The movement of interest rates this year will dictate the direction the housing market would go next.

Housing Industry Association economist Tim Reardon said the next course after the current “super cycle” in the housing market rests on whether the cash rate increases this year, as predicted by many experts.

“When interest rates inevitably increase, it will reduce households borrowing power,” he said.

“Slower house price growth will see banks increasingly reluctant to lend for the construction of a new home and have a negative effect on consumer confidence.”

Mr Reardon said the uptrend in borrowing rates has already started as many lenders raise their fixed rates for both investors and owner-occupiers.

Furthermore, the cost of land, labour, and materials are “rapidly” increasing.

According to CoreLogic’s latest Cordell Construction Cost Index (CCCI), national construction costs increased by 7.3% over 2021, the highest annual growth rate since March 2005.

“These rising costs have not yet had a significant adverse impact on demand for new homes, as established house price growth has exceeded these cost increases,” Mr Reardon said.

However, as price growth slows down and access to finance tightens, these rising costs would only further dampen the demand.

“Despite this slowing in demand for new homes over the coming years, if the national economy remains strong and unemployment low, the bottom of this next cycle will not be sharp, deep or sustained.

The expected sluggish demand for detached homes would see commencements reach pre-COVID levels at the end of 2023.

On the other hand, multi-unit starts are likely to gain some of the losses from the detached home segment. However, the level of commencements in the unit market will likely remain below pre-COVID.

“The affordability constraints in detached housing are expected to push some households into townhouses and apartments,” Mr Reardon said.

“A return of migration will assist in offsetting the impact of a rise in interest rates for multi-unit construction.”

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