In a recent report, CoreLogic has suggested that the recent reacceleration in the quarterly growth of national construction costs is a return to trend rather than a new surge.
The Cordell Construction Cost Index (CCCI), tracking the cost of building a typical new dwelling, recorded a growth rate of 0.8% over the three months to December, marking a reversal of the easing trend seen over the previous four quarters.
The quarterly CCCI reading shifted from 4.7% in Q3 2022 to 0.5% in Q3 2023, with an annual growth rate of 2.9% for the 2023 calendar year.
Kaytlin Ezzy (pictured above), CoreLogic economist, noted that despite the rise in the quarterly CCCI reading, it remained below the pre-COVID decade average of 1%.
“This suggests that reacceleration is more a return to trend rather than a new surge in construction costs,” Ezzy said. “While up over the quarter, the annual change in residential construction costs continued to ease as larger quarterly increases fell out of the annual calculation.”
The 2.9% increase in the latest 12-month period is the smallest annual rise in the national CCCI since the year to March 2007, indicating a normalisation after a recent peak of 11.9% over the 12 months to December 2022.
“Although 26.6% higher than at the onset of the pandemic, the recent surge in CCCI is below the increases seen across national house values, with CoreLogic's Home Value Index rising 36.5% over the same period,” Ezzy said.
John Bennett, CoreLogic construction cost estimation manager, said pricing remains generally unsettled, with no clear trend observed across most product types.
“Depending on the supplier, both increases and decreases were recorded in timber and metal prices, although we have seen rises in the price of hardware and chemical items,” Bennett said. “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.”
He said there was a sense of uncertainty in 2023 about the repercussions of interest rate increases and their potential impact on the building industry.
“While the latest figures show the market has settled down, I don't think we have seen the slowdown many were expecting,” Bennett said.
“While dwelling approvals are still well below historic averages, there is still an elevated level of projects under construction which is keeping cost pressures high.”
Construction cost increases varied across states, with NSW, Victoria, and WA experiencing growth, while SA and Queensland saw a reduction in quarterly CCCI growth.
The outlook for construction costs in the coming year is uncertain.
“While it's unlikely we'll see any declines in construction costs, the pace of growth could be influenced by several factors,” Ezzy said.
“Although national dwelling approvals have risen from a recent low of 12,185 in January, the latest data from the ABS showed that dwelling approvals remained -15.8% below the decade average in November at around 14,500.
“Although a number of projects are still moving through the construction pipeline, the recent lull in approvals could result in a shortfall in new projects, which would help keep growth in building costs low, due to greater capacity in the construction sector.”
However, with the CPI continuing to ease, The CoreLogic economist suggested that it appears increasingly likely there will be a cash rate cut in the second half of 2024, potentially boosting housing demand for both established and new dwellings.
Regardless, Ezzy noted that the normalisation in CCCI growth will offer assurance for builders, insurance companies, and homeowners alike.
For more information about the CCCI and construction costs, visit the CoreLogic website. To compare results with the same period last year, click here.
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