Construction price escalation has been a major concern in the property industry over the last couple of years, but signs that material cost increases are easing are giving cause for hope, but the prospect of an increase in labor prices is clouding the picture.
Turner & Townsend Senior Economist Tiffany Emmett said building material costs was where most of the price escalation was occurring in 2021 and 2022.
“The positive side now is that supply chain disruptions are now easing,” she said. “We saw a lot of those disruptions start to abate over 2022.
“What we’re thinking this year, and what we’ve started to see in some of the data come through, is that material costs have probably reached their peak or are getting close to the peak, we could see some softening across a range of different building materials.
“I think the worst of it is behind us now.”
She pointed to a drop in steel prices alongside shipping costs, two sectors that caused a lot of pain in 2021 and 2022, that are now starting to see prices ease.
However, the skills shortage will now be the critical issue, according to Ms Emmet, which is leading to higher preliminary costs.
“Skill shortages is a really critical issue across the construction industry at the moment,” she said.
“Anyone you talk to in the industry will tell you that they’re having trouble getting people. And what that is doing is it’s obviously driving higher wage growth.”
RLB Melbourne Director Domenic Schiafone said while materials costs have stabilised, it is improvements in the supply chain that will really pay dividends.
“Shipping has definitely improved,” he said. “The price of shipping has come right down.”
Mr Schiafone said with improving supply chains comes improved lead times for projects.
“There is more comfort that if it is a 12-week lead time, you’ll get it in 12 weeks,” he said.
“Whereas this time last year, it used to be an eight-week lead time, it then went to 12, but even at 12 it was uncertain.
“There seems to be more confidence in the supply chain and availability of materials.”
This certainty has stopped the ‘margin on top of margins’ environment of last year, as the amount of risk priced into a project is stabilised.
“We’ve seen the risk in the pricing fall,” he said.
“There are still allowances for increased costs, but there’ll be more measured in terms.
“I think that is where the easing is coming from. It is not that material prices are stagnant, but there is more certainty in the supply and the risk in delivering.”
Labor remains the big cloud hanging over the new year, according to Mr Schiafone.
“It’s not just our industry, it is everywhere,” he said.
“It was there last year…it will hit again this year, probably a little bit harder than last year.”
Costs beginning to ease
CoreLogic’s Cordell Construction Cost Index (CCCI) set a new high for the year, rising 11.9 per cent over the 2022 calendar year, the biggest yearly rise on record, excluding the period impacted by the GST’s implementation.
The amount was much higher than the 7.3 per cent figure reported in the 12 months to December 2021, but the quarterly growth rate of 1.9 per cent indicates a major reduction in the index following September’s quarterly surge of 4.7 per cent.
“Although the annual CCCI remains high, on a quarterly basis there’s been an easing in residential construction costs,” CoreLogic Construction Cost Estimation Manager John Bennett said.
“This reflects a pull back from consumers, builders and will eventually flow through to suppliers, as projects are delayed or put on hold in the current economic environment.”
He said volatile timber and concrete pricing, alongside a rise in the cost of metal products, are impacting costs.
The quarterly change in the index varied from 1.7 per cent in South Australia and 1.8 per cent in New South Wales to two per cent in Western Australia and Queensland.
Mr Bennett doesn’t expect 2023 costs to continue to grow at the same rapid pace as they have done in the past 18 months as consumers, builders and suppliers proceed with caution against a backdrop of rising rates and inflationary pressures.
It comes total dwelling commencements fell 5.2 per cent to 45,489 dwellings in September 2022, according to the Australian Bureau of Statistics.
Lack of domestic manufacturing
RLB Manager, Oceania Research and Development John Cross said as Australia has a small manufacturing industry that supplies materials to the construction industry, it is sensitive to disruptions in the supply chain.
“Costs have been fairly consistent for goods made in Australia, but the input costs in foreign lands are increasing,” he said.
“That means our costs are increasing, too, and there’s nothing we can do about that.
“The majority of influences that are impacted on escalation are external to the industry, we have little control.”
Mr Cross also said multi-employer bargaining agreements, committed to by the Albanese Government, is a risk factor going forward, as its impact is yet to be fully understood.