Australia’s construction prices continue to rise as an upturn in new housing projects has seen builders regain pricing power and ongoing labour shortages add to costs, new data shows.

And cost pressures are expected to intensify going forward.

The Australian Bureau of Statics has released the December quarter edition of its Producer Price Index Report.

In terms of construction, the report indicates that output prices for building construction increased by 1.1 percent during the quarter.

Whilst this is slightly lower than the 1.3 percent increase that was observed during the September quarter, it still represents the second highest quarterly rate of price escalation for more than two years (see chart).

Primarily speaking, the increase is being driven by two factors.

First, a recovery in the market for new home building has enabled builders to regain pricing power and to rebuild margins.

This followed a period of heavy discounting that was observed in the detached house segment of the market across 2024/25, particularly in New South Wales and Victoria.

As conditions improved in the second half of last year, detached house construction prices increased by 1.2 percent and 1.5 percent in the September and December quarter respectively.

Beyond this, pressures remain in terms of labour shortages and industry capacity.

This is occurring as the building sector faces ongoing competition for skills from major infrastructure projects.

It is leading to shortages in trade, site management and project management roles, the ABS says.

The shortages are not only adding directly to labour costs but are further impacting tender pricing as higher levels of project risk are leading to more conservative approaches to contractor bidding.

This is driving ongoing price escalation in multi-residential construction and commercial/non-residential construction.

Whilst prices are rising in building construction, the level of cost and price escalation in heavy and civil engineering construction appears to be muted for now.

In this sector, output prices increased by only 0.3 percent during the December quarter and by a modest rate of 1.8 percent across calendar 2025.

This is despite a busy market and ongoing skilled labour shortages (external factors such as a modest improvement in the Australian dollar across 2025 may have helped).

Looking at the longer term, prices remain well above pre-COVID levels.

Over the six years since December 2019, output prices have increased by 37.5 percent for building construction and by 25.8 percent for heavy and civil engineering construction.

Material costs remain in check

In addition to output prices, the ABS report provides cost data in respect of materials which are used in detached house construction.

Overall, the data indicates that material prices remain in check, with prices edging up by just 0.2 percent in December quarter and by 1.8 percent across 2025.

Within specific product categories, the main point of pricing pressure is the energy-intensive cement products sector.

Prices in this category increased by 1.6 percent during the September quarter and by 5.2 percent across 2025.

Meanwhile, prices for ceramic products increased by 2.4 percent during the quarter on account of a 5.9 percent increase in terracotta tile prices that was driven by structural price reviews.

The relatively stable prices for materials indicate that cost pressures are being driven by other sources.

These include labour, equipment and energy.

Cost pressure to intensify

The latest data comes as cost pressures are expected to intensity throughout 2026 and beyond as rising levels of construction activity combine with capacity constraints especially around labour.

Moving forward, higher activity levels are expected across sectors such as housing, data centres, energy, defence and the Brisbane Olympics.

Whilst this is happening, a severe worker shortage continues.

As at last October, Infrastructure Australia estimated that the nation had a shortage of 201,000 workers to meet public sector construction demand (refer Public Infrastructure Workforce Supply Dashboard).

In a research note, Oxford Economics Australia Senior Economist Michael Dyer said that cost pressures are likely to be sustained over coming years.

“Recent data releases suggest the trajectory for building activity has firmed, exacerbating pressure on a slow-moving resources base …” Dyer wrote.

“… Given (that the growing pipeline of work is butting up against construction sector capacity issues which are set to linger until the end of the decade, upwards pressure on costs will be sustained.”

Meanwhile, in its Australian Construction Market Conditions report released before Christmas, quantity surveying firm WT said it expected average construction tender prices to rise by 5.2 percent this year.

This will increase to 6.4 percent by 2028 as the Olympic building program gathers momentum.

Particularly impacted will be Brisbane, the Gold Coast and the Sunshine Coast.

In these areas, WT expects cost escalation of 6.0 percent, 6.5 percent and 6.8 percent in 2026 rising to 10.0 percent, 9.5 percent and 9.0 percent in 2028.

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