The cost of building new homes in Australia has slowed to its lowest rate in over two years, signaling a potential shift in the housing market that may benefit prospective home buyers.
According to the latest data from the Australian Bureau of Statistics (ABS), new home price inflation decelerated to 2.8% in the 12 months leading up to November 2024. This marks a significant reduction from the 4.2% rise recorded in the previous 12-month period ending in October. It is the smallest annual increase in new dwelling prices since July 2021.
REA Group senior economist Paul Ryan highlighted that this easing in construction costs comes as a relief to both new home buyers and builders. “The uncertainty surrounding rising home building costs over recent years has been a significant concern. With costs now rising more slowly—and potentially even declining slightly—it is expected that more buyers may turn their attention to the new home market,” he said.
The slowdown in construction cost inflation follows a period of significant supply chain disruptions and labor shortages that have plagued the sector. However, with these pressures starting to ease, inflation on new home prices has begun to moderate.
At the same time, historically low levels of home building approvals and a dip in demand for new homes have lessened competition for skilled labor, further alleviating cost pressures. Builders are also responding to the changing market dynamics by offering discounts and promotional deals to attract potential buyers.
Ryan emphasized that the reduction in building costs is crucial for improving the competitiveness of new homes in the marketplace. “As construction costs decrease, new homes become a more attractive option, especially in comparison to higher-priced existing homes. This could lead to a rebound in new home building,” he said.
The slowdown in new home price inflation is also seen as a positive development for the Reserve Bank of Australia (RBA), which has been battling inflation through interest rate hikes. According to Ryan, the easing of construction costs is one of the “key disinflationary drivers” pushing overall inflation down, providing the RBA with more room to potentially cut interest rates in the coming months.
Recent CPI data released by the ABS shows that inflation stood at 2.3% for the year ending November, slightly higher than previously estimated but still within the RBA’s target range. The preferred measure of inflation, the trimmed mean, which excludes volatile price changes, fell to 3.2% in the same period.
Decline in Home Building Approvals as Market Adjusts
While easing construction costs offer some optimism, the number of home building approvals continues to trend downward. National approvals for home building fell 3.6% month-on-month in November, according to ABS figures. The decline was observed across all residential building types, with private house approvals decreasing by 1.7% and approvals for other types of dwellings dropping by 10.8%.
Despite the monthly decline, the year-on-year picture is more positive, with total dwelling approvals remaining 3.2% higher than in November 2023. Housing Industry Association senior economist Matt King pointed out that while approvals fell in November, they were up by 7.2% for the three months to November compared to the same period last year. This suggests that a moderate recovery in the new home building sector could be underway.
“The approval data highlights the ongoing strengthening of the new home building market and indicates a gradual recovery in 2025,” said King. “While the sector has faced challenges, there are clear signs of a rebound, which bodes well for future home construction activity.”
In a broader context, home prices across Australia experienced their first decline in two years in December, according to PropTrack. The national median home price fell by 0.2% month-on-month, although prices were still up 4.7% compared to the same time the previous year.
As the construction sector adapts to a changing market and inflation slows, it appears there may be a light at the end of the tunnel for new home buyers and builders alike. With easing prices, lower costs, and potential interest rate cuts, the coming year could mark a turning point for Australia’s housing market.
Related Topics:
