Construction costs skyrocket to new heights

Australian construction costs have hit a new high, but there are signs emerging they are easing, a new report has found.

CoreLogic’s Cordell Construction Cost Index (CCCI) found prices increased by 11.9% over the 12 months to December 2022 – the largest annual increase on record. Meanwhile, December’s quarterly growth rate of 1.9% was less than half the Q3 figure of 4.7%.

Labour shortages are still persisting as timber, metal and petrol prices remain volatile.

The CCCI broke down construction cost increases across the five states with the highest populations.

CoreLogic construction cost estimation manager John Bennett said the recent quarterly figures reflected the post-pandemic operating period which was being hampered by rising rates and high inflation.

“The industry has been through a very challenging 18 months to two years, with extreme periods of volatility in pricing due to restricted domestic supply chains, material and labour shortages,” Bennett said.

“Although the annual CCCI remains high, on a quarterly basis there’s been an easing in residential construction costs. This reflects a pull back from consumers, builders and will eventually flow through to suppliers, as projects are delayed or put on hold in the current economic environment.”

Construction costs affected by volatile timber prices

Bennett said it was the lowest quarterly increase in the index since December 2021 and although there had been an improvement compared to the runaway September figures, the quarterly rate of growth remained higher than the five-year average of 1.4%.

“The biggest contributors currently are volatile timber prices, with fluctuations in structural timber costs and general increases to timber products,” he said.

“Prices for metal products such as gutters, lintels and fixings used for roofing and structural purposes continue to increase and concrete values also remain unstable. Petrol rises are affecting cartage and delivery costs, notably concrete, however larger items such as rainwater tanks are also affected.”

Bennett said he does not expect costs in 2023 to continue to grow at the same rapid pace as they had during the past 18 months as consumers, builders and suppliers proceed with caution against a backdrop of rising rates and inflationary pressures.

Fall in dwelling approvals should alleviate pressure on construction costs

CoreLogic research director Tim Lawless (pictured above) said dwelling approval figures had dropped by 41% since moving though historic highs in March 2021.

“Despite a substantial pipeline of residential construction work still to be completed, the drop off in consents would have helped reduce some of the pressure on the industry,” Lawless said.

“Although there remains a shortage of labour, the opening of borders and arrival of skilled workers is also expected to eventually flow through to the construction industry. Although many homes remain under construction, the dwindling number of approved homes in the construction pipeline should help to alleviate construction costs down the track.”

Lawless said anecdotally, as skilled migration continued to ramp up, there should be a trend of costs associated with some trades and labour slowing further.

“The housing component of the Consumer Price Index (CPI), which includes both the costs of building a new home and rents, has been one of the main contributors to high inflation over the past few years,” he said.

“A reduction in growth associated with the cost of building a new home should gradually flow through to less inflationary pressures from the housing sector through the year.”

Flow-through effect of higher interest rates yet to be felt

On January 10, the Housing Industry Association (HIA) reported a fall in building approvals at the end of 2022 was the next step in what had been a very well-broadcast downturn in the housing market.

HIA economist Tom Devitt said this was caused by the increase in the official cash rate.

“The full impact of the 2022 increases in the cash rate will not be observed until the second half of 2023,” Devitt said.

“We saw a 9% decline in building approvals for {December} the month, including a 2.4% fall in detached approvals and a 19.9% fall in multi-units. This puts detached approvals over the three months to November down by 12.1% on the same quarter in 2021 and multi-units down by 11.4%.”

A recent survey conducted by SME lender ScotPac found 100% of Australian SMEs had been hit by supply chain disruptions and as a result, two in three were increasing their prices.

ScotPac CEO Jon Sutton said larger SMEs (those recording $5 million to $20 million in annual revenue) told the lender they had experienced average production and other input cost rises of 20%.

“This is compared to 12% for smaller SMEs ($1 million to under $5 million in revenue) and larger SMEs increased the price of their goods and services by an average of 18%, compared to an average increase of just 1.5% for smaller SMEs,” Sutton said.

“The key areas of advice SMEs felt they needed to better navigate supply chain disruptions included alternate business funding tools such as invoice finance (25%), general risk advice and guidance (20%) and new supplier network referrals (16%).”

What are your thoughts on rising construction costs and the challenges they bring? Let us know in the comments below.