- Construction costs recorded smallest growth since September 2020, and is 50 basis points below the decade average of 1.2%.
- Industry still facing labour shortage and wage pressure.
- Home building cheaper, but too early to celebrate as supply and demand issues remain.
Home buyers can heave a sigh of relief as the unrelenting rise in the cost of building has slowed.
CoreLogic’s Cordell Construction Cost Index (CCCI), which records the costs involved in building a new home, recorded a quarterly growth rate of 0.7% for the June quarter. This marks the lowest rise since September 2020 and is below the decade average of 1.2%.
The quarterly growth rate of June is slightly improved from the 0.9% rate of Q1 and a substantial dip from September 2022’s index growth peak of 4.7%. However, Australia’s CCCI rose by 8.4% overall when looking at annual numbers.
Western Australia recorded the smallest index movements, with the cost of building a house in Perth moving up only 0.5% for the quarter, and 6.9% annually. Queensland recorded the highest rates of change, with the cost of building a house in Brisbane up 0.7% for the quarter, and 9.9% annually.
Setting a tone of cautious optimism
John Bennett, CoreLogic construction cost estimation manager, says that although the national annual growth rate remains elevated, it is an improvement from the 11.9% growth rate of the previous year, which is also the highest yearly index rise recorded, excluding the growth rate jump in 2000 caused by the introduction of GST.
“While the annual growth figure remains high it’s the lowest level it’s been since the 12 months to December 2021,” Bennett says.
“The latest index figures will bring some comfort and reassurance to the beleaguered building and construction industry as we’ve seen two consecutive quarters of growth more in line with long-term averages.”
John Bennett, CoreLogic construction cost estimation manager
Bennett cautions that there remains some volatility between different product types, though the substantive spikes of the last year have fallen.
“The CoreLogic costings team is recording some volatility and a large amount of variation across material types, but overall there’s a softening and stabilisation within products such as metal and timber prices,” he says.
“There’s been a significant drop off in dwelling approvals in the year to April, which will flow through to prices. As the level of residential construction work reduces pressure on material costs and labour supply is likely to reduce further.”
Construction costs are cheaper, but the market outlook remains grim
According to Bennett, wage pressure and a shortage of workers continue to plague the construction industry — an industry currently in the middle of an insolvency crisis as record numbers of construction companies have been going bust.
The national unemployment rate hovered at 3.5% last year. Nevertheless, wage pressure is forecasted to ease marginally, as the Reserve Bank of Australia (RBA) predicts that unemployment will hit a ceiling of 4.5% in 2024
Eliza Owen, CoreLogic head of research, says that the decline in residential construction costs is evident in the quarterly Consumer Price Index (CPI) outcomes — the annual growth in the cost of new dwelling purchases has almost halved from the year ending September 2022’s 20.7% to the year to March 2023’s 12.7%.
“The cost of new owner occupier dwelling purchases comprises the largest weighting in the CPI ‘basket’, which means the ongoing reduction in the CCCI is good news, potentially signalling lower inflation numbers,” Owen says.
Owen observes that the slowdown in the construction industry has seen the established housing market recover, with CoreLogic’s national Home Value Index (HVI) logging four uninterrupted monthly increases.
“Despite high inflation and 12 interest rate hikes in 14 months, an imbalance between supply and demand has put a floor under prices across the country,” she says.
“Unprecedented increases in rent, persistently low vacancy rates and record levels of net overseas migration is also continuing to support housing demand.”
Eliza Owen, CoreLogic head of research
“Net overseas migration was forecast to reach 400,000 people this financial year just past, and stay elevated for the foreseeable future, which is expected to create ongoing demand for Australian housing and place renewed pressure on demand for new dwellings down the track.”
