Record new house commencements
Australia has experienced a record year of new house commencements, despite ongoing labor and material shortages. Image – Canva
  • Rising building costs are proving a substantial headache for property owners
  • Several factors will continue to see costs increase this year
  • There are indication cost rises will slow toward the end of 2022

Anyone trying to build a home recently has run up against a monstrous problem – there’s been an extraordinary blowout in costs since mid-2020.

The wait time for all materials is incredible and if you had a budget for your build two years ago, best add 20% to 30% minimum to reflect today’s prices.

A big part of the problem is demand. The Australian Bureau of Statistics released its February data on building approvals for detached and multi-units covering all states and territories. Here are some salient quotes from the ABS:

“Multi-unit approvals were up by 17.9 per cent in 2021, recording almost 78,000 approvals for the year.

“This is an encouraging sign that apartment construction will return prior to the return of overseas migration.

“Building approvals for detached housing also remained elevated at the end of 2021 to produce the strongest year on record.

“There were over 150,000 approvals for detached homes 2021, 26.0 per cent up on the previous year and 11.0 higher than the previous calendar year record set in 1988.”

So, slowing down the titanic force of demand will take time.

Given all this, what’s else is driving cost increases and when will a sense of normalcy return to construction?

Supply chain

The ability to secure supplies in a timely manner and at a reasonable price was blown out of the water by COVID. Overseas manufacturers had to close their doors to protect staff health. Australia’s domestic production of construction materials is simply inadequate for meeting national demand.

Another element is freight difficulties. The cost a container pretty much trebled in the past year or so as shipping numbers ground to a crawl.

It feels entrenched, but things will ease eventually. I believe that as our COVID recovery slowly filters through, supply chains will gradually crank back to normal.

Subject to a few unknowns – such as future variants and the resilience of our trading partners – I expect that by year’s end supply chains will speed up substantially and we will probably be running at near pre-covid levels by mid 2023.

Government stimulus

Government stimulus saw huge demand for new-build property and vacant land in 2020 and 2021. The Homebuilder grant was designed to stimulate the construction industry… and it did just that.

Of course, this stimulus has ended, and is probably having limited impact on material and labour costs now. That said, there’s still assistance out there – particularly at state level for first homebuyers.

But, overall, I think the effect of stimulus on demand and costs has faded dramatically in recent months.

Federal election

The federal election will no doubt continue to be a bruising affair.

During elections, activity in the property market eases. That said, this year’s election is unlikely to influence building costs in any substantive way, unless one of the major parties implements some sort of important housing policy from out of the blue.

I’m happy to write this off as a driver for the moment and reserve the right to review as the year progresses.

Established property prices

The runaway cost of real estate has resulted in many sellers changing their construction plans. While some localities are reporting the rate of price growth has slowed, others (e.g., Southeast Queensland) say the pace is picking up again.

Homeowners in many jurisdictions chose to improve their existing home through renovation and extensions, rather than upgrading into another new property. This has added to demand for labour and materials.

I think this renovation wave will continue for a little while yet, although increased costs will dampen enthusiasm to some degree. Expect it to continue to influence costs throughout most of this year and into the next at least.

Lack of labour

The need for contractors and materials has tied up construction resources – i.e., supply is low, while demand is high. In this free market of ours, builders have been increasing their margins, if possible, while some entrepreneurial tradies are probably trying to make hay via inflated quotes while they can.

Meanwhile several builders have gone broke because they signed fixed-price contracts before the cost boom. As their projects progressed and costs ramped up, they found themselves falling further and further in a hole until, eventually, they were going to make a financial loss by completing their builds. Under those conditions, it’s smarter to close the business than continue working.

The fallout of this is less builders available in the market – so even less supply vs. strong demand.

That said, the market has a way of sorting this out. I think things will self-correct throughout this year and into the start of 2023.

So… when will costs stop rising?

There are other elements to factor in too of course. Interest rates, the state of the economy, international political tensions, employment numbers and household financial security just to name a few. So many unknowns out there that could have an impact. But allowing for this, I still feel confident in predicting what may happen to construction costs.

Firstly, I believe they will continue to rise throughout this year at least. Maybe another 10 to 15 per cent by December. But there’s no doubt consumers have reached a tolerance tipping point. Owners are deciding to push pause on their projects because of costs. Builders will still find plenty of work in 2022, but there’s probably less enquiry underway at present.

I also think 2022 will see a ‘cleansing’ of the industry. Good operators will shine, bad ones will be left by the wayside.

So, while my short-term opinion is that costs will continue to rise, they will increase at a more moderate rate this year and will probably peak in early to mid 2023.

I wouldn’t be surprised to see costs start to attenuate a little by the end of next year. They’re unlikely to go back to pre-covid levels, but their runaway growth will be behind us by the end of 2023.

Of course, my caveat is that no further surprises torpedo our plans and send costs spiralling higher once more.

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 I want to give credit to my business partner, Marty Sadlier. Marty’s expertise and insights about construction costs is unparalleled.

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