Will building costs continue rising?
As the construction industry moves through 2024, many stakeholders are watching closely to gauge the future trajectory of building costs. Recent reports suggest that while costs are still on the rise, the pace has significantly slowed compared to previous years. This article delves into the residential building data that the experts rely upon to form their forecasts, and practical strategies for residential builders to manage rising cost risks.
Current Cost Trends for Residential Building
The most recent data indicates that residential construction costs are rising at their slowest annual pace in over two decades. According to CoreLogic Australia’s July 2024 report, annual costs increased by just 2.6% in FY24. This is the smallest annual rise since March 2002, significantly below the pre-COVID decade average of 4.0%. This suggests a period of relative stability in construction costs, though the rate of increase still varies by region.
Various indicators of home building prices show a slowdown in growth but not a decline in prices. Home building materials prices have been increasing at single digits annually for the past five quarters, which is lower than the double-digit annual increases between late 2021 and early 2023 says HIA, New South Wales Outlook, Winter Edition 2024.
Expert Cost Forecasts
The Housing Industry Association (HIA) provides a broader context with its August 2024 State and National Outlooks. Western Australia, South Australia, Queensland, Tasmania and the ACT have already seen the trough in this cycle. The higher land and established house prices in Melbourne and Sydney could see these markets stagnate over the medium term as workers relocate to more affordable markets.
For New South Wales the report observes that construction commenced on 5,470 new detached houses in the first quarter of 2024, down by 5.4 per cent on the previous quarter. This is forecast to have declined by a further 4.8 per cent in the June Quarter 2024 to 5,210, producing a financial year total for 2023/24 of 21,070. This would be 18.8 per cent down from the previous financial year, with a further 0.8 per cent decline forecast to 20,890 in 2024/25.
2024/25 is expected to mark the trough in the cycle for New South Wales detached housing, and the two weakest financial years since 2012/13, before bouncing back to 23,160 in 2025/26 and reaching a peak of almost 24,000 by 2027/28.
Master Builders Australia agree that there is some evidence that detached home building approvals have bottomed out and that a very delicate upturn is in its preliminary stages.
Building Material Costs
The HIA Home Building Costs report, 21 August 2024 concluded that materials price rises are back to normal with price increases of 1.1 per cent compared to the previous year.
The ABS Producer Price Index (PPI) series on home building materials showed a slowdown in the pace of growth but not a decline in prices. In the past forty years, there have only been very few periods when the cost of home building materials fell, and these instances have only seen a marginal decline in costs says HIA.
Rawlinsons’ Quarterly Update for August 2024 echoes these sentiments, noting that Costs in most states and territories have mostly levelled off. It seems like the extreme price increases in material prices from the last few years have finally eased. Contractors now have more confidence in estimating supply costs, which helps in reducing project risks.
Building Trades Costs
The HIA’s June 2024 Trades Report reveals that home building pipelines across the country have been shrinking as the industry completes more projects than it commences. Labour shortages have been constraining the ability of the industry to complete the significant pipeline of work taken on during the pandemic. The slower rate at which new work is entering the pipeline has allowed the industry to work through the backlog of projects.
The improved availability or workers is more evident in the largest two states. New South Wales and Victoria have struggled to produce a turning point in any leading indicators of home building activity. This sees the HIA Trades Availability Index reflecting more modest – but still significant – shortages of skilled trades across these markets.
The HIA Trades Availability Index in the June Quarter 2024 sat at -0.23 in Sydney and -0.39 in Melbourne, far more modest than in Perth (-1.10), Adelaide (-0.82) and Brisbane (-0.66). The regional areas of New South Wales (-0.47), Victoria (-0.40) and Queensland (-0.34) also saw modest shortages compared to those of South Australia (-1.02) and Western Australia (-0.81).
Given the ongoing shortage of skilled trades, it is not surprising to see ongoing cost pressures. The price of skilled trades increased by 5.5 per cent in the 2023/24 fiscal year. This increase in price remains significantly elevated from the 2.0 per cent annual increase that prevailed before the pandemic, even after having moderated from the 9.5 per cent observed in 2021/22.
The extent of trade shortages varied across the various trade occupations. The most acute shortages of skilled labour exist for bricklaying (-0.94), ceramic tiling (-0.83), roofing (-0.66), carpentry (-0.62), and plastering (-0.61). It is noteworthy that the index tracking availability of electricians increased to -0.03, which indicates that supply/demand for this occupation was very close to balance during the quarter.
Rawlinsons’ Quarterly Updates for July and August 2024 echoes these sentiments, noting that the primary current challenge remains a skilled labour shortage and ongoing industrial relations negotiations in various states.
Regional Price Fluctuations
Around Australia, price fluctuations are influenced by local market dynamics. The variability in building costs can be attributed to factors such as regional demand, supply chain issues, and specific shortages in trades and materials. For instance, while some areas might experience cost increases due to high demand and logistical challenges, others might benefit from more stable conditions.
Master Builders Australia forecast change on previous year in number of new detached home building starts by state and territory to 2028–29 is as follows:
HIA and Master Builders Australia appear to agree that Western Australia and Northern Territory will see the fastest recovery and highest shortages while South Australia and Victoria will lag behind other States and Territories.
Strategic Implications
For residential builders, the key takeaways are:
- Cost Awareness: Although the pace of cost increase has slowed, ongoing vigilance is necessary. Builders and developers should regularly review and negotiate with subcontractors and suppliers to manage expenses effectively.
- Project Planning: With commencements projected to remain subdued in the near term, strategic planning and budgeting are crucial. Understanding regional market conditions and labour availability will aid in accurate forecasting and cost management.
- Adaptation: The ability to adapt to changing material costs and labour conditions will be essential for maintaining project viability. Staying informed and flexible will help navigate potential fluctuations and capitalise on emerging opportunities.
Conclusion
While building costs are expected to continue rising, the pace of increase has slowed compared to recent years. The current environment suggests a period of stabilisation with manageable annual rises. By staying informed, negotiating effectively, and adapting to market changes, residential builders can better manage costs and navigate the evolving construction landscape.
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