Residential construction costs rose by a record amount last year, new data shows, but signs of a slow down emerged in the latter months of 2022.
The CoreLogic Cordell Construction Cost Index (CCCI) rose 11.9 per cent year, largely driven by rising inflation and increased interest rates.
It was the largest annual increase on record, with the exception of the time period coinciding with the introduction of the GST.
For comparison, the index rose by 7.3 per cent in 2021.
CoreLogic Construction Cost Estimation Manager John Bennett said that the past two years had been challenging for the construction sector.
“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,” he said.
Price increases for commonly-used building materials had been contributing the record pace of growth.
“The biggest contributors currently are volatile timber prices, with fluctuations in structural timber costs and general increases to timber products,” Mr Bennett 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.”
Signs of construction costs easing
Despite the high headline figure the latest CCCI update indicates home builders may be in for some relief, with the 1.9 per cent rate of growth over the December quarter well down on the 4.7 per cent recorded during the September quarter.
“Although the annual CCCI remains high, on a quarterly basis there’s been an easing in residential construction costs,” Mr Bennett said.
The long-term average quarterly growth rate is 1.4 per cent.
This easing was likely the result of a reduction in demand, Mr Bennett said, with the December quarter posting the lowest quarterly increase since December 2021.
“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,” he said.
South Australia clocked the smallest increase in building costs at 1.7 per cent for the quarter, compared to highs of 2 per cent in Western Australia and Queensland.
CoreLogic Research Director Tim Lawless said that a reduced pipeline of building projects would help keep price increases lower in 2023, with new building approvals down 41 per cent since their historic high in March 2021.
“Although a large number of homes remain under construction, the dwindling number of approved homes in the construction pipeline should help to alleviate construction costs down the track,” he said.
Better availability of construction workers as a result of increased migration would also help.
“Anecdotally, as skilled migration continues to ramp up, we should see the costs associated with some trades and labour slow further,” Mr Lawless said.
This reduction in construction cost growth would help lower the rate of inflation, given that high construction costs had been a key reason for growth in the consumer price index.
“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,” he said.