Published by the Australian Housing and Urban Research Institute (AHURI), the report – Overcoming construction constraints for the supply of new detached and high-rise housing – draws on work by researchers from the Royal Melbourne Institute of Technology (RMIT), University of New South Wales, Monash University, University of Tasmania and the Royal Institution of Chartered Surveyors.
It claims that the country’s detached housing output has been largely static since the 1980s. And, while the industry can flex to meet soaring high-rise residential demand, market volatility means that labour, skills and process knowledge disappear when that demand enters a cyclical downturn.
The report recommends eight government policy interventions its authors believe would limit the damaging impacts of market volatility. They are:
Develop a national strategy for efficient housing supply that integrates construction, housing, manufacturing and technology; Smooth market volatility by avoiding excessive stimulus measures and balancing social housing investment with stability across the supply of all housing types; Modernise the regulatory framework by harmonising the National Construction Code across state jurisdictions, and ensure compliance; Attract and retain skilled employees through a national construction training board and a more rigorous apprenticeship system; Include cost escalation provisions in design-and-construct contracts to enable fair and transparent risk sharing; Provide greater support for research and development; Develop domestic manufacturing of materials and components to limit volatility arising from long, unstable global supply chains; Reduce industry fragmentation by helping firms grow in size and capacity – taking care to avoid excessive market concentration.GCR spoke to Professor Andrea Sharam, RMIT-AHURI research centre director and the report’s lead author.
What’s your initial advice for companies in the residential construction sector?
Our research suggests that firms should focus on resilience rather than simply chasing growth during booms.
Companies that invest in quality assurance systems, workforce retention, stronger supplier relationships, and more standardised construction processes are likely to be better positioned to survive downturns and take advantage of recoveries.
The findings also suggest that low margins and cashflow vulnerability are major weaknesses in the sector, so improving financial resilience is as important as improving productivity.
Can firms themselves do anything to counteract market volatility?
Individual firms can only partially manage volatility because it is largely a system-level problem. Businesses can diversify work streams, maintain long-term supplier relationships, increase standardisation, and adopt more rate-driven production methods rather than relying on boom-time expansion.
However, meaningful improvement ultimately requires policy intervention to smooth housing demand to avoid extreme boom-bust cycles. Counter-cyclical social housing investment is helpful but ultimately it is about stabilising private demand, which requires a less speculative system.
What’s your view of regulation?
Building regulation is often portrayed as a drag on housing supply, but weak enforcement is actually a bigger problem.
Effective building codes improve quality, reduce defects and rework, and encourage firms to invest in better management systems.
In the longer term, regulation helps shape a more capable and productive industry, not just a more compliant one.The issue is less about reducing regulation and more about using regulation strategically to improve quality, productivity and the long-term capability of the housing construction sector.
Our research challenges a quite politicised view that building regulation is a constraint on housing supply. Australia’s residential construction industry is highly fragmented, with many small firms operating on very thin margins and relying heavily on subcontracting.
Larger, better-capitalised companies generally have greater capacity to invest in quality assurance systems, supervision, training, and compliance. The challenge is often not that regulation is excessive, but that many firms are too small and under-capitalised to respond effectively to it.
How could regulation be adapted to meet the needs of employers?
In Australia we have a federated political system which has resulted in divergent regulation. National uniformity has been a goal of policy for decades, and the National Construction Code is one example. However, the politics of responding to local interests has seen uniformity undermined with states exercising their right to derogations.
On the other hand, the administration of building codes remains state-based and many aspects of building control are very fragmented and patchy. We have a natural experiment occurring currently in which the State of New South Wales has introduced a requirement for building designers to warrant their work is compliant with the code.
This is a very important reform, as design issues are often at the heart of construction inefficiencies and defect problems.
How can supply chain risks be mitigated?
Highly globalised supply chains, as we have in Australia, are inherently vulnerable. The pandemic disruption prompted debate regarding on-shoring critical manufacturing capability. Greater standardisation of housing design and components would reduce vulnerability as it would diversify sources.
