Construction loan demand falls to new low

Only 2,661 owner-occupiers took out a new construction loan to build their home in March 2023 (in seasonally adjusted terms), the lowest number recorded by the Australian Bureau of Statistics (ABS) for its Lending Indicators dataset.

The number marked the second month in a row that record-low numbers of owner-occupiers have turned to lenders for a construction loan, according to the ABS data, being 2.4 per cent down on February figures.

When compared to the same period in March 2022, when home building was still booming, the March 2023 figures represent a drop of 35.1 per cent in demand.

Over the 21-year history of construction loans being tracked, the only other time the number of owner-occupiers taking out new construction loans was during the global financial crisis, in November 2008.

Indeed, November 2008 was also the last time that such a small number of owner-occupier loans were written for new builds (including loan commitments for the construction of new loans and the number of new loans for the purchase of a newly erected home).

A total of 4,280 loans were written for either the construction or purchase of a new home in March 2023, just 10 more than in February 2023 and 25 more than in November 2008.

In original terms, the total number of loans for the purchase of construction of new homes in March 2023 declined in almost all jurisdictions compared to March 2022.

The largest drops were seen in the ACT (-37.3 per cent), NSW (-36.3 per cent), and Tasmania (-33.0 per cent), followed by Western Australia (-30.6 per cent), South Australia (-29.7 per cent), Victoria (-28.0 per cent), and Queensland (-21.8 per cent). 

The Northern Territory saw the only increase, up by 26.1 per cent over the year.

The record-low demand came following a boom in construction loan demand over the past few years (up to a peak of around 10,000 construction and purchase loans being originated during the first six months of 2021).

It also came following the collapse of several home builders that have been struggling to fulfil contracts amid rising costs, constrained supplies, and a dearth of available tradies.

Noting that lending for the purchase or construction of a new home “remains at its lowest level in 15 years”, the chief economist of the Housing Industry of Australia (HIA), Tim Reardon, added: “The last time so few loans were issued for the purchase or construction of a new home was in November 2008, when the GFC caused a contraction in building.”

Speaking to Mortgage Business, he added: “Unlike that time, there is an enormous volume of homes currently under construction. So, there’s almost two years worth of homes under construction that will reach completion over the course of the next 18 months. 

“Usually a slowdown of this size would push the national economy into recession, but that’s not going to happen in this cycle because there’s so much work currently underway on the ground that will sustain the economy for at least 12–18 months.”

However, he added that the data confirmed that “ongoing and significant declines in new home sales will see new home commencements slow significantly in the second half of 2023, under the weight of the higher cash rate”.

He warned: “The risk is that because of the volume of building work [currently ongoing], the full impact of the Reserve Bank’s rate rises [is] being obscured from view.”

The HIA economist explained that the weak lending figures observed by the ABS in March will not be apparent in other economic indicators until 2024, when the volume of homes under construction declines more markedly. 

“Given these long lags, the RBA shouldn’t be waiting to see unemployment rising before pausing the increase in the cash rate,” he said.

“We are concerned that when [the impact of the rate hikes] become apparent, it may be too late for the Reserve Bank to stimulate home building on the other side.

“So, we’d certainly like to see a very cautious approach to rate increases rather than the rapid increase that we have seen to date.” 

The HIA economist added that the pickup in total new lending is “likely to be short-lived as the weight of interest rate increases continues to constrain confidence.”

[Related: New home sales continue to fall in March: HIA]