Price growth across Australia’s construction sector has contracted to its slowest pace in five years as challenging market conditions are forcing home builders in Victoria and New South Wales to offer discounts to financially stretched consumers, new data shows.

But cost and price pressures remain in multi-residential construction and commercial/non-residential construction.

The Australian Bureau of Statistics has released the December quarter edition of its Producer Price Index report.

Overall, the report shows that output price growth across the construction sector has contracted to its slowest pace since before the global financial crises.

In particular, according to the report:

• The rate of output price escalation in building construction slowed from 0.9 percent in the September quarter to just 0.4 percent in the December quarter. This represents the lowest quarterly rate of price growth since before COVID. Output prices in building construction have now contracted for four consecutive quarters.
• In heavy and civil engineering construction, the rate of output price escalation eased from 0.9 percent in the September quarter to 0.3 percent in the December quarter. As is the case for building construction, this represents the lowest quarterly rate of growth since before COVID.

Across calendar 2024, prices for building and heavy/civil construction rose by 4.3 percent and 2.7 percent respectively.

However, caution should be observed when interpreting these numbers.

In terms of building construction, the ABS states that the reduction in price escalation during the quarter was driven by an 0.3 percent contraction in prices for detached home building.

This was driven not by easing cost pressures but rather by builders needing to offer greater discounts and incentives in order to attract financially stretched consumers.

The effect has been particularly evident in Victoria and New South Wales, where housing market conditions have been challenging.

“House construction prices fell for the first time since June quarter 2020, driven by decreases in Victoria and New South Wales,” the ABS says.

“Affordability concerns have negatively affected demand for house construction across most states. To attract customers builders have increased promotion activity, reducing prices.”

“Affordability concerns have negatively affected demand for house construction across most states. To attract customers, builders have increased promotion activity, reducing prices.”

Meanwhile, moderate pricing pressures remain evident in mutli-residential construction (units. apartments, townhouses etc.)  and commercial/non-residential building construction.

Across both the December quarter/calendar 2024, output prices in these sectors increased by 0.8 percent/5.1 percent and by 0.8 percent/4.9 percent respectively.

Across the two sectors, the report says that the most significant pricing pressure involves rising labour costs which are being driven by a continued shortage of skilled tradespeople. This is being caused by competition for labour associated with the record pipeline of public infrastructure work. Trades in areas such as joinery, mechanical, electrical and tiling are in high demand.

Other contributing factors involve cost increases for concrete and electrical services driven by high demand and increases in material prices and labour costs as well as a more conservative approach on the part of builders with respect to profit margins and price bids on account of greater levels of project risk.

Turing to heavy and civil engineering construction, prices for road and bridge construction increased by 0.8 percent during the quarter on account of wage increases driven by labour shortages along with higher costs for concrete.

The price rises in concrete were driven by long-term negotiations which had factored in recent elevated manufacturing costs for transport.

However, prices were virtually unchanged for other heavy and civil engineering construction.

Weak Material Price Pressures

The report also indicated that material price pressures for detached house construction remain subdued.

All up, the cost of building material price increases for detached house construction increased by only 0.5 percent during the December quarter and by 1.6 percent across calendar 2024 (data for material input prices is given for detached house construction only – no data is given for multi-residential construction).

This represents the most subdued level of annual price increase since before COVID.

During the quarter, prices increased by 3.3 percent for concrete products (driven by strong demand from other sectors of construction) and 2.0 percent for ceramic products (driven by higher clay brick prices on account of elevated gas and freight costs).

However, these were offset by 2.2 percent falls in prices for electrical cable and conduits which occurred on account of declines in prices for raw copper and crude oil for manufacturing.

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