Pressures on output prices and costs in Australia’s construction sector remain notwithstanding the slowdown in residential building activity which has taken hold, new data shows.

Released last Friday, the March quarter Producer Price Index report published by the Australian Bureau of Statistics has provided an update on quarterly output price movements across the building and civil construction sectors.

In terms of building construction, the data indicates that output prices increased by 1.6 percent during the March quarter and by 5.9 percent over the year to March.

At this level, the rate of escalation was slightly lower compared with the 1.9 percent increase that was recorded in the December quarter and remains well below levels that were seen during the recent peak of cost escalation across the 2021/22 financial year (see chart).

However, the current rate of output price growth is still well above pre-COVID historic levels.

Moreover, the quarterly rate of price escalation appears to have reaccelerated since the middle of 2023 (see chart).

Leading the charge are the multi-residential and commercial/ non-residential building construction subsectors.

Output prices in these subsectors increased by 1.9 percent and 1.8 percent respectively over the quarter and were up by 7.0 percent in each subsector across the year.

According to the report, the primary driving factor behind output price growth in multi-residential construction is the ongoing shortage of skilled tradespeople.

Aside from this, other contributing factors include an increase in margins which is occurring as builders seek to mitigate higher levels of project risk and elevated prices for concrete based structural components.

The higher levels of project risk referred to above are being driven by current and anticipated increases in costs for labour and materials along with potential delays which may occur as a result of the aforementioned shortage of skilled workers.

In non-residential building, significant price increases in New South Wales in Victoria are being driven by efforts on the part of contractors and subcontractors to restore or maintain margins in light of the higher levels of project risk.

Turning to detached house construction, price increases have been more modest as levels of activity have been more subdued in this area.

The effect of this has been most readily seen in New South Wales, where builders have been forced to offer higher levels of bonus offers in order to attract new business.

However, significant output price increases were seen in Western Australia and Victoria amid ongoing shortages for finishing trades and price rises for end-stage materials.

Building construction output price movements, Australia

Outside of building construction, output prices for civil and engineering construction rose by 1.3 percent during the March quarter and by 3.7 percent over the year to March.

Within this sector, prices for road and bridge construction increased by 1.5 percent during the quarter on account of supplier price rises that were driven by higher concrete prices.

According to the ABS, these higher concrete prices reflect ongoing demand for infrastructure projects as well as work associated with repairs for flood damaged roads.

In other heavy and civil engineering construction, output prices rose by 1.3 percent on account of supplier price rises particularly in concrete as well as a shortage of skilled labour.

Civil and heavy engineering construction output price movements, Australia

Aside the from quarterly and annual price movements outlined above, the latest data highlights the degree of cost and price escalation which has occurred since the beginning of COVID.

Between December 2019 and March 2024, output prices have increased by 29.7 percent in building construction and by 21.3 percent in civil and engineering construction.

Whilst output pricing pressures continue, the data has delivered some welcome news in that input prices for detached house construction remain in check for now on account of lower levels of activity in this sector (note: the ABS report only provides input price data for the detached house subsector specifically).

Significant contributing categories include:

• Other materials, in which a 2.0 percent increase during the quarter was driven by a 3.5 percent rise in the price of plaster products. This, in turn, has been driven by elevated levels of input manufacturing costs and constrained levels of gypsum supply.
• A 1.5 percent increase in the price of ceramic products. This was driven by a 3.9 percent increase in the price of ceramic tiles which has occurred on account of strong demand for finishing products as a significant portion of the pipeline of detached house projects enters the finishing stages.
• An 0.5 percent increase in prices for other metal products, which was driven by a 1.0 percent increase in the cost of aluminium windows and doors which has occurred on account of higher raw material costs and elevated costs for road freight.

Cost increases in these categories were partly offset by an 0.5 percent decline in the cost of timber board and joinery. This was brought about by a 2.5 percent fall in the price of structural timber which occurred on account of higher levels of softwood imports and falling demand for new house construction.

Input price movements for detached house construction, Australia

The latest data comes as Australia’s construction industry is experiencing an interesting period.

In terms of activity levels, the industry is witnessing contrasting fortunes as a slump in residential projects contrasts with massive levels of work in civil infrastructure.

In residential construction, data relating to building approvals and construction lending indicates the pace at which new work is coming in remains at near its lowest level in more than a decade.

Despite an underlying shortage of housing as evidenced by tight rental markets, activity levels are being impacted as higher interest rates, higher finance costs and the higher construction costs referred to above pose challenges to project feasibility.

Notwithstanding this, however, home builders remain busy for now as the industry continues to work its way through what was previously a record pipeline of detached home building work that resulted from the unprecedented boom in detached home building which occurred from mid-2020 until mid-2022.

In civil construction, by contrast, the industry is bursting at the seams amid a record pipeline of public sector transport projects and an increase in work associated with the clean energy transition.

Across calendar 2022 and 2023, work commenced on a whopping $129.5 billion and $121.7 billion worth of projects respectively as a substantial number of transport, energy and water developments came online.

This represents the highest level of civil/engineering commencements since the peak of the mining boom in 2012.

It underscores expectations of a very busy period during the remainder of 2024 and beyond.

Whilst the boom in civil and engineering construction is welcome, the massive levels of activity in these areas are leading to challenges in terms of the cost and availability of skilled workers.

Data from Jobs and Skills Australia indicates that vacancies for construction managers, engineers, construction tradespeople and labourers remain at elevated levels by historic standards. This is the case notwithstanding that vacancies have eased from their peaks that were seen during the middle of last year.

Staff shortages are particularly evident in the civil infrastructure sector. As of April, the Public Infrastructure Workforce Supply Dashboard maintained by Infrastructure Australia estimates that the nation has a shortage of 207,200 workers who are needed in order to complete the pipeline of public infrastructure work.

Even in the residential sector, the latest HIA Trades Report published last week by Housing Industry Association indicates that a significant shortage of tradespeople remains notwithstanding the slowing in housing construction activity.

Another factor which is impacting prices is a greater level of conservatism with regard to margins and price quotes. This is occurring as builders and subcontractors seek to mitigate the effect of additional project risk.

As mentioned above, the greater levels of project risk are emanating from the aforementioned skilled labour shortages as well as higher financing costs and the greater cost escalation referred to above.

Forecast Building Construction Output Price Movements, 2024 Annual

(source: April 2024 Quarterly Update: Rawlinsons)

Going forward, quantity surveying firm Rawlinsons said that it expects the rate of tender price escalation in the building sector specifically to remain at above average levels throughout the remainder of calendar 2024.

In the April edition of its Quarterly Update, Rawlinsons said that it expects tender price escalation of between four percent and six percent across all of Australia’s eight capital cities in calendar 2024.

Whilst it acknowledged that the rate of escalation has eased from recent highs, Rawlinsons said that forecasted escalation is still higher than historical averages and is therefore a key point of discussion on all projects.

It says the rate of escalation can vary between projects and can be impacted by labour availability, energy prices, finance costs, material costs, builder margins, supply chain procurement and other factors.

Not surprisingly, Rawlinsons says that the most significant challenge facing the industry is the shortage of skilled labour.

It said that the industry desperately needs to find new ways to attract and retain staff and to develop new strategies boost productivity.

In particular, Rawlinsons says that more needs to be done to attract and retain more women into the construction workforce.

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