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As confidence in the construction industry plummets, borrowers are steering clear of locking into construction loans.
At the height of the pandemic, broker Jaime Savory at Gippsland Finance Solutions was fielding up to eight calls a day from clients wanting new homes built. But that has fallen to around five calls a week, she said.
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“The construction space is the scariest for people at the moment,” Ms Savory said noting the construction collapses and surging prices in the region.
The Housing Industry Association’s (HIA) latest economic and industry Outlook Report estimates the number of detached homes commencing construction is set to decline this year and next to its lowest level since 2012.
The data showed the large backlog of building work, following the pandemic, has contributed to the record number of homes under construction and surge in building approvals.
The Australian Bureau of Statistics (ABS) building approvals data for December for detached houses and multi-units reported building approvals increased in December, up by 18.5 per cent, while the building activity data from September noted that the total dwelling commencements fell 5.2 per cent.
HIA chief economist Tim Reardon said despite the large volume of work in the pipeline, lending for the purchase of new construction is plummeting.
“Lending for the purchase or construction of a new home had already fallen to its lowest level since 2012 by the end of 2022, and the full impact of last year’s rate increases is still to flow through to households,” Mr Reardon said.
“This will see the number of detached housing starts to fall below 100,000 starts per year for the first time in a decade to just 96,300 in 2024. This is a very rapid slowdown from the 149,000 starts in 2021.”
Borrowers steer clear of construction
The volatility of the construction industry, alongside the rising interest rates was weighing on borrowers’ decisions, Ms Savory said.
In the Reserve Bank of Australia’s (RBA) monetary policy minutes for February, the board signalled more rate rises will be needed to slow rising inflation, adding more pressure on borrowers.
Ms Savory said the cost to build had “gone up significantly”, given inflation and a number of local building collapses.
“Unfortunately, like everywhere, we’ve had local builders that are in a position where they have had to shut down,” she said.
It’s been “terrible for everyone involved” from the local tradies to the “first home buyer in the middle”.
She added that at the end of the build, there might be a variation in price or a clause at the start, which has set clients back.
“If the first-time buyer is lending at 95 per cent [LVR] and there’s no room to move — that’s terrifying for them,” Ms Savory said.
Remove barriers to lending
Meanwhile, Mr Reardon added that more needs to be done to ease the barriers for first-time buyers to access a mortgage.
“Over a decade of macro prudential restrictions have seen borrowing for those with less than a 20 per cent deposit become increasingly expensive,” Mr Reardon said.
“This inevitably leads to banks increasingly lending to those that already own a home.
“Easing the barriers to home ownership need not undermine the efforts of the RBA or the government to reduce inflationary pressures.”
[Related: Refinancing at near record high]
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