Increasing costs also raise concerns for new home prices
Residential construction costs rose by 1% over the September quarter, in line with the pre-pandemic decade average, according to CoreLogic’s latest Cordell Construction Cost Index (CCCI).
The national CCCI for Q3 2024, which tracks the cost to build a typical new home, increased from a 0.5% rise in the June quarter, marking the strongest quarterly growth since the December 2022 quarter (1.9%).
Over the 12 months ending September, construction costs increased by 3.2%, up from 2.6% in the previous 12-month period, though lower than the 4% annual rise recorded this time last year.
CoreLogic economist Kaytlin Ezzy (pictured above) said the acceleration in construction costs could challenge the federal government’s goal of building 1.2 million new homes over five years. The target, which began in July, already faces hurdles due to lagging housing completions.
“Over the year to June, approximately 176,000 homes were completed, which is 26.6% below the 240,000 annual pace needed to meet the target,” Ezzy said. “With 250,000 homes in the construction pipeline, the slow rate of new approvals signals a potential shortfall once current projects are finished.”
In August, national monthly dwelling approvals were 17.9% below the decade average and 30% below the 20,000-per-month target required to meet the government’s housing goals.
Queensland recorded the highest quarterly increase in construction costs at 1.1%, up from 0.3% in the June quarter. New South Wales and Western Australia saw costs rise by 1%, while Victoria and South Australia experienced the smallest quarterly increases at 0.8%.
CoreLogic construction cost estimation manager John Bennett noted that building material costs have stabilised, with minimal changes over the quarter. Products such as timber, building permits, plant hire, and rainwater systems showed little movement, while categories like masonry, cement sheet products, joinery, and plumbing materials saw slight increases.
“This quarter has shown no standout trends in construction material costs,” Bennett said. “We expect this stability to continue in the coming months.”
Construction costs remain a leading indicator for inflation, with implications for the broader housing market. The Australian Bureau of Statistics (ABS) reported that the Consumer Price Index (CPI) rose by 1% in both the March and June quarters, with new dwelling purchases by owner-occupiers increasing by 1.1% due to builders passing on higher costs. Ezzy pointed out that residential building costs are a key driver of the housing component of the CPI.
“The recent re-acceleration in the CCCI is a concern for new home prices, as construction costs and CPI are closely linked,” she said. “This may partially offset the impact of slowing rent growth on housing inflation.
“Additionally, the increase will be unwelcome news for builders, who are still working to repair profit margins. Although the latest quarterly rise aligns with the pre-COVID decade average (1%), overall construction costs have surged 29.5%, putting significant pressure on the feasibility of many projects.”
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