Cost and price pressures within Australia’s construction industry moderated over the June quarter, new data shows.

Released on Friday, Producer Price Index data from the Australian Bureau of Statistics shows that the rate of output price growth across the building construction sector moderated from 1.6 percent in the March quarter to 1.3 percent in the June quarter.

Meanwhile, output price growth in civil and heavy industry engineering construction moderated from 1.3 percent in the March quarter to 0.6 percent in the June quarter.

In terms of building construction, the report noted that whilst material price pressures have eased (see below), cost pressures remain on account of skilled labour shortages and anticipated wage increases.

Turning to civil engineering, it says that the current focus of cost pressures revolves around higher manufacturing costs which are being driven by higher costs for raw materials and labour.

Over the twelve months to June, output prices rose by a fairly steep 6.3 percent for building construction and by a relatively modest 3.4 percent for civil and heavy industry engineering construction.

The report also provides details on the movement of prices for individual materials which are key inputs within the detached house sector.

Overall, it indicates that material price pressures have subsided.

All up, the rate of price increase for materials which are used in detached house construction edged up by just 0.4 percent in the June quarter and by only 1.1 percent over the year to June.

The latest data comes as cost pressures throughout Australia have eased since their peak in mid-2022 (see chart).

That peak was driven by COVID disruptions and the Ukraine War on the supply side as well as an unprecedented boom in detached house construction and a record program of public infrastructure work.

Now, pressures are easing as COVID supply-side issues have subsided and rising interest rates have led to a local and global slowdown in housing construction.

Nevertheless, output prices remain well above pre-COVID levels.

Over the four years from June 2020 to June 2024, output prices increase by 31.1 percent in building construction and by 22 percent in civil and heavy industry construction.

Over that same period, input costs for detached housing increased by 32.5 percent.

The data also comes as the focus of pricing pressures has shifted away from material availability toward skilled labour shortages and associated wage increases.

Meanwhile, a divergence in pricing trends within materials is evident as cost pressures have eased for early-stage construction materials such as steel but remain for ‘finishing’ materials such as plasterboard along with materials whose production involves energy-intensive manufacturing such as concrete and bricks.

The demand for finishing materials remains as a number of projects associated with the recent boom in detached house construction are moving through finishing stages.

Going forward, moderate cost pressures are expected to remain over the near term on account of aforementioned wage and labour issues.

In its July update, quantity surveying firm Rawlinsons Cost Management said it expected overall output price growth of between four and six percent across major Australian capital cities throughout calendar 2024.

Beyond that, there is concern that labour shortages will be further exacerbated as work gets going on a massive volume of renewable energy projects along with Commonwealth and state efforts to meet Australia’s target of delivering 1.2 million new homes over the five years from 1 July 2024.

By the Detail

As mentioned above, the rate of output price escalation in building construction moderated from 1.6 percent in the March quarter to 1.3 percent in the June quarter.

In terms of specific sectors:

• House construction prices rose by 1.0 percent in the June quarter, with most of the growth being evident in Western Australia and South Australia on account of stronger housing market conditions in those sectors. Predominately, increases are being driven by ongoing labour shortages particularly in finishing trades.
• In multi-residential building prices increased by 1.6 percent on account of increases in New South Wales, Queensland and Victoria. This is primarily being driven by ongoing shortages for skilled tradespeople and anticipated wage increases. Other contributing factors include higher margins to cover greater project volatility as well as increases in costs for concrete, windows and plasterboard which occurred on account of higher energy costs.
• Output prices for commercial/non-residential building construction increased by 1.5 percent on account of price growth in eastern states. Primarily speaking, the increase was due to ongoing labour shortages on government led projects such as schools, defence, health and other building infrastructure. Higher margins to cover project viability were an additional factor.

Over the year to June, output prices increased by 6.3 percent in building construction. In specific sectors, year-on-year output price increases totalled 7.7 percent in multi-residential construction, 7.2 percent in commercial/non-residential construction and 4.3 percent in house construction.

Turning to heavy and civil engineering construction, output price increases moderated from 1.3 percent in the March quarter to 0.6 percent in the June quarter.

In terms of specific sectors:

• Output prices for road and bridge construction rose by a modest 0.2 percent on account of increased project completion costs as well as manufacturing costs including machinery parts and maintenance, energy, freight and labour.
• Other heavy and civil engineering construction costs rose by 0.6 percent on account of higher manufacturing costs which were impacted by raw materials, freight and labour.

Over the year to June, output price increases for civil and heavy industry construction totalled 3.4 percent.

Turning to input prices for the detached house sector, prices increase by only 0.4 percent for the quarter and 1.1 percent for the year to June.

According to the data, in the June Quarter:

• Prices for other materials increased by 1.2 percent on account of increases in plaster products (+4.0%) that were due to elevated input costs into manufacturing and low gypsum supply.
• Prices for electrical equipment rose by 2.3 percent on account of increases in electric cables and conduit (+3.1%) that were due to higher copper prices for manufacturing.
• Prices for cement products increased by 2.4 percent on account of increases in the cost of fibrous cement products (+3.3%) which occurred on account of elevated costs for labour, energy and freight.

However, this was partially offset by price falls in:

• Plumbing products (-0.9%), driven by declines in sheet metal sanitaryware (-5.3%) that occurred on account of falling demand for house construction and lower raw material costs for manufacturing; and
• Steel products (-2.2%), driven by falling demand for steel globally along with subdued demand for early-stage construction materials.

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