Australia housing approvals point to weaker 2027 outlook

CreditorWatch has warned that Australia's residential construction sector is likely to weaken in 2027, following the latest building approvals data.

The credit reporting company's economist said higher interest rates and falling house prices were the main pressures on housebuilding, even as non-residential approvals remained strong because of data centre projects linked to AI investment.

Total residential approvals rose 5.1% in September after a 5.2% increase in August. However, that headline figure masked diverging trends across the main categories.

Private sector house approvals, the largest component of residential construction, fell 5.3% after a sizeable rise in the previous month. CreditorWatch said the trend in house approvals had flattened in recent months, in line with the impact of recent and expected interest rate increases and declining house prices.

By contrast, the more volatile multi-dwelling segment, which includes apartments, rose 16.6% in September and drove the overall increase in residential approvals. That gain followed a broadly similar fall in August.

The group said it was difficult to judge how much of the current pattern in apartment approvals reflected current and emerging housing conditions because projects in that category usually take longer to reach the approval stage.

Residential pressure

Ivan Colhoun, chief economist at CreditorWatch, said a key issue for the sector would be how much of the approved pipeline actually moved into construction.

"House approvals appear to be levelling off and are expected to decline over 2027 under the weight of higher interest rates and lower house prices. The key question on the residential side is how much of the current pipeline of work will proceed to the commencement phase given falling house prices and tighter conditions in private credit markets," Colhoun said.

That points to a possible gap between approvals and actual building activity if developers and financiers become more cautious. Tighter private credit conditions could be particularly significant for smaller builders, which are often more exposed to shifts in borrowing costs and financing availability.

Outside housing, the picture was markedly different. Non-residential approvals rose 46% month on month in September, reversing a similar fall in August.

CreditorWatch described non-residential construction as the strongest part of the economy at present, with data centre projects a major driver of approvals. Demand for such facilities has risen alongside investment in AI infrastructure.

Data centre effect

The expansion in data centre construction may support broader economic activity, but it could also create side effects for residential building, including sustained pressure on materials prices and competition for skilled labour.

"The questions here concern public pushback to these constructions in some locations as well as the extent to which this construction boom adds pressure to smaller residential builders and other forms of construction by drawing labour away and keeping building materials prices rising," Colhoun said.

The warning reflects a familiar problem for the construction industry when one segment grows much faster than another. Large non-residential projects can absorb tradespeople, engineers and specialist contractors while also lifting input costs across the market.

For smaller residential builders, that can add strain at a time when demand is already softening. Margins may come under pressure if materials costs remain high while new housing work slows and buyers become more hesitant amid falling prices.

CreditorWatch said the non-residential boom might offer only partial comfort for the industry as a whole. Activity in data centres and other major projects could support employment and output, but the benefits may not flow evenly across the building sector.

"While a positive support for the broader economy, it's unclear how favourable this development will be for residential builders, with the boom likely to keep construction materials price growth elevated and draw labour away from residential construction. This may add to financial pressures on smaller residential builders as residential construction slows through 2027," Colhoun said.