A 30 percent surge in residential construction costs1 over the last two years has prompted developers to shelve projects as property prices in Sydney and Melbourne flatline.

According to new analysis by KPMG Australia, almost 16,400 dwellings in New South Wales were approved but not yet commenced by the end of March, up from 13,800 at the same time last year. The last time construction levels stalled with a high number of approvals in New South Wales was in 2019, when developers were not commencing projects due to historically high vacancy rates (around 3.5 percent in Sydney, compared to about 1.4 percent today).

In Victoria, almost 10,500 dwellings were approved but construction had not yet commenced by the end of March, up significantly compared to 5,000 dwellings in March the prior year. Only December 2017, recorded a higher number (11,400) of dwellings not yet commenced.

Around three-quarters of the not-yet-commenced dwellings in New South Wales and Victoria are slated to be apartments or townhouses.

“Property developers are shelving projects because of soaring costs and lacklustre property prices. Some are even going bust,” KPMG urban economist Terry Rawnsley said.

“Both Victoria and New South Wales have increased demand for new dwelling approvals, but dwellings are far from materialising, due to significantly higher input costs and a potentially lower return on investment.”

Queensland and Western Australia have not seen the same slowdown in residential construction, largely due to the fact that house prices in those states have remained comparatively more robust, Mr Rawnsley said.  Those states also have a smaller proportion of new medium and high-density dwellings, which tend to be more sensitive to cost increases.

“With the increases in construction prices starting to moderate and property prices in New South Wales and Victoria stabilising, the rapid increase in dwellings not yet commenced is starting to slow,” Mr Rawnsley said.

Still, the trend in New South Wales and Victoria is unlikely to reverse anytime soon, with construction cost increases tipped to return to historical growth rates, firmly down on the 30 percent hike we’ve seen over the last two years, Mr Rawnsley said.

“These not-yet-commenced dwellings represent a pool of approved homes, which can be quickly delivered when market conditions improve,” Mr Rawnsley said.

1. Between March 2020 and March 2023 residential construction costs increased 29% in Sydney and 32% in Melbourne.

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