Building Materials Prices May Rise: Housing Economist

Monday, May 19th, 2014
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Increases in the cost of materials such as bricks and timber may be set to intensify as the home building recovery in Australia gathers momentum, a leading economist in the construction industry says.

Housing Industry Association economist Diwa Hopkins said that while the cost of most construction materials remained stable for now, upward pressure could build as home building activity rises further. The economist noted, however, that the impact of this would likely be tempered by the fact that momentum in commercial and civil construction is currently weaker than the residential sector.

“I think it will be interesting to watch over the coming year or so once we start to see housing construction really ramp up to see if that has a tangible effect on input prices,” Hopkins said. “I think we might get an idea of the capacity of the industry to meet those rising levels of construction. So if we start to see conditions escalate and we see those high annual figures of between 160,000 and 200,000 houses (forecast ranges for houses being built per year), I think that will test the industry in terms of its capacity, and we should get an indication of that from prices.”

Those comments follow the release of producer price index data earlier this month from the Australian Bureau of Statistics which showed that overall, weighted average prices of materials used in housing construction throughout the eight capital cities had risen by just under one per cent over the 12 months to March and by only 2.4 per cent over the past two years as lower costs for steel and plaster as well as relatively stable prices in other materials offset rising prices in ceramic products such as tiles and clay bricks as well as paint and coatings.

The subdued nature of price increases is also being reflected in other parts of the world. Despite a reasonably strong construction market, building material costs in the United States, for example, rose only 1.5 per cent in the 12 months to April.

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Hopkins said that overall, recent house price gains across capital cities have outstripped the sum of any increases in the cost of materials, land, labour and equipment.

She acknowledges, however, that a recent contraction in land sale volumes and upward movement in the price of vacant residential lots in markets such as Perth and Adelaide may be an indication of capacity constraints in terms of land available for development. The increase is lot prices has not affected major eastern seaboard markets, where prices have flat-lined.

Hopkins also said pressures may start to emerge within the trades, and cautioned against any assumption tradespeople who left building jobs to work on resource projects will necessarily return to housing sites.

“I think it’s a bit more complex than to assume that people who have come from the mining sector will quite easily transition back into the housing sector,” she said. “In terms of trade prices, we are at a point now as with other inputs in that we have seen a first round recovery in housing construction and as the second round starts to ramp up, that’s when we start to push these more historically high levels.”

“So I think it will be telling in terms of what the industry’s capacity is. If we start to see a ramp up in trade prices, certainly that will be an indication that the availability of trades just isn’t there.”

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