Despite the war in Iran driving up construction costs, an expert anticipates that the supply of new homes will continue to grow, keeping agents active.
Australia’s property market has been affected by the conflict in Iran, with construction costs taking a major hit and the cost of a new-build home rising, with further increases on the way.
According to the Housing Industry Association’s (HIA) latest data, the 1 per cent rise in oil prices equates to more than a $3,500 increase on the most affordable four-bedroom, two-bathroom home build.
The HIA tipped that when the annual price increases for materials take effect on 1 July, customers could face an additional $30,000 bill.
Recent ABS data found that the average cost of a new-build home reached $522,537 in February, with prices poised to keep rising amid global events that are increasing uncertainty across the industry.
Housing Institute Association chief economist Tim Reardon said the war in Iran’s impact would be felt on three levels: the short-term price impact of oil, the risk of a prolonged disruption and its impact on inflation and interest rates.
Reardon said the Iran conflict had a significantly different effect on the market than the COVID-19 pandemic, causing a short-term price impact rather than a supply chain disruption.
“We’re not talking about disruption to supply; there has been no impact on the supply of any building materials as a consequence of the war, including transport fuels,” Reardon said.
“There is a risk that if the war is prolonged, there will be an impact on supply, and the oil price ‘shock’ will be more than just a shock.”
He said the oil price shock had coincided with the standard price-increase cycle, and that the overall cost of materials had risen in line with expectations.
Reardon said that while the price of some materials would continue to trend upward over the next 12–18 months, the biggest factor influencing the cost of building a new home would be the land.
“Land prices have risen two to three times faster than the cost of labour and materials,” he said.
“It’s a direct consequence of government investment, infrastructure and constraints leading to rapidly rising prices.”
While the war in Iran had caused fluctuations in the cost of building or renovating a new home, its biggest impact was on inflation and interest rates.
Reardon said that the oil price shock could see inflation continue to put pressure on interest rates, driving them upwards
“Higher interest rates have a bigger impact on home building than just about any other factor,” he said.
Reardon said he anticipated property values would likely continue to rise strongly once the impact of economic factors had settled.
“Once the smoke of the rate rises and the Iran war clears, we are left with a growing population and relatively constrained volume of homes,” he said
“It is difficult to see a circumstance where the supply of housing exceeds the growth and demand.”
To combat the rising cost of land and materials, Reardon said more households had turned to home renovations rather than building new homes.
He said that renovation activity was currently at very high levels, particularly at the higher end of the market.
“Households are increasingly adjusting their existing residence to accommodate their needs, either increasing or decreasing capacity, which is likely to continue as we continue to undersupply housing,” he said.
Despite the tougher economic conditions, Reardon said he anticipates that the number of commencements in new units and detached houses would continue to grow.
“As long as unemployment and population growth continue to outweigh the impact of pricing construction and borrowing costs, commencements would continue to grow, albeit at a slower growth than we would have otherwise expected,” Reardon added.
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