Home building in for a soft landing as rates rise, HIA says

Rising borrowing costs are predicted to hit spending power and confidence, cutting new housing starts and putting further pressure on a detached house-building sector that will shrink by almost one-third from the 2021 peak of 141,000.

Already rising borrowing costs will increase further when the Reserve Bank lifts its benchmark cash rate, making financing new houses more expensive and cutting dwelling commencements by close to 96,000 by 2025, the Housing Industry Association said in its quarterly forecast.

“The key feature that will mark the turning point in this cycle will be a rise in interest rates,” HIA chief economist Tim Reardon said.

“When interest rates inevitably increase, it will reduce households’ borrowing power. Slower house price growth will see banks increasingly reluctant to lend for the construction of a new home and have a negative effect on consumer confidence.”

Total housing starts are likely to trough at 178,000 dwellings in 2024, close to their 182,400 average over the 15 years to 2021, the HIA predicts.

The forecasts point to a soft landing and offer some relief to a housing sector that a year ago was warning of a hangover after the federal government’s HomeBuilder incentive ended. That scenario was avoided, in large part because the pandemic-driven demand for larger homes coincided with record-low borrowing costs to keep demand for new homes ticking over.

But now the detached-house sector has a way to come off its current boom. Housing starts in the September quarter of last year stood at 35,770, the third-highest quarter on record, despite pandemic-imposed restrictions on activity in many markets.

That figure is likely to drop as low as 25,090 by the December quarter of 2023, the HIA said.

Over the same time, affordability pressures and the resumption of overseas migration will boost starts of apartments and townhouses, partially offsetting the sharp slowdown in detached dwellings.

So-called multi-unit housing starts will rise from their recent trough in 2020 of 70,760 to a forecast 77,680 in 2022 and bounce around that level, the HIA forecast.

But the total could be higher.

“There remains considerable upside risk to the multi-unit market if migration returns faster than anticipated and if affordability and supply constraints impede detached activity,” the industry group’s report said.

“Rising rates will also see a relative improvement in demand for apartments.”