Construction costs still streaking ahead

Supply chain disruptions and a shortage of materials has resulted in rapid rises in construction costs, although they are slightly down on the June quarter.

The Cordell Construction Cost Index (CCCI), reveals costs rose 1.6% in the three months to September down from the 2.2% rise in the previous quarter, but still well above the typical quarterly increase of about 0.8%.

On an annual basis, the country’s construction cost growth rose from 4.5% in the 12 months to the second quarter of this year and 5.5% in 12 months to the third quarter - the fastest annual rate since the first quarter of 2018 (when growth was already into a slowdown phase).

Cordell data shows timber prices, particularly structural timber and cladding, have been a key contributor to overall cost increases. Metal costs and products have also been a factor in the increases.

CoreLogic chief property economist, Kelvin Davidson, says it is likely the construction industry will remain busy for some time.

“Cost pressures as shown by the CCCI may get worse before they get better. Anecdotal evidence suggests the latest lockdowns will simply sustain the disruptions on supply chains and construction material costs.

“Investors are also now strongly incentivised to buy new builds, due to their exemption from the loan-to-value ratio rules and continued ability to claim mortgage interest as a deductible expense for the first 20 years of a property’s life.

“These tailwinds for new-build demand have all come at a time when more skilled labour can’t be imported, so it’s a bit of a perfect storm, and will likely help to sustain some upwards pressure on construction costs.”

However, Davidson says there are some headwinds which should eventually come into play and ease construction cost pressures.

“Mortgage interest rate rises will likely impact new home demand along with the general cost growth itself which will feed back into softer activity,” he says.

The jump in construction costs comes at a time when CoreLogic is reporting a 28.8% 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.
“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,” says Davidson.