Construction Material Prices on the Rise

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Monday, June 8th, 2015
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Prices for construction materials are back on the rise as record levels of home building activity underpins strong level of demand and a declining Australian dollar drives up the cost of imported products.

The March quarter Producer Price Index from the Australian Bureau of Statistics shows that despite a surge in housing starts, weighted average prices across the six main capitals around the nation for key materials used in residential construction increased by 0.8 per cent in the quarter and were up 3.3 per cent compared with the same time last year – the highest level of increase since the 6.9 per cent rise experienced in the year to March 2009.

Plaster, glass and timber and board products led the charge, while builders hardware, floor covering and carpet, bricks and tiles, and plumbing products also recorded significant gains.

Prices have fallen, however, for paint, steel and concrete products, while price rises have been more moderate in products such as insulation, waterproofing, electrical equipment and electrical appliances.

Not surprisingly, upward pricing pressure is greater in cities where housing construction activity is strongest, with Sydney, Melbourne and Perth all reporting annual price rises above three per cent and softer markets of Brisbane and Adelaide (though Brisbane is recovering) recording rises of less than three per cent.

Also not surprisingly, pressures are more evident in the case of products which have greater exposure to the stronger building markets as compared to more subdued markets in civil construction.

This can be seen through the relatively stronger performance of products such as glass, timber, plaster, bricks and carpet against those used more commonly in civil markets such as concrete and steel. Steel prices are also being influenced by continued oversupply coming out of China and South-East Asian markets.

The upward pressure on prices is being driven by a combination of record activity in new housing and a declining Australian dollar.

In terms of new housing, strong demand for products such as timber, plaster and glass products is being driven by record levels of new housing starts, which have risen by more than 30 per cent over the past two years as markets especially in Sydney experience significant gains in activity.

On the supply side, moreover, a fall in the Australian dollar from more than $US0.92 as at the end of March last year to around $US0.77 means imported products are now more than 15 per cent dearer compared with their cost around a year ago.

Going forward, both of these drivers are largely expected to remain in place for now, suggesting that upward price momentum will continue over the near term.

Housing starts are expected to reach another record in 2015, according to the Housing Industry Association, while St George Bank expects the dollar to decline further over the course of the year.

The data comes amid growing evidence that overall construction costs are under pressure as both trade prices and building material prices rise.

A recent report by quantity surveying outfit WT Partnerships suggests trade price escalation is picking up as a number of trades moved into shortage, especially on eastern seaboard states such as Victoria, New South Wales and Queensland.

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