A sharp slowdown in the pace of construction cost growth may be an early sign that pressures are stabilising within the building sector.
CoreLogic’s Cordell Construction Cost Index (CCCI), which tracks the cost to build a typical new dwelling, returned a quarterly growth rate of 0.5% for the September quarter, the smallest lift since the three months to June 2019 and half the pre-COVID decade average of 1.0% per quarter.
This took the annual growth in the index to 4.0%, below the recent quarterly peak of 4.7% this time last year.
CoreLogic Head of Australian Research Eliza Owen said while construction costs are still very elevated, the ongoing level of increase has normalised.
“This is the fourth consecutive slowdown in the quarterly pace of growth for residential construction costs,” Ms Owen said.
“The slowdown in new dwelling approvals also points to mixed news for the construction industry next year. On the one hand, this will free up capacity for material and labour resources, but it will also mean greater competition for new jobs.”
The recent slowdown in the growth rate of construction costs is broadly in line with the ‘new dwellings’ cost sub-component of the ABS CPI figures.
“This ABS CPI sub-index saw a peak in the March 2022 quarter at 5.7%, and has since slowed to just 1.0% through the June quarter of 2023. The cost of new owner occupier dwelling purchases comprises the largest weighting in the CPI ‘basket’, so the continual easing in the CCCI may also be a forward indicator of inflationary pressures easing within the building sector,” she said.
CoreLogic Construction Cost Estimation Manager John Bennett said cost pressures in construction are shifting from an issue of materials, to labour.
“While material costs appear to have stabilised in general, labour costs have had a number of new pressures applied,” Mr Bennett said.
“Award rates have increased more than 5% across the construction industry, coming in higher than previous years. The superannuation guarantee rate also increased to 11%, up from 10.5% from the 1st July 2023.”
Analysis from the RBA showed a sharp increase in the share of large residential builders experiencing negative cash flow, which was up to around 30% in the March quarter of this year.
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%.
Key findings by state – Q3 2023 CCCI Report
- The 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.
- Queensland saw construction costs rise by 0.8% over the quarter, the highest quarterly increase at a state level and 10 basis points up on Q2 2023. On an annual basis, costs increased 4.8%.
- 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.
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