Construction costs surge, highest increase since 2023

CoreLogic’s latest Cordell Construction Cost Index (CCCI) has revealed the cost of residential construction increased by 3.4 per cent over the 12 months to December in what was the largest annual increase in construction costs since the year to September 2023 (4 per cent).

According to the CCCI, the quarterly pace of growth increase to be in line with the decade average of 1 per cent (pre-COVID-19) through the second half of 2024 after the quarterly change in construction costs eased below 1 per cent in 2023 and the first half of 2024.

Despite costs still sitting around 40 bps below the pre-pandemic decade average of 4 per cent, the increase in the annual pace of construction costs bodes to be unwelcome news for builders already feeling profit margin constraints.

Kaytlin Ezzy, economist at CoreLogic, said this latest data has represented “another challenge for an industry that is already struggling”.

“Residential construction companies continue to face profitability challenges with the CCCI up 30.8 per cent since the onset of COVID,” Ezzy said.

“Outside of compressed margins and continued labour challenges, the construction industry is also facing a looming shrinkage in the construction pipeline.”

Ezzy also said that building commencements have trended lower in recent months. Data from the Australian Bureau of Statistics (ABS) for new dwelling commencements over the year to June 2024 is at 10-year lows.

“These factors combined have contributed to an increasing number of liquidations, with 2,832 construction companies becoming insolvent in the 2023-2024 Financial Year, representing the greatest proportion of company collapses,” Ezzy said.

“Although up over the year, dwelling approvals over the 12 months to November also remained -7.1 per cent below the decade average, suggesting this shortfall of new projects entering the construction pipeline may continue for some time.”

This was further supported by the November monthly Consumer Price Index (CPI) figures, which revealed new dwelling purchases subcategories recording a 0.6 per cent decline during the month.

“While deflation in new dwelling purchases seems contrary to increasing construction costs, the ABS noted this decline was primarily driven by builders offering discounts and promotional offers to entice business, putting further pressure on margins,” Ezzy said.

Furthermore, CoreLogic construction cost estimation manager, John Bennett, said movements in the costs of specific components were varied for the December quarter.

“It was a bit of a mixed bag this quarter, with increases and decreases across different categories. What is constant is that labour continues to be a key driver of cost increases,” Bennett said.

He said that concrete blocks were one area with falls, down by 15 per cent on average, while plumbing PEX fittings and pipework were up by 5 per cent.

“We’re not seeing any dramatic movements one way or another,” Bennett said.

Employment in the construction industry dwindles

Off the back of the ABS's Labour Force data for December, Housing Industry Association (HIA) senior economist, Matt King, stated that while the data showed resilience in the workforce, the data reinforced an "alarming picture" of the lack of employment within the residential construction industry.

“This troubling gap between the demand for skilled trades and its supply risks significantly impeding the nation’s ability to meet the ambitious housing target of 1.2 million new homes over five years.

“According to the ABS, in November 2024, private sector job vacancies were 308,000, an increase of 4.7 per cent from August 2024," King said.

King said the current pipeline of skilled labour in the construction industry is "far from sufficient" as it echoes the HIA estimates that an additional 83,000 skilled workers will be required for the federal government to reach its 1.2 million housing target.

“The persistent shortage of qualified tradespeople and construction professionals is compounding existing challenges, such as escalating construction costs and project delays.

“The situation is reaching a critical point, the housing industry plays a pivotal role in providing Australians with affordable and secure homes, but we are facing an unprecedented workforce crisis.

“Without urgent action to increase the number of skilled workers in the construction sector, Australia risks falling well short of its 1.2 million home target. This would have adverse long-term consequences for housing affordability and the broader economy," King added.

He added that while there are a range of policy solutions available to alleviate the shortfall in skilled workers, "not one alone can improve the current shortages".

King suggested that despite recent initiatives such as increased funding for vocational education and apprenticeship programs, more needs to be done to support the construction industry in meeting housing demand.

“The delivery of adequate housing to meet ongoing and underlying demand must be a priority and comprehensively responding to these persistent skills shortages is a key part of improving housing supply,” King concluded.

[RELATED: Dwelling approvals fall across all resi building types]

Adrian Suljanovic is a journalist at Broker Daily with more than two years experience reporting on all facets of the third party distribution channel.

Adrian has written for a range of business and finance titles including IFA, Investor Daily and Lawyer’s Weekly before joining the mortgages team in 2022.

He graduated from the University of Wollongong in 2021 gaining a Bachelor of Communication & Media with a major in Digital & Social Media.

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