Rising construction costs signal a return to trend

Construction cost increases have reaccelerated, but experts believe this is just a return to trend and not another new surge in prices, according to CoreLogic.

The Cordell Construction Cost Index (CCCI), which tracks the cost to build a typical new dwelling, recorded a growth rate of 0.8 per cent over the three months to December 2023.

Construction costs had risen as much as 4.7 per cent in the third quarter of 2022, before falling to 0.5 per cent in the third quarter of 2023.

CoreLogic Economist Kaytlin Ezzy said although the quarterly CCCI reading had risen, the latest growth rate remains 20 basis points below the pre-Covid decade average of 1 per cent.

“This suggests that reacceleration is more a return to trend rather than a new surge in construction costs,” Ms Ezzy said.

“While up over the quarter, the annual change in residential construction costs continued to ease as larger quarterly increases fell out of the annual calculation.” 

Ms Ezzy said at 2.9 per cent, the latest 12-month increase was the smallest annual rise in the national CCCI since the year to March 2007 (2.7 per cent) and below the pre-COVID decade average (4 per cent).

“This suggests that growth in construction costs have normalised after recording a recent peak of 11.9 per cent over the 12 months to December 2022, albeit at a higher level,” she said.

“Although 26.6 per cent higher than at the onset of the pandemic, the recent surge in CCCI is below the increases seen across national house values, with CoreLogic’s Home Value Index rising 36.5 per cent over the same period.”

For the quarter, construction costs rose the fastest in Melbourne at 1.1 per cent, up from 0.3 per cent in the prior period, with the annual rate now at 2.9 per cent.

In NSW, costs rose 1 per cent for the quarter, which is slightly ahead of the pre-COVID average of 0.9 per cent, while the annual rate eased to 3.1 per cent.

Queensland recorded the lowest quarterly rise at just 0.1 per cent, down from 0.8 per cent in Q3, bucking the acceleration trend. 

In WA, construction costs rose 0.7 per cent over the quarter, up 50 basis points on Q3. 

Annually, WA’s CCCI increased by 2.3 per cent, which was the lowest annual rate among the states. 

While SA’s CCCI increased by 0.5 per cent, down from 0.6 per cent in Q3, also bucking the national trend.

CoreLogic Construction Cost Estimation Manager John Bennett said pricing remains generally unsettled, with no clear trend seen across most product types. 

“Depending on the supplier, both increases and decreases were recorded in timber and metal prices, although we have seen rises in the price of hardware and chemical items,” Mr Bennett said. 

“This tells me suppliers are either bringing their product pricing back down to acceptable levels from the increases during the Covid period, or they are increasing to set up for the year ahead.

“While dwelling approvals are still well below historic averages, there is still an elevated level of projects under construction which is keeping cost pressures high.”

Ms Ezzy said the outlook for construction costs over the coming year was uncertain. 

“While it’s unlikely we’ll see any declines in construction costs, the pace of growth could be influenced by several factors,” she said.

“Although national dwelling approvals have risen from a recent low of 12,185 in January, the latest data from the ABS showed that dwelling approvals remained -15.8 per cent below the decade average in November at around 14,500. 

“Although a number of projects are still moving through the construction pipeline, the recent lull in approvals could result in a shortfall in new projects, which would help keep growth in building costs low, due to greater capacity in the construction sector.”

Ms Ezzy said with CPI continuing to ease, it looked increasingly likely there would be a cash rate cut in the second half of 2024, which could fuel housing demand for both established and new dwellings.

“Regardless, the normalisation in CCCI growth will help provide some certainly for builders, insurance companies and homeowners alike,” she said.

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Rowan Crosby

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