Australian Homebuilders Suffering Amid “Sharp Downturn”

Australian homebuilders and housing industry contractors are feeling the effects of a sharp downturn in the country’s housing market, according to ABC News

“Builders are just battening down the hatches and looking after their costs,” said Greg Zuccala – director at Australian homebuilder Zuccala Homes. 

With Melbourne housing prices falling 9.6% from their 2017 peak and new home building permits down nearly 40%, Zuccala has begun to adapt – laying off four workers amid a push to pinch pennies. 

That huge fall in demand for new home builds meant Mr Zuccala had to find savings.

To do that, he was forced to lay off four workers.

We’ve had to adjust things there to meet the market,” he said.

“I think a lot of building companies at the moment find themselves in the same situation.” –ABC News

It isn’t just homebuilders feeling the heat either; electricians such as Ray Sherriff – who employs nine electricians and four apprentices – has noticed the significant slowdown in housing activity. 

Electrician Ray Sherriff

“Two years ago we literally didn’t have time to price all the [residential] jobs that were coming in,” Sherriff explained. “Now it’s rare and there are lots of jobs getting postponed and put back.”

Residential work used to make up “probably 50 to 60 percent of our business,” according to Sherriff. “Now we’re probably looking at 20 to 30 per cent.” 

It starts with approvals

According to the Bureau of Statistics, Australian permit approvals were down nearly 29% in January y/y, with the exceptions of Western australia and Tasmania, where building permits are actually rising. 

Right now, the rate of contraction in house construction is the fastest it has been in six and a half years, according to figures by the Australian Industry Group’s Performance of Construction Index.

Activity in apartment construction has fallen for 11 months in a row to its lowest point in six years, at a time when the industry was recovering from the GFC.

With national house prices down 6.8 per cent since the 2017 peak, and down 13.2 per cent in Australia’s biggest housing market — Sydney — economists say it is no wonder those in construction are feeling the heat too. –ABC News

“When you have house prices falling as they are at the moment, the risks of entering into that are greater,” said Shane Garrett, chief economist with the Master Builders Association. 

“That’s one of the reasons why activity is starting to move down … It’s a riskier predicament for all concerned.”

Work drying up

Meanwhile, demand for the more than 1 million residential construction sector workers is beginning to weaken. Job ads seeking construction workers dropped by 14% in February. 

That said, ABC News would like readers to know that not all is lost… while “there is no denying we are in the midst of a downturn, and that is hurting the construction sector, the numbers are still good in a historical context.” 

Nationally, new home building peaked in 2016 with about 230,000 new dwellings.

“We see it bottoming out to about 175,000 over the next few years,” notes Garrett. “It’s worth emphasising, that 175,000 as a low point would still be the highest ever low point for new home building on record.”

Government isn’t helping

As we reported in February, with the Labour Party looking to wrest back control of the government during elections later this year, things could get worse for Australian housing. The party has pledged to curb tax breaks for property investors that helped drive up home prices (alongside an influx of foreign capital). 

Labor leader Bill Shorten has promised to scrap tax refunds worth A$5 billion ($3.6 billion) a year for share investors. The benefits are already being seen in the polls, where Labour is seeing a slight advantage.

Meanwhile, as home prices have soared, home ownership rates among younger Australians have plummeted.

To try and combat this, Shorten proposed that a tax break known as negative gearing which allows homeowners to treat costs associated with owning a rental home as a tax deduction (though, to be fair, that certainly sounds like it could have some unintended consequences for the property market). He has also promised to subsidize rents and build homes.

If Australia’s progressives are victorious in the May elections, the country’s “sharp downturn” in housing could accelerate.