Cost of Construction Begins to Stabilise

Affordability in Australia’s property market remains a concern. High levels of demand paired with low supply have created a complex situation, which has, in turn, been exacerbated by the slow and expensive output of new builds.

Construction costs

The construction industry has battled against rising costs over the last few years. For 2023, CoreLogic reported a 27.6% increase in construction costs compared to pre-Covid numbers. However, CoreLogic’s Cordell Construction Cost Index showed a 2.9% increase in 2023. This was below the previous decade average of 4.0%, indicating normalisation in the industry.

This could be attributed to several factors, including a slight easing of supply chain pressure or a normalisation of demand for materials. For example, CoreLogic reported that in 2023, builders saw both increases and decreases in material costs depending on the supplier. “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,” said CoreLogic Construction Cost Estimation Manager John Bennett.

Building approvals

The news is less positive on the pipeline front. Building approvals continue to decline, with the latest Australian Bureau of Statistics data showing a 2.2% drop in the total number of dwelling units approved in March, compared to the same time last year.

This trend demonstrates a shrinking pipeline of residential construction. This may lead to a potential future shortage of dwellings which is particularly concerning given the country’s projected population increases.

Pressure on the market

This imbalance between supply and demand is putting upward pressure on housing prices. That’s because too few properties listed for sale on the market increase competition among buyers, enabling sellers to ask for higher prices. In fact, with current approval numbers, a new report from the National Housing Supply and Affordability Council shows that the new supply of homes will remain below average into 2024. As a result, “housing affordability is expected to deteriorate further over the forecast horizon”.

Investors opportunity

 All of this could spell opportunity for savvy investors. Here’s why:

  • Entry point: With prices projected to continue climbing, a clever investor could get ahead of those costs by buying now. Additionally, construction costs having stabilised means the cost of a new build in 2024 will be more predictable.
  • Appreciation: The combination of low building approvals with an increasing population will likely keep demand steady and prices rising. This means potential capital growth over time.
  • Rental market: A limited supply of new dwellings could further contract the already tight rental market, leading to good rental yields with little chance of vacancies in rental properties.