Construction costs skyrocket on the back of dwelling approval surge

The surge in dwelling approvals early this year has already inflated construction costs across Australia.

CoreLogic’s latest Cordell Construction Cost Index (CCCI) showed a 3.8% increase in construction costs in the three months to September 2021, outpacing the Consumer Price Index of 0.8% during the same period.

This latest growth in construction cost is the largest quarterly increase since 2000, when costs jumped 7.2% higher after the introduction of the goods and services tax (GST).

On an annual basis, construction costs increased by 7.1% in September, the highest yearly gain since March 2005.

CoreLogic research director Tim Lawless said the recent uptrend in dwelling approvals, which peaked in March, has already progressed to the construction phase, resulting in a widespread demand for materials and tradespeople.

“The quarterly rate of growth in construction costs is happening everywhere and is not restricted to one city or state, it’s a national trend,” he said.

This increase in construction costs came as house prices increased by 20.3% annually.

Mr Lawless said the recent increase in construction costs could add further influence dwelling prices.

“There’s already evidence that the cost of new housing and residential construction is placing upward pressure on Australia’s inflation rates and these figures will only add to that pressure.”

Hike in construction costs likely to persist

Mr Lawless said there continues to be pricing volatility in the residential construction industry, with the recent quarterly gains being driven by increasing timber costs, particularly of structural timber, metal products, and plumbing supplies.

“For anyone who is looking to build or to renovate, or for someone who owns a business involved in the residential construction industry, it means they are all likely to be facing significantly higher costs,” he said.

The introduction of the HomeBuilder scheme last year and the surge in dwelling approvals early this year has led to a 50% growth in dwelling commencements in the year to June.

For Mr Lawless, it is crucial to note that while approvals are now trending lower, it would take some time for them to transition to construction and construction. This would result to an extended period of uptrend for construction costs.

“This doesn’t look like a short-term spike, the surge in construction costs is due to the amount of construction activity that’s been approved at a time when we can’t import more skilled labour and are facing significant supply chain disruptions,” he said.

Mr Lawless predicts that the construction cost inflation could potentially persist for the next 12 to 18 months.

“It’s unlikely the industry can absorb a cost increase this significant into their margins and higher construction costs will ultimately be passed on to the consumer, placing further upwards pressure on the price of a new dwelling or renovation,” he said.

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