Construction costs still rising, likely to surge further

The past three months had been tough for builders and renovators in Australia as construction costs continued the upward trend, striking another record growth over the second quarter of the year.

CoreLogic’s Cordell Construction Cost Index (CCCI) showed a 2.4% increase over the June quarter, extending the growth recorded during the first three months of the year.

This latest quarterly growth was more than double the gains recorded in Q4 2021 at 1.1% but below the 3.8% surge during the three months to September 2021 when lockdowns had the most significant impact on domestic supply chains.

On an annual basis, construction costs went up by 10%, the highest annual growth rate outside the introduction of the goods and services tax in March 2001, when costs increased by 10.2%.

CoreLogic construction cost estimation manager John Bennett said the latest readings reflect the pressure in the costs of metal, structural steel, reinforcing, fixings, fencing, and timber products.

“Suppliers are frequently mentioning the impact of rising fuel, freight and electricity costs on their bottom line and these are significant additional challenges being faced by the industry,” he said.

Pressures mount across states

Mr Bennet said the surge in construction costs remained broad-based, with quarterly index readings ranging from 2.2% in South Australia to 2.5% in New South Wales and Victoria.

Queensland and Western Australia reported a 2.3% increase in construction costs, which is only slightly lower than the national reading.

On an annual basis, South Australia registered the biggest upswing at 10.5%, followed by Western Australia at 10.4%.

Mr Bennet said the factors driving costs up add to the availability of labour.

“A shortage of labour and materials means a delay in completion times, which leaves builders vulnerable to market changes and holding costs,” he said.

Challenging outlook for construction

CoreLogic research director Tim Lawless said the double-digit annual surge in construction costs was expected, given the trends playing out across several states since the start of the year.

“Construction cost growth is an additional concern to an industry already under immense workload pressures as well as economic conditions such as rising interest rates and inflationary pressures,” he said.

Over the past five years, construction costs have increased by more than 25%, resulting in a knock-on effect to builders’ margins, budget blowouts among customers not on fixed price contracts, and homeowners who are waiting for their projects to finish.

“It’s also impacting the insurance industry, as homeowners struggle to reassess existing policies to make sure they are adequately covered in the event they need to make a claim,” Mr Lawless said.

“The pipeline of construction approved during COVID is still being worked through and there’s been a number of major weather events as recently as this month, which require significant rebuild and repair work — these all add further demand-side pressure for construction materials and trades.”

The lack of materials, rising fuel costs, and the broader upswing in the inflationary environment would, Mr Lawless believes, continue to push building costs higher for some time.

—

Photo by @rquiros on Pexels.