New home building costs are stabilizing now,
Every aspect of building a new home has significantly increased in cost. Experts predict that these higher prices are likely to persist.
According to analysis by Oxford Economics Australia, the cost of building a new home surged by 41 percent. This increase brought the total cost to $465,000 over the four years leading to December 2023.
During the same timeframe, land costs also jumped by 34 percent, reaching $410,000. Consequently, the typical deposit required for a new home rose by 38 percent.
Moreover, mortgage repayments skyrocketed by an astonishing 95 percent due to the fastest rate hikes in a generation. These hikes amounted to 300 basis points during that period.
In the September quarter, the cost of building a typical new home grew by 1 percent. This increase is up from the previous quarter’s 0.5 percent rise.
Additionally, it marks the strongest growth seen in three months since December 2022. CoreLogic’s latest Cordell Construction Cost Index provided these findings.
Timothy Hibbert, head of property and building forecasting at Oxford Economics, shared insights on home building costs. He stated that these costs are not expected to return to pre-pandemic levels.
Despite a cooling in price growth over the past year, Hibbert emphasized that costs will remain elevated. He noted that when land and building costs rise, they typically stabilize at those higher levels.
Furthermore, Hibbert remarked that it is rare for material or labor costs to decrease. This is especially true while inflation persists in the broader economy.
There was a significant increase in land demand during the pandemic. However, the supply was constrained due to several factors.
Subdivisions were delayed, leading to fewer available lots. Additionally, there were shortages of workers needed to prepare the land and build infrastructure.
Moreover, there was increased scrutiny regarding flood zones and environmental concerns. This combination greatly impacted the real estate market dynamics.
When land prices rise, developers typically try to maintain those price increases. They might offer incentives, such as additional inclusions or rebates.
However, developers generally prefer to keep the headline prices stable. This strategy helps them secure profit margins amidst changing market conditions.
Furthermore, the sharp rise in construction costs compounded the issue. Delivery times increased significantly, soaring by as much as 140 percent in the last four years.
Housing Industry Association economist Maurice Tapang noted that despite the slowdown in growth, costs for home building will likely remain high.
He does not anticipate a return to pre-pandemic pricing anytime soon, given the ongoing economic challenges.
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He mentioned that the prices of materials increased by just 1.1 percent in the year ending June, based on ABS data. This represents a significant slowdown compared to the previous year.
In that timeframe, material prices surged by 17.3 percent over the twelve months leading to June 2022.
“We don’t anticipate any abnormal rates of cost growth moving forward,” Tapang explained. He believes future growth will be around 3 to 5 percent,
which reflects the pre-pandemic growth rate. “Generally, the costs of materials and labor do not decline in an economy.
It’s challenging to persuade anyone to accept lower wages than they received in recent weeks or months,” he noted.
Additionally, inflation is built into the prices of goods and services, making them resistant to downward adjustments.
Tapang emphasized that it would require highly unlikely changes in economic conditions for construction costs to decrease significantly.
He also indicated that while the industry would no longer experience pandemic-related supply chain disruptions, growth would proceed at a slower pace.
In fact, Tapang reported that overall material prices increased by only 0.4 percent in the June quarter.
Moreover, the price of skilled trades rose by 1.7 percent according to ABS data.
Energy-intensive materials continue to face pressure, with clay bricks rising by 9.8 percent over the year ending June.
Ongoing shortages of skilled trades also persist, as the residential construction sector competes with public infrastructure, mining, and commercial projects.
Commonwealth Bank’s head of Australian Economics, Gareth Aird, stated that although home building costs are moderating, they are expected to rise.
“Certainly, the rate of growth for building new homes is slowing,” Aird noted. “While we anticipate that interest rates will decrease, making borrowing cheaper,
the costs associated with home construction will not decline.”
“Some material prices have decreased from their previous levels, but it’s up to builders whether they pass these savings on.
Many builders need to restore their margins due to challenges with fixed-price contracts. Labor costs, on the other hand, rarely decrease; they almost always trend upwards.”
