Cost pressures in house construction throughout Australia are easing but remain at elevated levels, the latest data shows.

And pressures are expected to ease further over the coming year.

Releasing the latest edition of its Cordell Construction Cost Index report, real-estate services firm Cordell says costs associated with the construction component (labour materials, equipment etc.) of building a typical new house across Australia increased by 1.9 percent in the December quarter.

At this level, cost escalation remains above the five-year quarterly average of 1.4 percent.

Nevertheless, the increase was below the 4.7 percent rise that was recorded in the September quarter and represents the lowest quarterly rate of increase since December 2021.

Across calendar 2022, house construction costs increased by 11.9 percent. This is well above the previous elevated level of increase (7.3 percent) that was recorded in 2021.

The latest data comes amid increasing signs of a slowdown in new home construction that has taken hold since the Reserve Bank of Australia (RBA) commenced a cycle of monetary policy tightening that has seen official interest rates rise from 0.1 percent in April to 3.1 percent in December.

On Friday, new data released by the Australian Bureau of Statistics (ABS) showed that the seasonally adjusted number of loans made to owner occupiers for the purpose of either constructing a new home or purchasing a newly constructed home has declined for six consecutive months (to November) and now sits at its lowest level in almost ten years.

Meanwhile, earlier building approval data indicated that the seasonally adjusted number of new dwellings that have been approved for construction has contracted for five of the past six months (to November) and has fallen by 22 percent over the past quarter.

All this points to a likely slowdown in new home construction during 2023 – a phenomenon that is likely to ease pressure on resources as the industry works through a record pipeline of detached home building work that followed low interest rates and home building incentives in the wake of COVID.

(source: CoreLogic)

CoreLogic Construction Cost Estimation Manager John Bennett said the figures reflect a post-COVID operating period which is being hampered by rising interest rates and higher inflation.

“The industry has been through a very challenging 18 months to two years, with extreme periods of volatility in pricing due to restricted domestic supply chains, material and labour shortages,” Bennet said.

“Although the annual CCCI remains high, on a quarterly basis there’s been an easing in residential construction costs. This reflects a pull back from consumers, builders and will eventually flow through to suppliers, as projects are delayed or put on hold in the current economic environment.”

Bennett says pressures stem from numerous sources.

“The biggest contributors currently are volatile timber prices, with fluctuations in structural timber costs and general increases to timber products,” he said.

“Prices for metal products such as gutters, lintels and fixings, used for roofing and structural purposes continue to increase, and concrete values also remain unstable.

“Petrol rises are affecting cartage and delivery costs, notably concrete, however larger items such as rainwater tanks are also affected. Gravel, aggregates and fill have increased, possibly affected by the rise in petrol prices, while increasing costs for appliances and fittings have also been noticed.”

Despite these pressures, Bennett expects cost growth to ease over coming months amid caution from consumers, builders and suppliers against a backdrop of rising interest rates and ongoing inflation pressures.

CoreLogic Research Director Tim Lawless agrees.

Whilst the pipeline of residential work remains strong, Lawless says a 41 percent decline in dwelling approvals/consents since March will have helped to ease pressure off an overstretched industry.

“Although a large number of homes remain under construction, the dwindling number of approved homes in the construction pipeline should help to alleviate construction costs down the track,” he said.

“Anecdotally, as skilled migration continues to ramp up, we should see the costs associated with some trades and labour slow further.”

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