The latest construction industry data shows that the pace of building cost increases has slowed.
Growth in the cost of building materials has eased over the past year, with prices stabilising as supply chain issues improve and demand for new construction decreases.
Input prices to the house construction industry rose by 0.6% in the June quarter, the lowest rise since December 2020, according to data from the Australian Bureau of Statistics.
The construction industry Producer Price Index, which measures the price change of products leaving the place of production or entering the production process, is at its highest point to date. However, there are signs that it is starting to level off.
Costs for certain essential building materials, such as concrete, plaster, and plumbing products, have increased. These are integral to the construction process and have driven up the price of new builds.
However, the decrease in the cost of steel products has offset the extent of the rise.
The easing of material prices is a welcome relief to construction companies, but it isn't just materials that have caused the cost of new builds to rise.
The shortage of labour is also a significant issue, particularly for finishing trades, which include painters, tilers, and plasterers.
High construction costs have largely driven the increase in outstanding work in the pipeline.
There were 240,813 dwellings under construction in March, 26% higher than in March 2020. The value of work yet to be done is now at an all-time high.
The backlog of work has been building since late 2020 when the popularity of the HomeBuilder grant drove an increase in building commencements.
At the same time, pandemic-driven supply chain issues, building cost increases and the frequent shutdown of construction sites due to Covid outbreaks stalled work and slowed down completions.
As a result, construction companies have been hit with surging costs and falling sales, which has put some firms under financial stress.
In the 2023 financial year, 2213 construction companies entered administration, which was 23% more than the previous record set in 2014.
The easing of construction costs may be helping to get outstanding work in the pipeline moving along, freeing up construction crews to start on new projects.
There was a 14% increase in new commencements in the March quarter, totalling 46,546 dwellings, driven by a 57% increase in apartments and townhouse commencements.
The number of house commencements continues to drop, influenced by lower demand due to high lending and construction costs, affordability concerns and lower incentives.
Buying a house and land package isn't as cost-effective as it was a few years ago, when the HomeBuilder grant, low interest rates and lower material costs were compelling reasons to build a new property instead of purchasing an established one.
The combination of lower demand for new builds, high costs, and labour shortages has had a knock-on effect on new approvals for residential construction.
Total building approvals in June 2023 fell by 7.7% and are down 18% year-on-year.
New approvals are vital to the residential construction industry, providing a flow of future work and a steady cash flow to fund current builds.
Additionally, new private dwellings are needed to meet the requirements of a rising population.
High construction costs, lower demand, and construction industry insolvencies mean there won't be enough new properties to meet current and future migration numbers, let alone demand from the existing population.
It will take some time before the construction industry recovers from recent headwinds, and further decreases in building material costs and the easing labour shortages are needed to get existing work moving through the pipeline.
While interest rates are high, it's unlikely we'll see demand for new builds pick up without greater incentives such as increased government grants or a significant reduction in building costs.
