Construction costs stabilise, bringing renewed demand

This brought the annual growth in the index to 4.0 per cent, down from the recent quarterly peak of 4.7 per cent at this time last year.

Supply chain issues, lockdowns, increased regulations, and labor delays have all weighed on the construction industry over the past two years.

According to the Australian Securities and Investment Commission (ASIC), these challenges have resulted in a staggering 72 per cent increase in insolvencies during the financial year 2023.

The Reserve Bank of Australia’s (RBA) Financial Stability Review has further highlighted the sector’s challenges, revealing that rising insolvencies in construction accounted for one-third of the recent increase in insolvencies, although this upswing occurred from the very low levels recorded during the pandemic.

“Higher interest rates have also raised debt-servicing costs for many firms. Reflecting these financial pressures, residential builders’ overdue trade credit balances to major suppliers have increased,” the RBA noted.

These factors have “eroded profit margins on existing fixed-price contracts for many residential builders,” noted the RBA.

“Some builders are still working through these contracts, which are now loss-making for many. As such, the share of large residential builders with negative cash flows has sharply increased over the past couple of years,” the RBA said.

CoreLogic’s construction cost estimation manager John Bennett noted the shift in cost pressures from materials to labour.

“Award rates have increased more than 5 per cent across the construction industry, coming in higher than previous years,” Mr Bennett said.

“The superannuation guarantee rate also increased to 11 per cent, up from 10.5 per cent from 1 July 2023.”

Finance broker at Perry Finance, Cameron Perry, said these factors have made it difficult for property developers to deliver projects on time and within budget, especially in Victoria.

Mr Perry said many builders that entered fixed-price contracts, when costs were stable over a number of years, have been hit with costs that have risen by 40–50 per cent, which they have been unable to recover.

He also highlighted that regulations such as BAL fire ratings have made new builds more challenging for developers to start quickly.

“As a result there probably hasn’t been as much, private sector construction going on over the last couple of years than we saw previously,” Mr Perry said.

Despite these challenges, demand for new construction remains strong, he noted.

“There is plenty of demand for buyers and there’s projects where the developers owned the land for a period of time, so they haven’t had to go through all of these hoops,” Mr Perry said.

Constructions cost easing

While construction costs remain elevated, CoreLogic’s data showed that the rate of increase has normalised.

“This is the fourth consecutive slowdown in the quarterly pace of growth for residential construction costs,” said Eliza Owen, head of Australian research.

“The slowdown in new dwelling approvals also points to mixed news for the construction industry next year. On the one hand, this will free up capacity for material and labour resources, but it will also mean greater competition for new jobs.”

The recent slowdown in the growth rate of construction costs is broadly in line with the latest inflation data from the Australian Bureau of Statistics (ABS).

The monthly Consumer Price Index (CPI) indicator rose 5.2 per cent in the 12 months to August 2023, up from the 4.9 per cent recorded in July 2023.

However, annual trimmed mean inflation remained steady at 5.6 per cent, in line with the rise of 5.6 per cent recorded in July.

In addition, inflation for owner-occupied new dwellings saw a peak at 20.7 per cent n September 2022 steadily decreasing to 7.8 per cent in June 2023.

“The cost of new owner-occupier dwelling purchases comprises the largest weighting in the CPI ‘basket’, so the continual easing in the CCCI may also be a forward indicator of inflationary pressures easing within the building sector,” Ms Owen noted.

[Related: Building approvals bounced back in August]