11.16.2022 Local News

What Impact Are Rising Construction Costs Having On The Property Market?

What Impact Are Rising Construction Costs Having On The Property Market?

Australia’s construction costs are climbing at a record rate, and the ripple effect is starting to flow outwards.

We take a look at what it means for homeowners, sellers, buyers and investors.

Australia is in the midst of a building boom. ABS data shows that the number of new homes under construction rose to a record high in June, rising from the previous record set in the March quarter and continuing a trend that began in early 2021.

And it’s not just new builds that have been peaking in popularity. Renovations are on the rise, too, with ABS figures revealing that as a nation, we spent $12.3 billion on renos in 2021, 33 per cent more than in 2020 and almost twice the amount spent in 2011.

But there’s a spanner in the works that looks likely to put an end to this heightened level of building activity. Construction costs are rising at record rates.

Construction costs are spiking

According to newly released numbers from CoreLogic, residential construction costs rose by 11% over the year to September. This is the highest-ever annual growth rate, excluding the period impacted by the introduction of the GST. The rise over the September quarter (+4.7%) was higher than the previous quarter (+2.4%) and the same quarter last year, which saw a 3.8% jump due to domestic supply chain issues brought on by lockdowns.

Here in NSW, construction costs rose by 4% in the September quarter – the largest quarterly rise on record after the September 2000 quarter when the GST was introduced. This puts us in the middle of the pack, with costs rising by 3.3% in WA and 5.6% in Victoria over the same period. Here in NSW, construction costs grew by 10.3% in the 12 months to September.

So, what’s going up in price? According to CoreLogic, timber and metal materials, such as framing and reinforcing, wall linings like plasterboard and fibre cement, and doors, have all seen significant cost increases. Back in May, the Master Builders Association of NSW reported that building material costs were increasing at their fastest rate since 1980, citing particularly sharp increases in the price of reinforcing steel (+43.5%), steel beams and sections (+41.5%) and structural timber (+39.2%). But it’s not just building materials that are increasing in price. Rising fuel, labour, electricity and freight costs are all affecting the industry too.

Why are construction costs skyrocketing?

The construction industry is caught in a perfect storm of material shortages, a tight labour market, rising interest rates and inflation. For more than 18 months, the cost of fuel, freight and power has been increasing. While some prices, like sea freight charges, have now stabilised, the heightened cost of energy and raw materials and ongoing labour shortages continue to have a major impact on prices.

Some pundits also believe that programs like the Commonwealth Government’s HomeBuilder scheme, designed to support the construction industry during COVID, have overstimulated the sector and are contributing to the issues it faces today. Original estimates from the Department of Treasury predicted 27,000 approved HomeBuilder grants; a review of the program in June found that 100,214 grants were approved. Brendan Coates, Grattan Institute economic policy program director, told the Sydney Morning Herald that while the residential building sector needed support during COVID, it’s now clear that construction costs would be lower today if the program had been smaller.

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Ongoing labour and material supply problems mean the issue of elevated construction costs won’t be going away any time soon. There’s still a large pipeline of building work approved during COVID to be worked through, and rebuilds and repairs following this year’s extreme weather events around the country are adding to the demand for materials and labour. “There’s no quick solution for providing additional materials, and fuel costs remain elevated. All of these factors have an impact and are likely to push building costs higher for some time yet,” says CoreLogic Research Director Tim Lawless.

What impact will rising construction costs have on the property market?

The impact of the ongoing increase in construction costs will be felt across the country and not just by those in the industry or people planning to build or renovate a home.

High building costs will start to slow down the supply of new homes. ABS figures show that the commencement of new dwellings fell to its lowest level in 18 months in the June quarter. Meanwhile, building approvals are declining, with the total dwellings approved in the September quarter down by 5.8%. New homes will increasingly come at a premium. Higher dwelling replacement costs could well serve to underpin the housing market, balancing the effect of rising interest rates. We can also expect a slowdown in the delivery of new housing stock to potentially impact the already tight rental market.

At a micro level, high construction costs may influence homeowners’ decisions about their next property move. Those considering a renovation, a knockdown rebuild or their own ‘grand design’-style architectural passion project may opt to sell and buy another existing home instead.

We’re already starting to see this play out through enormous buyer interest in finished, renovated homes like 148 Denison Street, Queens Park. This stunning Tribe Studio designed house was completed at the end of 2018, and attracted around 150 groups over three inspections, before breaking the Queen’s Park suburb record and selling for $8.7 million.

On the flipside, if you’re looking for a renovation project in Sydney’s Eastern Suburbs, rather than the finished product, check out the incredible potential of 2 Dudley Road, Rose Bay on 664 square metres in a prized location.

Thinking of buying or selling in Sydney’s beautiful east? Get in touch with my team today.