The rate of growth in the cost to build new homes across Australia has returned to normal levels, new data shows.The rate of growth in the cost to build new homes across Australia has returned to normal levels, new data shows.
On Wednesday, real-estate services firm CoreLogic released its Cordell Construction Cost Index report, which tracks the costs to construct a typical three-bedroom, two-bathroom detached house across Australia.
The report measures the construction cost component of new homes only (materials, labour, plant and equipment and preliminary costs). Costs which are associated with the purchase of land are not considered.
According to the report, the cost of constructing a new dwelling increased by 0.8 percent in the December quarter.
At this level, the rate of escalation was higher compared with the 0.5 percent cost growth that was recorded during the previous September quarter.
Nevertheless, it is well below the 4.7 percent peak that was recorded in the September quarter of 2022.
That peak occurred as the industry was working through a record pipeline of detached house projects and was being impacted by supply side disruptions associated with COVID and the Ukraine War.
Across calendar 2023, construction costs increased by a modest rate of 2.9 percent.
This represents the lowest annual rate of growth for more than sixteen years (since the twelve months to March 2007) and is comfortably below the pre-COVID decade average annual growth rate of 4.0 percent.
Furthermore, the quarterly rate of cost growth remained below the 1.0 percent quarterly average that was recorded over the decade prior to COVID.
CoreLogic Economist Kaytlin Ezzy said that the results indicated that construction cost pressures have normalised following a previously turbulent period.
“This suggests that reacceleration is more a return to trend rather than a new surge in construction costs,” Ezzy said, referring to the fact that quarterly cost escalation increased during the quarter but remains below pre-pandemic levels.
“While up over the quarter, the annual change in residential construction costs continued to ease as larger quarterly increases fell out of the annual calculation.
“This suggests that growth in construction costs have normalised after recording a recent peak of 11.9% over the 12 months to December 2022, albeit at a higher level.”
CoreLogic Construction Cost Estimation Manager John Bennett said that pricing remains generally unsettled, with no clear trend observed across most product types.
Price rises were also varied across states, with an increased growth rate seen in NSW, Victoria and WA, while SA and Queensland both saw a reduction in quarterly CCCI growth.
“Depending on the supplier, both increases and decreases were recorded in timber and metal prices, although we have seen rises in the price of hardware and chemical items. This tells me suppliers are either bringing their product pricing back down to acceptable levels from the increases during the Covid period, or they are increasing to set up for the year ahead,” Bennett said.
“In 2023 there was a bit of uncertainty around what the fallout from the interest rate increases would be and therefore the overall impact on the building industry. While the latest figures show the market has settled down, I don’t think we have seen the slowdown many were expecting.
“While dwelling approvals are still well below historic averages, there is still an elevated level of projects under construction which is keeping cost pressures high.”
Going forward, Ezzy says the outlook for costs in 2024 is uncertain.
“While it’s unlikely we’ll see any declines in construction costs, the pace of growth could be influenced by several factors,” she said.
“Although national dwelling approvals have risen from a recent low of 12,185 in January, the latest data from the ABS showed that dwelling approvals remained -15.8% below the decade average in November at around 14,500. Although a number of projects are still moving through the construction pipeline, the recent lull in approvals could result in a shortfall in new projects, which would help keep growth in building costs low, due to greater capacity in the construction sector.
“However, with the CPI continuing to ease, it’s looking increasingly like we’ll see a cash rate cut in the second half of 2024, which could fuel housing demand for both established and new dwellings. Regardless, the normalisation in CCCI growth will help provide some certainly for builders, insurance companies and homeowners alike.”
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