THE RISING COST OF CONSTRUCTION Should I build now or wait for prices to go down?

What has caused the increase in Construction Costs?

Firstly, it is really important to understand the main contributors that are responsible for driving up prices so you have the tools available to decide when the best time is for you to build.

From 2010-2020, The Australian Institute of Quantity Surveyor’s (AIQS) tracked the escalating prices in the construction industry, noting a 31% increase during this period – or a 3.1% average increase per annum. In 2021, we saw prices for raw materials reach record highs amid global shortages which we are still feeling the impact of today.

It has been widely publicised that in 2021/22, construction prices increased at an almost unprecedented rate. These increases were caused by a “perfect storm” of factors which includes but is not limited to:

a) Material supply shortages

b) Shipping and transportation shortages

c) Fuel price increase

d) Covid19 restrictions

e) Construction boom (50% increase in Australian dwelling commencements)

f) Trade embargos

g) Power shortages in China limiting manufacturing

The impact of all of the above led to the highest annual Construction price increase seen in 16 years. Some of the most significant raw material increases that were experienced during 2021 were:

1. Raw steel (131% increase)

2. Timber (32% increase)

3. Raw aluminium (41% increase)

4. Raw copper (50% increase)

CoreLogic’s Cordell Construction Cost Index (CCCI) % Australian Housing Construction costs recorded an increase of 15.6% in the previous 15 months to March 2022.

i. Quarter 1 2021: 0.8% increase

ii. Quarter 2 2021: 1.4% increase

iii. Quarter 3 2021: 3.8% increase

iv. Quarter 4 2021: 7.2% increase

v. Quarter 1 2022: 2.4% increase

With a new array of influencing factors (ie: war in Ukraine, high inflation, political elections, surging interest rates etc), the future is hard to predict with any certainty.

We are expecting to see a similar level of construction cost escalation in 2022/23 with hope it is not as severe. This is being influenced by material shortages that are still prevalent , labour being in high demand and likely to follow the material increases and Builders unwilling to commit to fixed price contracts due to the uncertainty of price fluctuations.

What does this mean for the costs of Construction?

We recently completed a financial analysis for a volume builder of entry level homes in Victoria. We analysed their actual project costs on just under 300 houses (1-3 bedrooms) between 2017 and early 2022. The financial data showed the average cost per square meter of homes went from approximately $1,500/m2 up to just under $2,500/m2 between 2017 and 2022. Between 2020 and early 2022, the increase was as much as 20%.

It is worthwhile noting, the above is a guide on the average cost increases for entry level volume-built housing only. The average increase may vary on differing project types.

Should I build now or wait for prices to go down?

I have been asked this question more in the last 18 months than my previous 15 years combined in the construction industry. With no easy answer, I can only rely on the data that is available from similar historical events.

Historically, it is extremely rare to see a significant reduction in costs for almost any goods or services unless a global economic downturn is experienced (ie: world war or global financial crisis etc). Waiting for a significant reduction in construction cost is like waiting for the real estate market to crash before jumping in. We sometimes see a marginal flattening/softening (10% or less reductions), but historically the price continues to march upward.

So, when is the best time to Build? With material shortages easing and demand decreasing now might be the perfect time to start.

Building your dream home can be one of the most exciting times of your life. Not to mention living in a perfectly designed home for you and your family. However, everyone’s design, budget, circumstances and financial position are different, there is no one size fits all. I strongly recommend you consider all of these factors before proceeding so you can move ahead with confidence.

If you would like some construction cost guidance or advice, feel free to reach out for a chat. We are more than happy to help.

Nathan Grimes
Director
Melbourne Quantity Surveyors

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