No end in sight for rising construction costs

There’s still no relief in sight for builders, with construction costs continuing to rise at a record rate.

According to CoreLogic’s Cordell Construction Cost Index (CCCI), national residential construction costs increased at a record 11 per cent in the year to September 2022.

The annual increase in construction costs is at the highest level, with the exception of the period impacted by the introduction of the GST in March 2001.

The 11 per cent rise was up from 10 per cent in the previous quarter, while the quarterly figure of 4.7 per cent was higher than the previous quarterly figure of 2.4 per cent.

The most recent quarter’s figure was also above the 3.8 per cent surge recorded over the three months to September 2021, when lockdowns were having a more significant impact on domestic supply chains.

CoreLogic Construction Cost Estimation Manager John Bennett said costs continued to rise, especially across timber and metal materials, which had a flow on effect on framing and reinforcing.

“In particular we are recording significant volatility in pre-fabricated framing and the range of products affected by higher building material costs is only growing, with many suppliers having little choice but to pass on price increases,” Mr Bennett said.

“This quarter has also shown a larger increase in the cost of wall linings, including plasterboard and fibre cement, which previously had been relatively stable. It will cost you more to get into your house too, with the price of doors showing a sharp rise in the last quarter.”

Mr Bennett said while some suppliers have noted a stabilisation in sea freight prices it was the increasing cost of raw materials, labour and fuel that continues to place upwards pressure on residential construction costs.

“We’re also seeing this flow into other sectors,” he said.

“We’re seeing a large increase in waste disposal fees across most states, and volatility in professional fees and services, with Victoria and Queensland showing the highest cost increases.”

The quarterly index change ranged from a low of 3.3 per cent in Western Australia and 3.8 per cent in South Australia, to 4 per cent in NSW, 5.8 per cent in Queensland and 5.6 per cent in Victoria. 

Annually, Victoria recorded the largest growth rate of all states, with residential construction costs increasing 12.3 per cent over the 12 months to September 2022.

Mr Bennett said the industry was facing significant additional challenges each quarter, with suppliers having dealt with the impact of rising fuel, freight and electricity for more than 18 months.

“A shortage of labour and more expensive overheads continue to have a bearing on the industry and its impact on the residential construction industry has not been lost, with ongoing delays to completion times and a blow out to builders holding costs during a period of market change,” he said.

CoreLogic Research Director Tim Lawless said while the rising cost of construction was not new, the persistent increase in construction costs would continue to have a big impact nationally.

“This is an industry facing tough workload pressures against a backdrop of low labour supply, material shortages, rising interest rates and inflationary pressures,” Mr Lawless said.

“This new high in the cost of construction flows through to margins, unexpected costs for consumers and potentially lengthy delays to home owners who are waiting on the sidelines, often in rental or short-term accommodation, for the completion or possibly the start of their project.

“We also forget the impact to existing home owners and the insurance industry, as they struggle to reassess existing policies in a timely manner to make sure they are adequately covered in the event they need to make a claim.”

Mr Lawless said ongoing labour shortages and supply issues meant it was likely conditions in the construction industry would remain challenging, with little reprieve expected in the short to medium-term.

“The backlog of construction approved during Covid is still being worked through and on top of that is the rebuild and repair work following this year’s major weather events, with more forecast this month,” he said.

“The demand and pressure for construction materials and trades is expected to continue.

“There’s no quick solution for providing additional materials and fuel costs remain elevated.

“All of these factors have an impact and are likely to push building costs higher for some time yet.

“Persistently high construction costs are clearly adding to inflationary pressures as well, with the price of new dwellings one of the most significant contributors to the June quarter inflation reading.”

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.