WEALTH HUB JOURNAL

Lower Building Costs on the Horizon

Construction costs are projected to fall next year, following years of skyrocketing costs due to material and labor shortages caused by the pandemic and, more recently, the war in Ukraine. This is welcome news for those who’ve had plans frustrated by the high prices, and many developers have put projects on hold in anticipation of the drop.

According to the Q2 2022 report by consultancy Rider Levett Bucknall (RLB), hikes in construction costs are expected to ease considerably between today and next year in all regions except Darwin.

• Adelaide – 4.8 per cent in 2022 to 3.8 per cent in 2023
• Brisbane – 10.5 per cent to 5.1 per cent
• Canberra – 5 per cent to 4 per cent
• Darwin – 4 per cent to 5 per cent
• Gold Coast – 11.5 per cent to 5.5 per cent
• Melbourne – 8 per cent to 4 per cent
• Perth – 9 per cent to 5 per cent
• Sydney – 6.9 per cent to 3.9 per cent
• Townsville – 12.6 per cent to 5.5 per cent

Construction costs are expected to decrease due to the easing of demand as manufacturing and logistics begin to normalise by the end of 2022. This will also lower material prices.

However, while things are looking up, “Supply chain instability, shipping costs, and the battle to secure appropriate levels of skilled labour are also all set to remain constant obstacles to the industry as we see out 2022, and move into 2023”, said Domenic Schiafone, RLB’s Oceania Director of Research and Development.

More Owner-Occupiers Changing Lenders

More Australians are refinancing with new lenders. This is due to rising interest rates as borrowers seek to optimise their loans.

Katherine Keenan, head of Finance and Wealth for the Australian Bureau of Statistics (ABS), said, “The value of owner-occupier refinancing, where the borrower changed lender, was 25 per cent higher in June compared to a year ago.”

She said higher interest rates in recent months have motivated borrowers to seek loans with lower interest rates, and the market has driven lenders to compete for them.

The value of borrower refinancing of owner-occupier housing loans between lenders increased 9.7 per cent to a record-breaking $12.7 billion in June, Ms Keenan said.

According to the report, the rate of first home buyers dropped 8 per cent to 9,393 over the month. This has brought the number near to pre-pandemic levels — as February 2020 saw 9,549 first home buyers.

Nationwide, loans to investors saw a 6.3 per cent drop. The highest was in Western Australia with a 10.6 per cent decrease to $78 million, followed by New South Wales at 10.5 per cent or $439 million. Victoria fell 3.4 per cent to $100 million.

Additionally, the ABS reported a 4.7 per cent drop in building approvals in June. This followed a 10.8 per cent increase the previous month.

Banks Offering Discounts to Some Borrowers

As interest rates increase, lenders are offering incentives to low-risk borrowers. According to research by Canstar, roughly half of banks in Australia are using discounts to attract borrowers with a significant deposit or home equity.

Steve Mickenbecker, a financial commentator for Canstar, said these discounts and incentives are a strategy by some banks to boost their market share. “With the outlook for continued economic growth clouded in the face of rising interest rates, it is not surprising that lenders are competing harder for lower-risk borrowers”, he said.

In fact, 49 per cent of lenders are offering a discount on their interest rate worth an average 0.21 per cent to new and existing customers with a 40 per cent deposit or equivalent equity in their home.

Also, 29 per cent of lenders are offering deals to borrowers with a 30 per cent deposit or similar equity in the property. But the average discount is only 0.13 per cent.

“Lenders are looking for loans where there is a greater buffer for falls in property prices, and almost half of them are rewarding these borrowers with lower interest rate offers”, Mr Mickenbacker said.

Imminent Crash Unlikely

Worries of a looming crash in the property market are not supported by evidence, according to Nerida Conisbee, chief economist at Ray White.

While many experts are sounding the alarm for imminent price drops, the facts just aren’t there.

“The conditions are just not in place for the sort of house price declines that some forecasters are putting out there”, Ms Conisbee told The Australian.

Reported in The Courier Mail, fund manager Emmanuel Datt of Datt Capital called the doom and gloom predictions “nothing short of ludicrous”.

On the contrary, Mr Datt said low vacancy rates and rent prices increasing more than 10 per cent a year point to property continuing to attract long-term investors.

While rising interest rates may not be ideal for borrowers, Datt predicts they are unlikely to default on their loan.

Quote of the Week

“Supply chain instability, shipping costs, and the battle to secure appropriate levels of skilled labour are also all set to remain constant obstacles to the industry as we see out 2022 and move into 2023.”

Domenic Schiafone, Oceania Director, Research and Development, Rider Levett Bucknall (RLB)

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