Costs and output prices across Australia’s construction sector continued to grow throughout the December quarter, new data shows.

But the rate of growth remains modest compared with that seen during 2021 and 2022.

Released on February 2, Producer Price Index data from the Australian Bureau of Statistics reveals that cost pressures remain in Australia’s construction sector notwithstanding a slowdown in new residential projects.

These pressures remain as levels of output are still strong and shortages of tradespeople are leading to higher wages.

Nevertheless, the rate of cost growth has eased back after the industry experienced a surge in costs across 2021 and 2022.

The data also reveals a divergence as cost escalation has intensified in building construction whilst pressures continue to ease in heavy and civil construction.

In terms of building construction, the quarterly rate of growth in output prices increased from 1.3 percent in the September quarter to 1.9 percent in the December quarter.

At this level, the rate of price escalation is much greater compared with that which was seen before the pandemic (see chart).

However, it remains below the 3.8 percent quarterly peak in output price escalation that occurred during the June quarter of 2022.

This suggests cost and price pressures remain but have eased since the peak of activity associated with the Commonwealth HomeBuilder program and disruptions to supply that originated out of COVID and the Ukraine War.

From an annual perspective, the rate of output price growth eased from 7.8 percent in 2021 and a whopping 11.4 percent in 2022 to a more modest 5.4 percent last year.

Largely speaking, the result reflects an easing in pressures relating to the cost of materials – albeit with pricing pressures still evident for materials such as concrete that involve energy intensive manufacturing processes.

In terms of specific subsectors, output pricing pressures are particularly strong in multi-unit residential construction as well as commercial/non-residential building construction.

In mutli-unit residential construction (units, townhouses, apartments etc.), the quarterly rate of price escalation increased from 1.5 percent in the September quarter to 2.6 percent in the December quarter.

In its report, the ABS attributes the latest quarterly increase primarily to continued shortages of skilled tradespeople.

In addition, contractors have sought to improve their margins as ongoing pressures add to cost and project risk.

Finally, whilst material price escalation has eased overall, pressure remains for prices for concrete based structural components as higher energy prices flow through to higher manufacturing costs.

Across calendar 2023, mutli-residential building construction output prices increased by 6.3 percent.

A similar story emerges in the commercial and non-residential building sector, where the rate of output price escalation increased from 1.5 percent in the September quarter to 2.3 percent in the December quarter and 6.2 percent across calendar 2023.

In this sector, price growth has been driven by skilled labour shortages for joinery trades, mechanical trades, electricians and tilers as well as the more conservative approach to contractor margins referred to in the multi-unit sector above.

Turning to detached house construction, pricing pressures are more subdued, with quarterly price growth of 1.3 percent (up from 0.9 percent in the September quarter) and annual output price growth of 4.1 percent.

This represents a much lower rate of growth after output prices in this subsector surged by 30.8 percent across 2021 and 2022 combined.

Whilst material cost pressures have eased (see below), output prices in Western Australia, Victoria and New South Wales have been impacted by ongoing labour shortages and resultant cost increases for finishing trades and finishing materials.

These factors have resulted in cost escalation that was applied to base prices in the December quarter.

Building Construction Costs: Australia

Outside of building construction, cost pressures are more subdued in heavy and civil construction.

All up, the rate of output price growth in this sector eased from 0.9 percent in the September quarter to 0.6 percent in the December quarter.

At this level, quarterly price growth is well below the two percent plus rates that were seen throughout calendar 2022 (see chart)

On an annualised basis, output price growth in civil and heavy engineering construction eased from 5.6 percent in 2021 and 9.6 percent in 2022 to a more modest 2.9 percent in 2023.

Cost pressures in this sector have eased on account of lower shipping costs and a softening trend in prices for oil since their peak in early 2022 as well as commodities such as iron and copper – the primary ingredients in steel manufacturing.

Turning to specific subsectors, price growth for road and bridge construction eased from 1.4 percent in the September quarter to 0.9 percent during the December quarter.

The modest increase was driven by higher bitumen prices which occurred on account of demand from ongoing infrastructure projects and repairs for flood damaged roads.

Finally, price escalation for other heavy and civil infrastructure eased from 0.8 percent in the September quarter to 0.5 percent in the December quarter.

The modest price increases in this quarter were due to ongoing shortages for skilled labour and increased operating costs for machinery.

Outside of output prices, the report also provides details about movements relating to the cost of materials which are inputs specifically to the detached house construction sector.

Civil and Heavy Industry Costs: Australia

On this score it says that input costs barely increased by a miniscule 0.3 percent during the December quarter.

This is well below the 4.3 percent quarterly peak in material cost escalation reached in June 2022 and indicates that pricing pressures for materials in the detached house sector are extremely subdued.

Detached Housing Input Price Movements by Material, Australia, Dec qtr 2023

The modest level of increase was driven by higher prices for electrical equipment (up 2.2 percent). This was driven by switch and distribution boards (up 4.8 percent) on account of higher manufacturing costs and limited labour supply in manufacturing.

Also contributing was a 1.6 percent quarterly increase in the cost of paint and other coatings. This occurred on the back of higher manufacturing costs and recent increases in crude oil prices that were experienced throughout August, September and October notwithstanding that oil prices have eased since their 2022 peak.

On an annual basis, material cost escalation for detached house construction has dropped from 12.0 percent in 2021 and 11.4 percent in 2022 to just 2.4 percent in 2023.

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