The costs of building and renovating a home have surged by 3.8 per cent nationwide in the three months to September – more than four times the consumer price index of 0.8 per cent during the same period, and the sharpest quarterly spike since GST was introduced in 2000, the Cordell Construction Cost Index (CCCI) shows.
Over the year, residential construction costs have jumped by 7.1 per cent – the highest annual increase in more than 16 years, as the surge in new builds and renovations coincided with the disruptions to supply chains and a shortage of materials and labour.
CoreLogic’s research director Tim Lawless said the higher construction costs were 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,” he said.
Mr Lawless said the boom in dwelling approvals, which peaked in March, was now progressing through to construction, causing widespread demand for materials and tradies.
“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,” he said.
here 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.
“For anyone who is looking to build or to renovate, or for someone who owns a business involved in the residential construction industry, it means they are all likely to be facing significantly higher costs.”
Construction costs rose 3.8 per cent in NSW during the quarter, more than double from the previous three months. Over the year, they rose by 6.6 per cent – the highest annual growth on record for the state.
Sydney-based builder and developer Mark Bainey, chief executive of Capio Property Group, said homebuyers would ultimately bear the brunt of rising construction costs.
“Dwelling prices will have to rise as developers pass on the rise in cost,” he said. “I don’t know what other developers will do, but we have to make our margin, so we have to pass it on to the customer.”
Perth-based developer Gary Dempsey, founder of Gary Dempsey Developments, said while they have been insulated by the recent jump in the cost of materials, the shortage of labour had caused significant delays in some of his projects.
“We’re lucky that we’ve managed to pre-order large quantities of materials at the start of COVID-19, so we’re not hit by the soaring costs, but we’ve been smashed over the last four or five months because our subcontractors haven’t been able to finish their job as they kept losing workers to the mining industry,” he said.
“I’m not exaggerating, I’ve been labouring on site on the weekends and sometimes during the week too. It’s that bad, but we have no options.
“Normally, on Saturdays when we have a job of this size, we have around 40 people working. We’re lucky to have one to three workers turn up. It’s ridiculous.”
Mr Dempsey said the uncertainty over construction costs has prompted him to put his next project – a 17-level apartment block in Scarborough – on hold.
“We’re putting it on hold for now because we’re not sure how much higher construction costs could go,” he said.
“We don’t want to rush into pre-sales right now, even though we know we could sell well in this market. So, I think there’s going to be a big shortage of finished stock because projects that aren’t on the ground, probably are going to be delayed.”
Western Australia posted a 4.3 per cent rise in construction costs for the quarter, up sharply on its June quarterly growth rate of 1.4 per cent and the fastest pace of growth in more than two decades.
Queensland recorded a 3.8 per cent quarterly rise, Victoria was up by 3.5 per cent and SA jumped by 4.4 per cent – the highest quarterly increase across the five largest states.
Mr Lawless said construction costs could rise further in the years ahead.
“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,” he said.
“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.”