Building inflation rises to near 50-year high

Supply and demand factors have rapidly affected building-cost inflation at levels not seen in almost five decades, National Housing Finance and Investment Corporation (NHFIC) data has found.

The NHFIC — dedicated to “improving housing outcomes by supporting efforts to increase the supply of homes for Australians” — recently revealed its insights on the influences driving the recent construction cost inflation. 

Based on its 30 June data, the research analysed the demand and supply-driven components of building material cost inflation, highlighting the following key points: 

- Building material and labour cost inflation rose at its fastest pace in nearly 50 years on the back of supply constraints over the past 12 months. 

- The cost of structural timber, plywood and steel reinforcement have all increased by more than 25 per cent over the past year, with some products such as structural timber rising by more than 40 per cent.

- Drawing on a model used by the San Francisco Federal Reserve, NHFIC’s analysis demonstrates that 83 per cent of all residential building material cost inflation in 2021–22 has been due to supply constraints.

- Building cost inflation in the prior fiscal year was strong, but considerably less than in 2021–22, with 75 per cent of total building cost inflation in 2020–21 due to demand pressures.

Inflation pain now but ease coming — maybe

According to the NHFIC, recent data suggests global supply chain pressures have moderated over the past six months, indicating the supply influences on construction costs could be likely to ease.

However, it highlighted that: “Anecdotal evidence from the construction industry suggests that labour costs have become of increasing concern more recently.” 

The magnitude of its insights is reflected in its earlier reports on how critical the building industry is to the overall inflation equation.

Last June, NHFIC released Building Jobs: How Residential Constructions Drives The Economy, which looked at the important role the residential construction industry plays in generating jobs and growth across the Australian economy.

“The residential building construction industry generates more activity across Australia than nearly every other industry, with each $1 million of economic output supporting nine jobs across the economy,” it emphasised.

The snapshot is even more significant given, as previously reported in The Adviser, while many industries have made their recovery post-COVID, the building industry has lagged behind.

Several large building companies have collapsed in the past year, leaving thousands of subcontractors, tradies and soon-to-be home owners falling victim.

Demand increased during the pandemic due to incentives like the HomeBuilder scheme – more than 137,000 people applied – which ironically was to provide a boost to the construction industry.

Rising inflation (which is expected to peak at around 7 per cent this year, according to the Reserve Bank of Australia [RBA]), alongside the war on Ukraine and the global pandemic have all reportedly contributed to the exorbitant cost of labour and materials over the past year.

[Related: Unfinished Business - navigating Australia's construction crisis]