[+] The Numbers Game: Building Costs Refuse to Add Up

It’s all in the numbers. But no matter who is delivering them, or what they’re saying, the numbers don’t add up to a lot of good news for the construction industry in 2024. Or for anyone looking to buy a first home. Ray White senior economist Nerida Conisbee released research late last year showing that across the country and in the past two years, capital city house prices jumped 11 per cent. But construction costs have rocketed 27 per cent. Simply, it is more expensive to build a new home than buy an established property. Which doesn’t auger well for a federal government with plans to deliver 1.2 million new homes over the next five years. “While there are many challenges to meeting this goal, high construction costs will ensure that this doesn’t happen, making building a lot of new homes unviable,” Conisbee says of her research. Slattery Australia, the property and construction advisory firm that puts out its own national construction market update, says materials costs have eased over 2023, following the record price increases of 2022. The price of steel and reinforcing steel, for example, has plateaued, according to Slattery director and quantity surveyor Barry Laycock. ▲ Ray White senior economist Nerida Conisbee: Across the country construction costs have risen about 27 per cent in the past two years. Timber has stabilised. Concrete remains volatile, in part because cement is produced at very high temperatures and therefore susceptible to energy price hikes. Wars in Europe and the Middle East don’t help petrol prices. And when the industry says “prices have eased” it really means prices have stopped rising or, in some cases, stopped rising as quickly. “Will those prices ever go back to what they were pre-pandemic,” muses the Australian Constructors Association chief executive Jon Davies. “I think the answer to that is pretty clearly, no.” Today, rising construction costs really means the increasing cost of labour. Enterprise Bargaining Agreements (EBAs) posted average pay rises of 4 per cent or more for 10 weeks straight from mid-July, according to the Fair Work Commission. But Slattery’s December release says the Construction, Forestry, Maritime, Mining and Energy Union (CFMEU) is bargaining for a 5 per cent annual pay rise, which is likely to be 8 per cent in the first year. “A lot of EBA agreements are currently up for renewal,” says Davies. “And what we’re seeing is that they are being agreed at rates in excess of the Consumer Price Index. ▲ The cost of steel has plateaued, say quantity surveyors, but concrete remains volatile. “So the cost of labour is going up.” But Davies says the biggest issue is there’s nothing included in the agreements that offsets the increased costs with improved productivity. He is not alone in his concerns. “It’s not so much the cost of labour,” Scott Hutchinson, chairman of Queensland’s biggest building company, privately owned Hutchinson Builders, tells The Urban Developer . “That just goes up by the normal or healthy amount. “It’s the efficiency of that labour.” Hutchinson is talking about not just the critical shortage of construction labour—now across most of the country—but a shortage of skilled labour. According to the Australian Bureau of Statistics, the national jobless rate in the third quarter sat at 3.7 per cent, or slightly higher than the 3.6 per cent recorded the previous quarter. That is still close to a 50-year low. And according to the latest Skills Priority List, published by Jobs and Skills Australia in October, 36 per cent of those occupations assessed are in shortage. Technicians, trade workers and professional occupations have the highest shortages, particularly in regional and remote areas. ▲ The cost and availability of skilled labour will be the biggest challenge facing the construction industry in 2024. “Given labour accounts for around 40 to 50 per cent of most construction projects and with labour at a premium for both trades and professional services, we expect industrial relations will be a hot topic and a cost lever in 2024,” Slattery’s Laycock says. “It’s not wage rises that have caused this,” Hutchinson says. “In the building industry the lack of labour drives down productivity. And productivity is not there because the bottom end of the workforce is being employed.” Further south, Melbourne-based construction company Kapitol Group—one of the country’s biggest builders of data centres—has first-hand knowledge of the issues with finding skilled labour. Kapitol co-founder David Caputo points the finger at government infrastructure projects—Victoria’s so-called “Big Build”. “Infrastructure is still busy and booming and we’ve lost a lot of the skills out of the commercial construction sector to infrastructure because labour is chasing the extra in salary,” he says. “We’ve really had to lean heavily on the