Construction Costs Driving up Australian Inflation

A closed construction site in Fairfield in Sydney, Australia, on July 18, 2021. (Jenny Evans/Getty Images)

Australian construction costs in the September quarter jumped at its highest rate in over 20 years, as the industry struggles with supply chain disruptions, material shortages, and high demand for building and renovation services.

CoreLogic’s Cordell construction cost index found that residential construction costs rose 3.8 percent nationally during the three months to September, which was over four times higher and a major driver of the 0.8 percent rise in CPI during the same period.

This was the highest quarterly increase since the introduction of the GST tax in 2000 when construction prices exploded by 7.2 percent over the quarter.

Costs increased by 7.1 percent over the year, the highest annual jump since 2005.

CoreLogic research director Tim Lawless said increased construction activity coincided with a disruption to supply chains, placing further strain on an industry that was already dealing with severe material shortages, particularly for timber.

“The quarterly rate of growth in construction costs is happening everywhere and is not restricted to one city or state. It’s a national trend,” Lawless said. “There was a much bigger increase in our index when the GST was introduced; however, outside of that structural adjustment, this is by far the biggest quarterly change on record.”

“This would be the largest market driven increase we’ve seen,” he said.

Lawless said anyone who is currently looking to build or renovate or is involved in the industry would be facing significantly higher costs that is likely to continue for a prolonged period of time.

“This doesn’t look like a short-term spike; the surge in construction costs is due to the amount of construction activity that’s been approved at a time when we can’t import more skilled labour and are facing significant supply chain disruptions,” he said. “This construction cost inflation could continue for another 12 to 18 months.”

Lawless noted that it was unlikely the industry could absorb the cost increase, meaning they would ultimately be passed on to the consumer, placing further upward pressure on an already highly unaffordable housing market.

“There’s already evidence that the cost of new housing and residential construction is placing upward pressure on Australia’s inflation rates, and these figures will only add to that pressure,” Lawless said.

Meanwhile, the Housing Industry Association (HIA) found that skills shortages across all trades in the industry are worsening.

“Skilled trades continued to be in high demand as a record volume of detached home building and renovations is occurring,” HIA economist Angela Lillicrap said. “All regions across Australia are reporting an acute shortage of skilled trades, and all trades are in short supply.”

Finishing trades such as painting, plumbing, and plastering recorded the biggest declines in availability as HomeBuilder projects are nearing completion.

The Australian Bureau of Statistics (ABS) previously revealed that the September quarter CPI was driven by rising fuel prices and construction costs.

“Construction input costs such as timber increased due to supply disruptions and shortages. Combined with high levels of building activity, this saw price increases passed through to consumers,” ABS head of price statistics Michelle Marquardt said.