During booms, supply chains come under pressure and are a cause of delay and inflation. Downturns on the other hand are negative for suppliers and can result in firms exiting and products being withdrawn. Hence, stabilising demand should be a priority.
How can the industry better attract and retain skilled people?
Volatile housing demand creates workforce instability. During downturns workers leave, taking skills and knowledge with them. This makes it difficult to rebuild capacity when demand returns. Therefore, workforce attraction is only half the challenge; retention through stable employment opportunities is equally important.
Policies focused solely on increasing labour supply, such as migration or training, will have limited success if employment remains highly cyclical. Further, any construction workers, especially on commercial projects, are rejecting the industry culture of long shifts and six-day weeks.
Again, steady demand would provide the conditions for moving to more regular hours, and more family-friendly options would also help women into the workforce.
How could contracts be changed to include cost changes?
In Australia we have seen a widespread shift to design-and-construct contracts which shift time and cost risk to head contractors without cost-escalation provisions. This reflects the power gained by clients when there is excessive competition between builders. Early contractor involvement and open books will get a better built outcome, and there is nothing novel in this. But the issue, especially in the apartment sector, is how development is financed.
The risk of a downturn means developers are anxious to lock everything in, but in doing so it creates building risk and hence the desire to shift the risk rather than share it. In short, it is easy to change the type of contract. The problem is market conditions need to be conducive. It comes back to demand volatility.
Are there ways of boosting margins that many may not consider?
In Australia, the most obvious avenue for improving margins is to cut costs. Unfortunately, the lack of code enforcement means this often comes at the cost of quality.
The issue is not actually identifying the efficiencies, it’s embedding the cultural and process changes required to survive temporary teams and boom-bust cycles.
One example that stood out to us was psychosocial harm. When a worker is bullied they often stop showing up for work, and then they quit. This loss of capacity adds to the build time.
How could the government support R&D growth?
R&D spending in the industry is low compared to other sectors. This reflects the lack of stability.
Successful government R&D support needs to be paired with industry investment. Government R&D has a role but, more importantly, government needs to create the conditions required for the roll out of target changes or technologies.
For example, mandating the use of BIM and setting standards for interoperability of digital systems.
Are there specific concerns for detached or high-rise housing?
Yes. Detached housing output has been largely static for decades, although the population has doubled in that time.
What happens is that builders take on more work during booms. Scheduling becomes challenging and delays are more frequent. Moreover, delays are not linear. A delay in one task can cause a longer and more serious delay for a subsequent task.
Detached housebuilders will take on more jobs during a boom, but they also take longer to get the house built. That is, they rely on being able to have a backlog. The backlogs are often not fully cleared in the subsequent downturn, so when the next upswing occurs, they have less capacity to respond. So, while we see small periodic peaks and troughs, the completions trend line over a longer time period is flat.
The apartment sector also experiences inflated costs, labour shortages and delays during booms. But the sector, as we saw during the 2010s boom, can marshal the resources and smash out apartments. We believe this reflects the capacity of larger firms. This is an important lesson for the detached sector.
However, there is a downside. Developer anxiety to avoid getting caught by a downturn means poor early design resolution, inevitable construction inefficiencies and defects.
The reliance of the apartment sector on investors seeking capital gains in a rising market (incentivised by generous tax treatment of profit) means the model is orientated to private rental rather than owner-occupiers, with design and quality typically poor. The lesson government should take away is that supply is dependent on market volatility which undermines construction efficiency.
How does residential construction differ from other sectors?
Residential construction shares many of the known issues of the broader construction industry. Where it is different is that private housing demand is very sensitive to the broader economy and in many countries housing systems have become highly financialised. That is, housing is now a financial product rather than simply shelter. This has exacerbated market volatility which fundamentally undermines attempts to improve productivity.
Overcoming construction constraints for the supply of new detached and high-rise housing is available to read hereHow to solve Australia’s volatile and fragmented residential building sector Global Construction Review.
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