Last year, it looked like the rapid rise in construction costs had come to an end. While the cost of building a new home increased by more than 20 per cent in the 12 months to September 2022, by September 2023, that rate of growth had declined to 3.9 per cent.

Given how expensive it is to now build a new home in Australia and the negative impact this has had on housing supply, it was hoped there would at some point soon be a decline in construction costs. Concerningly, the rate of growth has again climbed.

Although construction cost increases have picked up, there are two states in which price acceleration is particularly apparent. In South Australia, construction costs accelerated in the June quarter, recording 7.3 per cent year on year increase.

This is an increase from the March quarter of 6.4 per cent. However, Western Australia is the marked outlier. Construction cost increases are again getting back to where they were during the pandemic, rising by 18.9 per cent in the 12 months to June. 

Labour continues to be a major contributor to the cost of construction and year-on-year increases in wages remain problematic to bringing down the cost of building a new home.

The Australian Bureau of Statistics specifically pointed to a lack of finishing trades. Strong union activity, now the subject of a Senate inquiry has also contributed to low productivity in the industry.

However, here is better news for many building materials. For example, the cost of timber has come down significantly, as has steel. In comparison, increases for bricks, plaster and concrete continue to rise.

Copper pipes also continue to increase. Copper is a key input to green energy and electric cars which is also driving up pricing. 

What does this mean for property? Across all asset classes, it will support values. The cost of building a new property now far exceeds the price of an existing property.

For residential, we are already seeing clearly how much higher construction costs are, leading to fewer homes being built and higher prices for existing properties.

Perth is seeing the strongest house price growth in Australia with prices up in excess of 25 per cent over the past 12 months. While population growth, strong population growth and very low vacancy rates are drivers, the surge in construction costs would be one of the main contributors.  

Commercial property is currently not seeing price growth in the same way, however, rising construction costs support higher prices paid for commercial properties in the short to medium term. This is even the case for the office sector which has been the most impacted property type in the current downturn for this sector. 

More reading by Nerida Conisbee Ray White Group Chief Economist.

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