In December 2023, I wrote about how construction costs had dramatically outpaced house price growth, making it cheaper to buy an established home than build new.
At that time, nationally, capital city house prices had risen by just 11 per cent while construction costs had soared 27 per cent over the previous two years.
Fast forward to mid-2025, and while it remains cheaper to buy than build in most markets, the gap is finally narrowing.
Some capital cities are now seeing house price growth outpace construction cost inflation for the first time in years – a crucial shift for housing supply.
The national picture has improved dramatically since my December 2023 analysis.
Over the full four-year period from 2021 to 2025, construction costs have risen 35 per cent while house prices have increased by 32 per cent – a gap of just 2.3 percentage points.
This is a remarkable narrowing from the 16 percentage point gap I identified in late 2023.
The narrowing gap is evident in the national data, which shows house prices and construction costs tracking much closer together through 2024 and into 2025.
Unlike the earlier period where construction costs surged ahead, the lines are now converging.
What’s changed since December 2023
The transformation has been particularly striking in Perth, which I highlighted as having 20 per cent house price growth against 40 per cent construction cost increases.
Now, Perth house prices have surged 66 per cent over the four-year period, significantly outpacing the 56 per cent increase in Western Australian construction costs.
Perth has not only closed the gap but reversed it – finally reaching replacement cost levels that encourage new home construction.
Adelaide shows a similar pattern, with house prices up 64 per cent compared to construction cost growth of 45 per cent.
Brisbane follows the same trend, with house prices rising 58 per cent against construction costs of 40 per cent.
Eastern capitals still lagging
However, the story remains challenging in Australia’s largest housing markets.
Sydney house prices have grown just 19 per cent since 2021, well below the 32 per cent increase in New South Wales construction costs.
Melbourne presents an even more stark picture, with house price growth of only 4 per cent dramatically lagging behind Victoria’s 25 per cent construction cost inflation.
Canberra shows the most extreme divergence, with house prices up 10 per cent while Australian Capital Territory construction costs have soared 41 per cent.
Supply implications
These diverging trends have significant implications for housing supply.
In cities like Perth, Adelaide and Brisbane, where house prices now exceed construction cost growth, we should expect to see renewed interest in building new homes as the economics finally stack up.
Conversely, in Sydney, Melbourne and Canberra, the economics of new construction remain challenging.
Until house prices rise further or construction costs moderate significantly, these markets will continue to see limited new supply.
The Federal Government Housing Accord plans to deliver 1.2 million new homes over the next five years.
While there are many challenges to meeting this goal, the improving economics in some markets provides hope, even as the major eastern capitals remain constrained.
Despite the narrowing gap, it remains cheaper to buy an established home than build new in most markets.
However, the momentum is clearly shifting. For the first time in years, we’re moving in the right direction for housing supply.
