All Pain, No Gain: Building Costs Forecast to Soar Again

Constructions costs rises have been predicted to reaccelerate, growing by 4 per cent each year for the next three years as one Australian state braces for a massive insurance increase.

According to the Oxford Economic Australia  Construction Costs and Inflation report, costs will typically outpace the consumer price index and push higher by the end of the decade.

This “could easily add $200 million in costs on a multi-year $1-billion megaproject”, the research briefing said.

Oxford Economic Australia said that drivers of construction-specific cost growth had shifted from international (supply chain disruptions, commodity volatility) to domestic (productivity, building boom, sustainability push) factors, and that boosting productivity remained the key to minimising escalation risks.

Oxford Economics Australia senior economist and study co-author Thomas Westrup said the recent surge in construction costs was “primarily driven by supply-side factors; commodity market volatility and the energy cost crisis has shifted up manufacturing and transport costs, compounded by supply-chain disruptions from the lingering impacts of the pandemic”.

The report said the recent surge in economy-wide inflationary pressures has highlighted the increased exposure of construction cost escalation to domestic and international market factors.

It said a range of price indices indicated growth in construction costs was exceeding general inflation as measured by the CPI.

“Construction cost escalation grew at record rates over the 2022 financial year 2022 (5.7 per cent) and 2023 (8.2 per cent)—exceeding growth in the CPI—underpinned by the combination of various severe shocks to demand and supply in domestic and overseas economies,” the report said.

The report said that there has been a significant fall in some key construction input prices, overall measures of construction cost escalation had seen growth slow rather than reverse outright.

Worse, the latest ABS engineering construction price data (March quarter 2024) released alongside National Accounts “suggests annual construction cost escalation may be 'bottoming out' at a rate above two per cent and is now starting to reaccelerate,” according to study co-author and Oxford Economics Australia director of construction and infrastructure Adrian Hart.

▲ The demise of Porter Davis was among the biggest and highest profile builder collapses in Victoria.

Builder insurance cost leaps in Victoria

Meanwhile in Victoria, residential builders will have to foot the bill for those who fell in the Covid-construction aftermath.

Domestic building insurance premiums in the State will jump by an average of 53 per cent on August 6. Premiums on new single and multi-unit homes will rise 65 per cent and on renovations by 20 per cent.

The government-backed Victorian Managed Insurance Authority (VMIA) has been under increasing financial pressure due to the many building company collapses of the past year.

It reportedly paid out more than 4000 claims, with Porter Davis one of the largest.

Master Builders Victoria chief executive Michaela Lihou said the cost hike could put a handbrake on the Victorian Government’s ambitious target of 80,000 new homes every year for the next decade.

“It is enormously frustrating to say the least,” Lihou said.

“We are very concerned that this significant cost increase this will create yet another significant barrier to securing projects and put builders under more financial pressure than ever.” 

HIA executive director Victoria Keith Ryan said the VMIA hike came on top of a 43 per cent increase in September.

“It is another hit to an already suffering home building industry in Victoria,” Ryan said.

“Home builders are already struggling with increased building materials and labour costs and will be further tested by this latest increase which ultimately will be borne by home buyers.

“It means new home buyers face more fees and charges, with the typical home in Melbourne already paying more than 40 per cent of the cost of a new house and land package in taxes, fees and charges—which is locking thousands of Victorians out of home ownership.”