domestic sector to replenish the stock and resourcing now. ▲ Matt Hemming from Mitchell Brandtman, Slattery’s Barry Laycock, and Jon Davies from the Australian Constructors Association. “But that process of teaching and training … you know up-skilling … having different systems and things like that, is an issue.” Caputo estimates he is now seeing a 10 per cent increase in program duration because the lack of skilled labour. “And labour numbers aren’t necessarily decreasing so it just seems to be that productivity is a big issue.” Davies believes the issue is more widespread in south-east Queensland, with its assortment of major projects, including inland rail, cross-river rail, Brisbane’s metro, and upgrades to the M1 Pacific Motorway and Bruce Highway. And all that before the pipeline of growth to support the 2032 Olympic Games. “I think if we look at Queensland and its best-practice industrial conditions and those government projects, people are able to get substantially better rates than in the private sector,” Davies says. “And a lot of those projects are happening in metropolitan areas. ▲ Government infrastructure projects are sucking up skilled labour, particularly in Victoria and south-east Queensland. “Logically and, unsurprisingly, labour is gravitating towards those projects and it’s the private sector development type projects that are really suffering.” Laycock says, “They (infrastructure projects) are definitely absorbing a lot of concrete and reinforcing steel. And they have also absorbed the pre-cast concrete market. Again, we were getting reasonable availability. It’s just the cost of labour.” Finding skilled form-workers along the eastern seaboard remains a problem. It has been so for some time in Queensland but was not helped in Victoria when in September Caelli Constructions—form-work, concrete and reinforcing specialists for more than 40 years—went into liquidation. “There’s probably only two decent form-workers in Melbourne at the moment which can do projects of any great size,” Laycock says. That said, he may be more concerned about groundworks. Giant tunnels, rail links, roads and level-crossing removals right across Victoria have sucked up heavy earth-moving equipment. Digging basements has suddenly become more expensive for the private sector. “On some projects we’ve seen 100 per cent increases in the rate per tonne for excavation,” Laycock says. “And again, that is just the availability of plant and labour.” House price index vs construction CPI, Australia ▲ Research by Ray White shows the increase in construction costs has outstripped the rise in house prices. Source: ABS, Neoval Brisbane-based quantity survey Matt Hemming, a partner with Mitchell Brandtman, is forecasting increases next year of 4 to 6 per cent. But he is the first to concede that depends upon location, the scale of the project and the availability of those trades that are needed for the job. “It seriously is a confidence-of-labour scenario that’s continuing to push these prices,” he says. “The whole value-for-money position and what that means is really coming into play. “Anything that needs to be making commercial sense is very difficult … that’s probably a good way to put it.” And as the industry raised a glass and kissed goodbye to a volatile 2023 there was more worrying news, which is likely to see a return to higher prices on imported materials as well as supply chain delays. Late last week Maersk—one of the world’s biggest shipping companies—announced it was diverting all container vessels from Red Sea routes around Africa’s Cape of Good Hope for the foreseeable future. The Danish shipping giant warned customers to prepare for significant disruptions after Iranian-backed Houthi militants in Yemen stepped up attacks on vessels in the Gulf region to show their support for Palestinian Islamist group Hamas fighting Israel in Gaza. ▲ Shipping lines across the world are avoiding the Red Sea-Gulf of Aden Route. Shipping lines across the world are switching from the Red Sea—the shortest route between Europe and Asia-Pacific via the Suez Canal—adding about 10 days to journeys. That means more fuel and crew time, and big increases in shipping costs. For Conisbee the economist, making the numbers work is simple. Or rather, it’s a simple equation. “Either construction costs have to come down significantly or established houses need to rise to increase the flow of money into building new homes,” she says. “With construction costs moderating but not dropping any time soon, it is looking like prices will need to continue to rise to ensure greater levels of housing supply.” ▲ There have been reports prices in the rate per tonne for excavation have increased by as much as 100 per cent. You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

[+] The Numbers Game: Building Costs Refuse to Add Up

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