Construction costs blow out

The jump in costs for residential construction marked the “highest annual growth rate” outside of the introduction of the GST, which was 10.2 per cent over the year to March 2001.

The quarterly indexed growth rate for Q2 2022 was 2.4 per cent – a repeat of the previous quarter, but more than double Q4 2021 (1.1 per cent).

It comes as Australians deal with rising inflation, expected to tip 7 per cent, and rising interest rates, at 1.35 per cent, which have in part contributed to several construction companies closing their doors over the past year and a slowdown in building approvals.

The Australian Bureau of Statistics (ABS) reported a 23.4 per cent drop in building approvals over the year from May 2022 and a 37.2 per cent drop in the construction of dwellings over the year.

CoreLogic’s research director Tim Lawless said the impact of increased costs had been playing out across several states this year.

“Construction cost growth is an additional concern to an industry already under immense workload pressures as well as economic conditions such as rising interest rates and inflationary pressures,” Mr Lawless said.

“Construction costs have increased more than 25 per cent over the past five years, which has a knock on effect on builders’ margins, budget blowouts for customers not on fixed price contracts and home owners waiting for their projects to finish or even start in many cases.

“It’s also impacting the insurance industry, as home owners struggle to reassess existing policies to make sure they are adequately covered in the event they need to make a claim.”

Given the weather events and labour shortages, Mr Lawless said the short to medium-term outlook for the construction industry remained challenging.

“The pipeline of construction approved during COVID is still being worked through and there’s been a number of major weather events as recently as this month, which require significant rebuild and repair work. This all adds additional demand-side pressure for construction materials and trades,” he said.

“There’s also no reprieve on the supply side either with a lack of materials, elevated fuel costs and broader inflationary pressures. All of these factors have an impact and are likely to push building costs higher for some time yet.”

In addition the time it takes to complete a build has blown out, CoreLogic’s construction cost estimation manager, John Bennett, said the shortage of labour and increased materials cost has meant completion times have increased leaving builders “vulnerable to market changes”.

“Suppliers are frequently mentioning the impact of rising fuel, freight and electricity costs on their bottom line and these are significant additional challenges being faced by the industry,” Mr Bennett said.

The costs are being felt across the industries from metal, structural steel, reinforcing, fixings and fencing, adding to rising prices across timber products.

The surge in construction costs remained broad-based, with the quarterly index change ranging from 2.2 per cent in South Australia to 2.5 per cent in NSW and Victoria, with Queensland and Western Australia both recording a 2.3 per cent increase in construction costs over the three months to June, slightly lower than the national growth rate of 2.4 per cent.

[Related: Brokers feel the pinch amid construction folds]