Perth’s housing shortage is being squeezed from both ends

Developing apartments has never been straightforward. It requires capital, conviction and a tolerance for risk that most industries would find uncomfortable.

Adding to the complexity of building this critical housing product is the current need for developers to simultaneously manage escalating construction costs and rising interest rates, with both moving in the wrong direction and neither showing any sign of reversing.

The impact on construction costs is more visible and commonly understood, with well-documented construction cost challenges plaguing the home building industry since the COVID-19 pandemic, and the conflict in the Middle East introducing a fresh jolt to global supply chains.

The Civil Contractors Federation has warned that soaring fuel and material costs are pushing projects across the country towards unviability, with diesel, which underpins virtually everything that moves on a construction site, having doubled in price since the conflict began.

And some of Australia’s largest developers have estimated the conflict could add as much as $50,000 to the cost of a new apartment if it continues.

The second pressure is no less significant – futures markets are currently pricing three additional interest rate increases this calendar year, which would take the official cash rate to 4.85 per cent, an 18-year high.

Interest rate rises and cost-of-living pressures may reduce the buyer pool, but they also create a unique opportunity for investors looking to maximise on a downturn in competition in what has been and will continue to be a highly competitive housing market.

And despite less people finding themselves with the risk appetite or capacity to buy, demand for residential accommodation shows no sign of abetting, with Australia’s housing target of 1.2 million homes already falling well short of its required run rate before either pressure intensified.

While it isn’t possible to predict what will happen next in the Strait of Hormuz, predictions around the upside in Perth’s apartment market are much more reliable.

Western Australian developers have navigated significant headwinds before, with pandemic-era supply chain disruptions, acute labour shortages and sustained cost pressures all testing the sector over the past decade.

Through each of those periods, apartment values continued to rise, and risk tolerant investors who held their position benefitted.

In an environment where delivery risk is real, the track record of the developer a buyer chooses has never been a more important consideration.

Today’s environment may be more demanding than most, but the enduring link between elevated risk and meaningful reward remains – and with demand continuing to outstrip supply, opportunities persist even amid uncertainty.