According to CoreLogic’s latest Cordell Construction Cost Index (CCCI), construction costs posted a 0.8% increase in the December quarter. 

Making sense of the quarterly reading, CoreLogic economist Kaytlin Ezzy said the latest growth rate remains 20 basis points below the pre-Covid decade average of 1.0%

"This suggests that re-acceleration is more a return to trend rather than a new surge in construction costs," she said.

On an annual basis, residential construction costs saw a 2.9% increase – the smallest annual rise since the year to March 2007 when it posted a 2.7% growth rate, and below the pre-Covid decade average of 4.0%.

"This suggests that growth in construction costs have normalised after recording a recent peak of 11.9% over the 12 months to December 2022, albeit at a higher level,” Ms Ezzy said. 

“Although 26.6% higher than at the onset of the pandemic, the recent surge in CCCI is below the increases seen across national house values, with CoreLogic's Home Value Index rising 36.5% over the same period."

CCCI tracks the cost of building a typical new dwelling.

However, the Cordell costings team said pricing remains generally unsettled, with no clear trend seen across most product types.

Both increases and decreases were recorded in timber and metal prices while hardware and chemical items experienced cost surges, according to John Bennett, CoreLogic’s construction cost estimation manager.

“This tells me suppliers are either bringing their product pricing back down to acceptable levels from the increases during the Covid period, or they are increasing to set up for the year ahead," Mr Bennett said.

Price rises varied across states. An increased growth rate was seen in New South Wales, Victoria, and West Australia, while Queensland and South Australia saw a reduction in quarterly CCCI growth. 

Slow building and approvals stand in the way

The low levels of new dwelling approvals and commencements are clouding the outlook for construction costs this year.

Total dwellings approved between July and November 2023 reached 70,900, lower compared with 81,954 over the same period in 2022, according to the latest data from the Australian Bureau of Statistics (ABS).

On a monthly basis, approvals for new residential buildings rose by a seasonally adjusted 1.6% in November.

“Although a number of projects are still moving through the construction pipeline, the recent lull in approvals could result in a shortfall of new projects, which would keep growth in building costs low, due to greater capacity in the construction sector,” Ms Ezzy said. 

The impact of rising prices and high borrowing costs was evident in the ABS’ latest building activity data released this week.

New dwelling commencements in the September quarter slumped to an 11-year low of 10% to 37,116.

Similarly, the 12-month total fell to 165,602 over the four quarters to September, well below Australia’s yearly average target of 240,000. 

The slow pace of building activity doesn’t bode well for the government’s plan – through the National Housing Accord – to build 1.2 million homes over the next five years, starting in July.

Sales of new homes have consistently dropped since the RBA’s first interest rate hike in May 2022.

But experts said the anticipated rate cut in the second half of 2024, on the back of slowing inflation, may lead to a recovery.

“With the CPI continuing to ease, it's looking increasingly like we'll see a cash rate cut in the second half of 2024, which could fuel housing demand for both established and new dwellings,” Ms Ezzy said.

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