A reacceleration in the quarterly pace of growth for national construction costs is suggested to be a return to trend rather than a new surge, according to CoreLogic.
The Cordell Construction Cost Index (CCCI), which tracks the cost to build a typical new dwelling, recorded a growth rate of 0.8% over the three months to December. This marks a reversal of the easing trend seen over the previous four quarters when the quarterly CCCI reading went from 4.7% in Q3 2022 to 0.5% in Q3 2023. The annual growth rate for the 2023 calendar year was 2.9%.
CoreLogic Economist Kaytlin Ezzy said although the quarterly CCCI reading has risen, the latest growth rate remains 20 basis points below the pre-COVID decade average of 1.0%.
"This suggests that reacceleration is more a return to trend rather than a new surge in construction costs," Ms Ezzy said.
"While up over the quarter, the annual change in residential construction costs continued to ease as larger quarterly increases fell out of the annual calculation."
At 2.9%, the latest 12-month increase was the smallest annual rise in the national CCCI since the year to March 2007 (2.7%) and below the pre-COVID decade average (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. 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," Ms Ezzy added.
CoreLogic Construction Cost Estimation Manager John Bennett said pricing remains generally unsettled, with no clear trend seen across most product types.
"Depending on the supplier, both increases and decreases were recorded in timber and metal prices, although we have seen rises in the price of hardware and chemical items. 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.
"In 2023 there was a bit of uncertainty around what the fallout from the interest rate increases would be and therefore the overall impact on the building industry. While the latest figures show the market has settled down, I don't think we have seen the slowdown many were expecting.
"While dwelling approvals are still well below historic averages, there is still an elevated level of projects under construction which is keeping cost pressures high," he added.
Price rises were also varied across the states, with an increased growth rate seen in NSW, Victoria and WA, while SA and Queensland both saw a reduction in quarterly CCCI growth.
Ms Ezzy said the outlook for construction costs over the coming year is uncertain.
"While it's unlikely we'll see any declines in construction costs, the pace of growth could be influenced by several factors. Although national dwelling approvals have risen from a recent low of 12,185 in January, the latest data from the ABS showed that dwelling approvals remained -15.8% below the decade average in November at around 14,500. Although a number of projects are still moving through the construction pipeline, the recent lull in approvals could result in a shortfall in new projects, which would help keep growth in building costs low, due to greater capacity in the construction sector.
"However, 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. Regardless, the normalisation in CCCI growth will help provide some certainly for builders, insurance companies and homeowners alike," she said.
Key findings by state – Q4 2023 CCCI Report
- The CCCI for NSW rose 1.0%, up 40 basis points on the previous quarter but only 10 basis points above the pre-COVID decade average of 0.9%. The annual reading eased to 3.1%, the lowest annual change since the 12 months to March 2021.
- Victoria’s CCCI rose 1.1% over the quarter, up from 0.3% in the September quarter, making it the fastest acceleration in construction costs among the states. The annual increase continued to ease to 2.9%, down from a recent high of 13.0% over 2022 and is Victoria's lowest annual change since the 2016 calendar year (2.6%).
- Queensland recorded the lowest quarterly rise at just 0.1%, down from 0.8% in Q3, bucking the acceleration trend. This is the state's lowest quarterly result since Q1 2001 when CCCI fell -0.1%. The December quarter's weaker growth helped bring Queensland's annual growth rate back in line with the other states at 2.8%.
- In WA, construction costs rose 0.7% over the quarter, up 50 basis points on Q3. Annually, WA's CCCI increased by 2.3%, which was the lowest annual rate among the states.
- SA’s CCCI Increased by 0.5%, down from 0.6% in Q3, also bucking the national trend. This took SA's annual change in construction costs to 2.8%.
CoreLogic researches and reports on materials and labour costs which flows through to its Cordell construction solutions to help businesses make better decisions, estimate rebuild and insurance quotes easily and, ultimately, price risk effectively.