth consecutive decline, since Commencement values peaked in June 2021.

However, the vast amount of work in the pipeline has led to continuing challenges with completions. The sheer number of houses under construction is way beyond the current capacity of the industry to complete within historic timeframes.

This is reflected in completion times for houses, which extended from an average of 9.0 months in September to 9.12 months in the December quarter. That may not sound like much, but that 0.12 addition is literally millions of extra hours required to complete the pipeline of houses, in a building system that pays for labour by the hour.

The reason for this increase in completion times is complex and not fully understood. One theory – this one is incorrect – is that we are building larger homes today than historically. However, the ABS’ recent annual review of the floor area of new houses shows the average size of 232.3 m2 is relatively steady and is in fact lower than over some earlier periods.

Frankly, that makes sense, because latest data also tells us the average size of households is declining, albeit with more of us are working from home. This change in household size from just above 2.6 to just below 2.5 in recent years may seem small but equates to demand for an additional 140,000 new houses and apartment. Creating further dwelling demand which is discussed elsewhere in Stats Count.

A more likely reason for the pipeline proving to be so intractable and so challenging to ‘build out’ lies in the system used to construct houses. It is a linear, labour-intensive model for the most part, one in which large amounts of work are done ‘on site’ with labour flowing into and out of the construction process.

That alone produces a form of ‘economic friction’, which burns up scarce and valuable resources like labour to no good effect.

An example might be a house with its frames and trusses up, but the windows are delayed, causing a delay in cladding, which delays lock-up, which only becomes clear to the plasterers when they turn up and find there is little work they can do. Their labour is under-utilised and they reasonably expect to be paid for it anyway, as its not on them that the delays occurred. It gets worse from there, because the joiners and cabinetmakers, water-proofers, tilers, painters and final fix teams and so on are also all delayed thereafter.

Doubtless we can all think of other examples. None is a disaster, in its own right, however, added up and applied across a company, or an entire economy, it can quickly be a serious problem.

Economic friction can be a form of feedback loop and it could be argued, that’s where we are right now. Every time there is a delay that forces itself down the supply chain, it creates new delays, adding time and costs, but not getting the work done.

The data shows this is a long-standing problem, and one for which a solution is probably overdue.

Posted Date: May 8, 2023

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