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Unprecedented spike in housing construction costs

  • November 16, 2021

A surge in new builds and renovations, supply chain disruptions and a shortage of materials have driven a 3.8% increase in residential construction costs in just three months says CoreLogic.

 

  Three key takeaways:

  • CoreLogic’s Cordell Construction Cost Index has tracked the largest quarterly increase since the third quarter of 2000, when construction costs increased 7.2% after the introduction of the GST.
  • The national increase of 3.8%, recorded in the three months to September 2021, outpaced the Consumer Price Index of 0.8% for the same period.
  • Nationally the annual increase was 7.1%, the highest yearly growth rate since March 2005.

 

“The quarterly rate of growth in construction costs is happening everywhere and is not restricted to one city or state. It’s a national trend,” says Tim Lawless, CoreLogic’s research director.

Dwelling approvals, which peaked in March, are now progressing through to construction, causing widespread demand for materials and trades. This increased construction activity has also coincided with supply chain disruptions which have placed further pressure on an industry dealing with a severe shortage of materials.

“There was a much bigger increase in our index when the GST was introduced. However, outside of that structural adjustment this is by far the biggest quarterly change on record. This would be the largest market driven increase we’ve seen,” Lawless notes.

Quarterly price rises have been mostly driven by increasing timber costs, notably structural timber, metal products and plumbing supplies.

“This doesn’t look like a short-term spike. The surge in construction costs is due to the amount of construction activity that’s been approved at a time when we can’t import more skilled labour and are facing significant supply chain disruptions,” Lawless says.

Australian dwelling commencements have lifted by more than 50 per cent over the year to June, following the introduction of the HomeBuilder grant.

“This construction cost inflation could continue for another 12 to 18 months. It’s unlikely the industry can absorb a cost increase this significant into their margins and higher construction costs will ultimately be passed on to the consumer, placing further upwards pressure on the price of a new dwelling or renovation.”

The jump in construction costs comes at a time when CoreLogic is reporting a 20.3 per cent rise in housing values nationally over the past year. Higher construction costs are likely to add to affordability challenges already at play across the established housing market.

“There’s already evidence that the cost of new housing and residential construction is placing upward pressure on Australia’s inflation rates and these figures will only add to that pressure,” Lawless concludes.