“If you build them, they will come”. This line from the 1989 film “Field of Dreams” could just as easily apply to Australia’s ‘always-in-demand’ housing market. Sure, interest rate rises and the correlating increase in the cost of borrowing and mortgage serviceability will dent some house prices and encourage some vendor discounting (the average price reduction that sellers are willing to take if they want to sell their home quicker). However, these market forces will likely only result in a temporary reprieve from unprecedented growth fueled by the Pandemic. Why temporary, you ask? Because the costs of construction have increased more than ever before in modern Australian history. We take a look closer look at why this is happening and what it means for the prestige property market.
With new waves of Covid varieties again sweeping the globe, no one knows what might be behind the corner, both in Australia and globally. With lockdowns, layoffs and constant constraints, many developers are less eager than before to jump into large-scale building projects. Other developers that have not gone under have had to weather unforeseen and increased operational costs – and therefore are more cautious before developing further. Putting concerns for the future aside and taking a snapshot of the present, we know that construction companies, developers and suppliers are facing some of the most challenging conditions since the onset of the global health crisis.
There are shortages of concrete, steel, glass, gravel, plastic piping, tiles, and almost every necessary building material. Material shortages inevitably drive up competition for them, and therefore the direct costs of materials acquisition rise. Simply put, there is more demand for what available materials there are.
But it gets even more complicated than that. There is a well-known global shortage of semiconductors, essential components in almost all smart technology. This means security systems, home entertainment systems, and integrated climate control in the home. Not only that, semiconductors are essential in building equipment such as on-site safety monitoring devices, vehicles, phones, tools, you name it. Without the relevant tools and technology, houses (especially prestige and luxury residences) will not be completed on time, or with a lower specification.
So we know there is already more demand for fewer resources and technology. On top of this, suppliers have had to overcome massive increases in the cost of shipping, labour, fuel and, finally, inflation.
So it costs more to bid on materials, move them and when they all arrive – the labour force costs more to employ! Then there is the organisational nightmare (and extra cost) of extended construction timelines as a result of all the materials not arriving when needed. Project delays due to staff and material shortages are one of the main reasons many construction companies have been unable to complete developments. Indeed, upon realising that the completion cost would be less than the potential return – some builders have opted to walk away from incomplete projects to minimise losses.
When interest rates increase, we know mortgage payments increase and total loan amounts offered to home buyers go down to ensure mortgage serviceability. With the RBA making significant and often reactive monetary policy decisions (who can forget said that there would be no rate rises in 2022), developers have found themselves unable to borrow the necessary funds to ensure successful construction completion. Existing debt repayments have increased, and attracting new investments and loans has become more complex.
The lack of essential and specialist materials and services has had a long and enduring effect on the Australian construction industry, with almost no project unaffected by the supply chain disruption.
We are taught in Economics 101 that if demand exceeds supply, then prices increase. When it comes to prestige property, this is compounded even further.
“We classify prestige property by location, size and quality of construction, as well as fittings and inclusions,” says Mercer and Cooper co-founder Bernice Cooper.
Prestige property is, by definition, exclusive, not overproduced, something of inherent value. To be genuinely prestigious, it should have some quality that not everyone can get. These could feature, this could be location, and often all of the above. These fine features, from Miele appliances to marble flooring, are much harder to come by. For example, timber products such as oak beams can no longer be legally sourced. Therefore, homes currently fitted with historic oak beams, fireplaces or other prestige features are understandably more in demand.
Due to all the above factors (and many more beyond the scope of this article), many buyers opt not to take the risk associated with building their own home or buying off-plan. After all, one can’t be too sure of the final cost or even time of completion. At the same time, inflationary pressures and a general stock market downturn mean capital is steadily losing its purchasing power. This makes parking one’s capital in bricks and mortar or other prestige assets a standard move for high-net-worth investors.
Ultimately, typical buyers of prestige properties are more likely to hedge their bets on property that is built and ready to go with all the trimmings and inclusions that they want – in the locations they love.
All of this boils down to one simple truth: The demand and prices commanded for prestige property – especially in the glorious Gold Coast – will remain high for the foreseeable future.
If you want to sell your property, you may be surprised to find out what it is worth. Based in the heart of Paradise Point, we specialise in selling prestige properties in some of the Gold Coast’s most exclusive suburbs. Don’t hesitate to contact Mercer and Cooper today for a free, no-obligation property appraisal.
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