Still-rising house prices: how inflation is driving up construction costs

Still-rising house prices: how inflation is driving up construction costs

“It had to go somewhere, so people were spending it on their homes,” Wawn said. “We were a bit like a canary in the inflationary coal mine. Inflation hit us hard 12 months ago.”

If Australians haven’t signed up to build a new home, they’ve at least spent money to improve it in some way, as evidenced by record building permits and renovation spending.

Construction companies are struggling with rising costs.Recognition:Scott McNaughton

The Housing Industry Association’s chief economist Tim Reardon said the increase in construction costs was two-fold.

First was the sheer increase in demand for homes in rate and volume, Reardon said, then came the constraints in supply and labor that could not meet this unprecedented demand, compounded by the fact that most other developed economies were experiencing the same housing boom had at the same time.

Before the pandemic, the construction of detached houses slowed, with about 105,000 being built, the association’s figures show.

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By the end of 2021, this had increased by almost 50 percent. That’s now up to 80 percent more homes under construction than before COVID, Reardon said.

“We’ve seen a 19 per cent increase in the value of the average licensed home in Australia over the last 12 months to May,” he said.

“It has been very difficult for builders to price the construction of a home… given the rapid rise in prices, and builders typically carry that risk, which has been a challenging time for builders and businesses.”

At one point, when Canberra went into a two-week lockdown, it took just five days for battens to run out across the East Coast as the city was the only place where the product was made, Reardon said.

“It is these additional shocks that have disrupted the efficient operation of the industry and created additional costs throughout the supply chain. All of these factors combine, and those costs are borne by those building new homes.”

The sector is facing increasing problems when it comes to the supply of materials and labour.

The sector is facing increasing problems when it comes to the supply of materials and labour.Recognition:Pat Scala

Local brick production has increased, but ramping up production will take time to get new plants up and running and train new staff, he said.

Housing construction over the next 12 months will remain busy, but permits will slow as interest rates rise and construction costs begin to weigh on households, Reardon said.

“The bottom line is that the increased cost of new homes will slow demand for new homes, compounding the increase in the cash rate,” he said.

Jon Stoddart, managing director of the Stoddart Group, Australia’s leading supplier and installer of products to the housing industry, said the sector is being impacted at every step of the construction process, adding to inflationary pressures.

The cost of building a new home continues to rise, defying the trend of falling real estate prices for the time being.

The cost of building a new home continues to rise, defying the trend of falling real estate prices for the time being.Recognition:Paul Rovere

“First there was the home support subsidy. We sold buckets of houses, then the freight became more expensive, and then global logging decreased. To top it off, much of the timber coming in from Russia was banned, limiting that supply,” Stoddart said, adding that they resorted to using steel frames as an alternative.

But during the recent floods, train lines used to transport heavy loads of steel were destroyed, disrupting the alternative supply chain again, as well as a labor shortage as insurance companies pay caps to complete urgent flood damage, Stoddart said.

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“If you can think of something that can go wrong, then it went wrong. It wasn’t just one thing that happened, but a multitude of things that happened,” he said.

“There is no one to blame and the builders have suffered. You’re stuck on fixed price contracts and you see construction companies go bust.

“I don’t think anyone has fared well with this, whether it’s the builder, the homeowner, the contractor, or the contractor.”

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