The costs within construction have increased drastically over the last few months. This is undoubtedly driven by inflation, but it can also be noted that factors such as economic stimulus, supply chain issues, material availability and shortage of skills are all placing immense pressure on the development pipeline, timelines and margins within the construction sector.
It is, however, anticipated that the peak will be reached this year before we experience a plateau, and then prices will graduate to being more moderate by 2023.
The sharpest increase was structural steel which increased by 39.5% per ton, followed by plasterboard, which increased by $35.3 per sqm.
Overall, residential construction costs increased by 11% over the 12 months to September, exceeding the 10% annual rise recorded over the 12 months ending June 2022. The quarterly figure of 4.7% was higher than the previous one of 2.4%. The most recent quarter’s figure was also above the 3.8% surge recorded over the three months to September 2021, when lockdowns were having a more significant impact on domestic supply chains.
With such a large rise in construction costs over the year, this could translate into more expensive new homes and bigger renovation costs. This could ultimately place additional upwards pressure on inflation.
Takeaways:
- Over the last 12 months, building material and labour cost inflation rose rapidly on the back of supply constraints.
- We have seen over 25% increase in the cost of structural timber, plywood and steel reinforcement, with some products rising by over 40%.
- Approximately 83% increases in all residential building material cost inflation in 2021-22 can be attributed to supply constraints.
- Building cost inflation in the prior fiscal year was solid. However, this is still less than in 2021-22, with 75% of total building cost inflation in 2020-21 due to demand pressures.
Shortage of skills
According to the 2022 Australian Bureau of Statistics June survey for ‘Business Conditions and Sentiments’ skill shortages are putting industries relying on trade workers, labourers, and hospitality workers under pressure. A serious shortage of skilled construction workers is directly correlated with slower delivery times. Also, the shortage has increased costs for building and executing major infrastructure projects, with a predicted 100,000 unfilled roles by 2023.
Material supply chain issues
The unexpected delays and price increases associated with supply chain issues and materials shortages are a few of the common concerns within the construction industry. With a mix of factors such as lockdowns, workplace restrictions, border closures and natural disasters, we have seen significant interruptions in the production and manufacturing of building materials and domestic and international supply chains.
Overview
The construction sector contributes approximately 5% to the GDP and accounts for 134,000 jobs. Therefore, it is safe to say it plays an important role in the Australian economy. In Perth, a significant infrastructure pipeline is contributing to the demand for materials, with border closures and competition from the mining sector having constrained Western Australia’s labour supply and driven wage increases.