Home prices have surged in recent years, mortgage rates have moved higher and growth in household incomes hasn’t kept up.

As a result, housing affordability has deteriorated sharply hitting its worst level in at least three decades.

Despite the shortage of homes, the delivery of much-needed new homes has faced significant obstacles due to labour shortages, disrupted supply chains, and pandemic-related restrictions.

These challenges are compounded by a pre-existing array of difficulties, including delays in planning, limited land availability, and excessive bureaucratic processes.

These persistent delays not only slow down the building process but also contribute to higher construction costs, adding to the burden of inflation in building material prices and higher financing costs.

These challenges are contributing to the persistent housing supply deficit flowing through to both prices for existing homes and the rental market, fuelling continued upward pressure on home prices and rents.

Many are hoping that housing supply will lift to match strong demand, however per capita building completions and approvals are both at historic low levels.

Unless these challenges and cost pressures ease, delivering enough new houses or apartments will be difficult and we will continue to see the housing and rental affordability crisis worsen.

Since the pandemic, building input prices have increased 33.4% while output prices have risen 40.1% for houses and 23.2% for apartments. Although price rises have stabilised in the past year for input costs, build costs remain at a now higher level and continue to increase, albeit at a slower pace.

Higher labour, materials and financing costs compress margins, resulting in a potentially lower return on investment, which has delayed many projects.

Though growth has eased, the surge in labour, construction and financing costs has also pushed up prices of new builds.

Buying new versus established

Both established house and unit price growth in Sydney is lagging price growth of new builds.

This greater price inflation for new builds has increased the premium of buying new housing over existing stock.

This discrepancy in price between existing and new properties is another challenge for new development of both houses and units.

While there is strong demand for new housing, construction costs have risen so much that in many parts of the country replacement costs are more expensive than what existing homes are selling for.

This means in many regions buying an existing home in lower cost new build areas may have become more attractive.

In Sydney, most new house development is occurring in the 11 local government areas comprising Western Sydney. And in Western Sydney, the median price of new houses are currently listed at a 21% premium to existing houses for sale.

Potential investors and owner occupier buyers that may have looked primarily at Western Sydney’s new house and land market are likely also considering the established market, given the premium that buying new currently presents.

Of course, one advantage to buying new are the depreciation benefits which are at a maximum for new homes, meaning the greatest depreciation returns will be delivered by buying new houses or apartments.