Don’t count your chickens, but after two years of runaway price increases, a sharper slowdown in the pace of construction cost growth could reveal welcome signs of stabilising pressures that have plagued the building sector.
CoreLogic’s Cordell Construction Cost Index (CCCI), which tracks the cost to build a typical new residential dwelling, returned a quarterly growth rate of 0.5% for the September quarter.
This was the smallest lift since the three months to June 2019 and is under half the 1.2% decade average.
At 4.0% annual growth the index is now below the recent quarterly peak of 4.7% this time last year.
Four consecutive falls
While construction costs remain elevated, CoreLogic Head of Australian Research Eliza Owen says the market can take some comfort from four consecutive falls in the quarterly pace of growth for residential construction costs.
“The slowdown in new dwelling approvals also points to mixed news for the construction industry next year,” said Owen.
“On the one hand, this will free up capacity for material and labour resources, but it will also mean greater competition for new jobs.”
New dwelling cost pressures easing
The slowdown in the growth rate of construction costs is broadly in line with the ‘new dwellings’ cost sub-component of the ABS CPI figures.
Having peaked at 5.7% in the March 2022 quarter, the CPI sub-index has since slowed to just 1.0% through the June quarter of 2023.
With the cost of new owner-occupier dwelling purchases comprising the largest weighting in the CPI ‘basket’, a continued easing in the CCCI may be another indicator of easing inflationary pressures within the building sector.
Cost pressures switching to labour
While material costs appear to have stabilised overall, new labour cost pressures are currently surfacing.
As a case in point, award rates are up over 5% across the construction industry, higher than previous years, while the superannuation guarantee rate also increased to 11%, up from 10.5% from 1 July 2023.”
Where these new pressures are most evident, notes CoreLogic’s construction cost estimation manager John Bennett is in fewer funds to deploy on new projects. This explains why around 660 construction companies have gone bust so far this year.
Reserve Bank (RBA) data shows a sharp increase in the proportion of large residential builders experiencing negative cash flow, up to around 30% in the March quarter of this year.
Overall, Queensland had the highest quarterly growth and was also the only state where the pace of change in the index accelerated, up 10 basis points to 0.8% and on an annual basis costs were up 4.8%.
Other key findings
- CCCI for NSW rose 0.6% over the three months to September 2023, steady on the previous quarter but down from a recent high of 4.0% Q3 last year. The annual increase also sank to 3.9% from 7.3% in the three months to June 2023.
- Victoria’s CCCI recorded a 0.3% increase in construction costs over the September quarter, down from 0.7% in the three months to June and the largest deceleration in construction costs over the quarter. Annually costs increased 3.7%, from a peak of 13.0% in the calendar year of 2022.
- In WA, construction costs rose 0.2% over the quarter, the lowest quarterly growth rate of all states. The quarterly pace of change is down from a recent high of 4.3% in the September quarter of 2021 and is running below the pre-COVID decade average rate of 1.0%.
- SA’s increase in construction costs was 0.6% for the quarter, the smallest increase in the CCCI since the Q3 2020, when the effects of material constraints and a surge in demand from HomeBuilder were yet to be fully felt in the residential construction space. The annual increase plummeted to 4.1% from a recent high of 10.5% in the 2022 calendar year.
