Construction costs for the residential sector climbed higher last month, putting pressure on home builders to make good on the government’s ambitious housing promises.
CoreLogic’s latest Cordell Construction Cost Index (CCCI) revealed that residential construction costs grew 1 per cent over the September quarter, bringing the industry back in line with the pre-COVID-19 decade average.
The national CCCI was up from a 0.5 per cent rise over the 2024 June quarter, marking the highest quarterly rise since the 1.9 per cent increase during the three months to December 2022.
Annually, construction costs rose 3.2 per cent, up from 2.6 per cent in the 12 months to June, with CoreLogic economist Kaytin Ezzy saying the additional pressure would spell pain for home builders tasked with completing the federal government’s 1.2 million home builds.
“With the official start date for the government’s target for 1.2 million well-located homes over five years kicking off in July, the recent re-acceleration of the CCCI could put additional pressure on an already difficult-to-achieve goal,” Ezzy said.
“Over the year to June, approximately 176,000 dwellings were completed, -26.6 per cent below the 240,000 annually needed to fulfil the target.
“While 250,000 homes remain within the construction pipeline nationally, the sluggish flow of new dwelling approvals suggests a shortfall of projects once the backlog is worked through.”
Boiling the data down state-by-state basis, Queensland recorded the highest change in the CCCI, with the largest quarterly increase in construction costs of 1.1 per cent.
Both NSW and Western Australia followed suit, recording cost increases of 1 per cent, while Victoria and South Australia had the smallest quarterly rises of 0.8 per cent.
With interest rates and labour costs still leaving a lot of tradies operating in the red, Ezzy predicted that the increase would be “unwelcome news” for businesses trying to repair their profit margins.
“Although the latest quarterly rise aligns with the pre-COVID decade average (1.0 per cent), overall construction costs have surged 29.5 per cent, putting significant pressure on the feasibility of many projects,” she said.
But builders aren’t the only ones feeling the brunt of the cost hikes. On the latest release of the June quarter Consumer Price Index (CPI), the Australian Bureau of Statistics pointed to the higher labour and material costs as the main reason behind the 1.2 per cent increase in dwellings purchased by owner-occupiers.
Commenting on the data, Ezzy said that the residential building costs made up the “largest share” of the CPI’s housing component and would play a major role in curbing housing inflation.
“As a forward indicator, the recent re-acceleration in the CCCI is concerning for the new homes component of the CPI, as the two series are highly correlated,” Ezzy said.
“This may partially offset the impact of slowing rent growth on housing inflation.”
But the price projections aren’t all doom and gloom, according to CoreLogic Construction Cost Estimation Manager John Bennett, who predicts building materials costs have stabilised after minimal increases and decreases last quarter.
He said categories such as timber products, building permit and application costs, plant hire and rainwater products demonstrated little movement for the quarter, while masonry, cement sheet products, joinery, plumbing material (mainly copper) and general waste disposal all showed slight increases.
“This quarter has shown no standout specific trends in the market for construction cost materials. We fully expect this to continue for the coming months,” Mr Bennett said.
