The latest CoreLogic building index report (CHIP) out today, confirmed housing construction costs continued to rise over the March quarter, however growth is generally decelerating. Report author Eliza Owen noted that in nominal terms, quarterly growth in the national CHIP Index fell from 1.1% in the December 2017 quarter, to 0.8% in Q1 of 2018. She said, “Annually, growth in the national CHIP index was 3.9%. Victoria had the highest annual growth at 4.4%.” 

Across each of the 5 states covered in the CHIP report, growth in construction costs over the March quarter was lower fell relative to the December quarter last year. New South Wales was the exception; quarterly growth was steady at 1.1%. 

Nationally, Ms Owen said slower growth in residential construction costs reflects other signs of a slowdown across the residential construction space such as employment in construction. Based on Australian Bureau of Statistics data, in the three months to February, employment in the construction sector grew 1.8%. While employment in the construction sector has grown rapidly since 2016 to meet demand in the housing sector, this 1.8% growth in employment is substantially lower than the recent high of 2.7% growth recorded over the June quarter 2017. 
However, Ms Owen said, “The slowdown in construction employment growth may not place added pressure on housing costs because dwelling starts have slowed, too.” 

The trend commencement data from the ABS suggests that residential dwelling commencements peaked in March 2016 at 59,253. At the December 2017 quarter, commencements had slowed 8.8% to 54,035.  

This slowing in construction may see pressure ease on the cost of housing construction in future quarters, and is reflected in the slowdown in the CHIP index growth in the March 2018 quarter. 

New South Wales is the exception, with housing construction costs holding firm over the quarter. Unlike the national quarterly growth in the CHIP Index, where growth fell 23 basis points, growth in the NSW CHIP index slowed just 3 basis points, from 1.12% growth in the December quarter, to 1.08% in Q1. This was the highest quarterly growth rate across the 5 states.  

Furthermore, real growth in the NSW CHIP index actually increased in Q1, to 0.79%, up from 0.4%. This is due to increased building costs against a particularly slow quarter for inflation in NSW.  

The 0.79% real growth in the index was the highest since December 2012, when growth in the cost of housing construction in NSW diverged 101 basis points from inflation.  

Ms Owen said, “It is difficult to understand the drivers of such a sharp real increase in the value of construction, particularly when dwelling commencements are following the national trend of decline. The number of commencements has fallen 15.9% in NSW, following a peak of 20,638 starts in September 2016.  
One consideration is that while the number of apartments under construction peaked back in 2016 across both Victoria and Queensland, the most recent data shows unit construction to still be at record highs in NSW. 

“Another factor that may put upward pressure on building inputs from a demand perspective is construction in other sectors. The value of non-residential building work done in the December 2017 quarter rose 7%, led by warehouse buildings, which jumped 27%.”