The rate of growth in construction costs and prices across Australia has eased, new data shows.

But the industry is still grappling with substantial cost increases which have accrued over recent years.

Released on April 30, March quarter Producer Price Index data from the Australian Bureau of Statistics shows that the rate of growth in output prices for building construction moderated from 1.6 percent in the December quarter to 1.1 percent in the three months to March.

Whilst this remains a relatively high rate of cost and price escalation by historic terms, it represents the slowest rate of growth since the March quarter of 2021 (see chart).

In heavy and civil engineering construction, meanwhile, output price growth moderated from 1.4 percent in the December quarter to 0.4 percent in the March quarter.

As with building construction, this represents the lowest quarterly rate of price growth since the March quarter of 2021.

In terms of building construction, the data indicates that:

• Growth in house construction prices moderated from 1.1 percent in the December quarter to 0.8 percent in the March quarter as material prices stabilised and higher interest rates and construction costs led to subdued buyer interest. This occurred even as some cost pressures remain on account of labour shortages and higher wage costs.
• Price escalation for other residential building moderated from 1.9 percent in the December quarter but remained at elevated levels of 1.2 percent in the March quarter. The price increases are being driven by labour shortages for skilled trades and rising material prices on account of high demand for concrete based structural components and internal fixing along with manufacturing delays.
• Output price growth for non-residential building (commercial and public building) moderated from 1.9 percent in the December quarter but remained at historically elevated levels of 1.3 percent in the March quarter. Price growth is being driven by ongoing shortages of skilled labour and high prices for concrete based materials and internal fixings.

Turning to heavy and civil engineering construction, substantial moderation in quarterly price growth is evident amid a moderation in road and bridge construction (2.1 percent in the December quarter to 0.9 percent in the March quarter) and a near zero change in prices for other heavy and civil construction (0.2 percent in the March quarter – down from 1.3 percent in the December quarter).

In road and bridge construction, some pricing pressures remain on account of higher costs for bitumen.

These are being driven by high energy and manufacturing costs along with strong global demand and limited supply.

In other heavy and civil works, higher concrete prices and wage costs were mostly offset during the March quarter by falling steel prices and more favourable exchange rates.

The latest data comes as Australia’s construction sector has been challenged over the past two years by rising costs and project delays.

Over the two years from March 2021 until March 2023, this has seen overall prices surge by 20.5 percent for building construction and 15.9 percent for heavy and civil engineering construction.

The surge in price has been particularly evident in the detached house construction sector, which has seen output price growth of 29.6 percent over that period.

Largely speaking, costs and delays have been driven by a shortage of materials and labour as well as rising energy prices.

These, in turn, have been driven by a combination of COVID related disruptions (which have now largely eased), the war in Ukraine and its impact on energy supplies and massive demand as the industry works through a record pipeline of work in detached housing and public sector infrastructure.

The surge in costs over the past two years has placed considerable pressure on construction margins.

For this reason, the easing in cost escalation over the March quarter will be of significant relief to the industry.

Apart from construction output prices, the ABS data also provides estimates of price movements for major construction material inputs.

In particular, the data focuses on materials which are used in detached house construction.

Overall, the data indicates that the rate of input cost growth for materials that are used in detached house construction moderated from 2.2 percent in the December quarter to a still relatively steep 1.6 percent in the March quarter.

This occurred as rising costs for some materials was partly offset by a decline in costs for others.

In particular, material price increases during the quarter were driven by:

• A 3.9 percent increase in the cost of electrical equipment. This was driven by a 6.0 percent increase in the cost of electric cable and conduit which in turn was driven by increased costs for copper and PVC coupled with higher transport costs.
• A 2.8 percent cost increase in the cost of other materials, which was driven by a 5.2 percent rise in prices for plaster products which occurred on account of higher energy and gas costs as well as higher transport costs.
• A 1.7 percent rise in the cost of other metal products, which occurred on the back of a 2.6 percent rise in the cost of aluminium windows and doors on account of higher costs for aluminium, glass, transport, and labour.

These were partly offset by price declines of 4.4 percent in steel products which occurred on the back of a 6.4 percent fall in prices for steel sections and beams that was driven by improved supply conditions.

As with output prices, however, input costs for detached house construction have risen markedly over the past two years.

Between March 2021 and March 2023, housing construction input prices rose by 28.45 percent.

Over that period, particularly strong price growth has been evident in terms of timber windows (52.8 percent) reinforcing steel (51.6 percent), terracotta tiles (47.5 percent), structural timber (44.0 percent), plywood and board (42.8 percent) and sand (40.2 percent).