New home build costs may be moderating, but they won’t fall back to pre-pandemic prices

Every single component of building a new home has skyrocketed and experts forecast higher prices are here to stay.

The cost of building a new home surged 41 per cent to $465,000 in the four years to December 2023, analysis by Oxford Economics Australia found. In the same period, land costs jumped 34 per cent to $410,000.

As a result, the typical deposit rose 38 per cent as mortgage repayments skyrocketed an eye-watering 95 per cent thanks to the fastest rate hikes in a generation of 300 basis points in that time.

The cost of building a typical new home grew 1 per cent in the September quarter – up from 0.5 per cent in the previous quarter and the strongest three-month growth since December 2022, CoreLogic’s latest Cordell Construction Cost Index found.

Oxford Economics head of property and building forecasting Timothy Hibbert said home building costs were not expected to fall back to pre-pandemic levels despite price growth cooling in the past year.

“When prices of land and build costs for houses go up, they will hold where they are,” Hibbert said. “It typically never happens that prices of materials or labour costs fall, especially when inflation in the broader economy is still present.

“There was a huge surge in demand for land at the time of the pandemic, and supply was limited with subdivisions being held back, shortages of workers to level the land and put in infrastructure, and more notice being taken of flood zones and biological concerns.

“When the price of land goes up, a developer tries to hold on to the price gains. He might play around with incentives, like giving additional inclusions or rebates, but he’ll hold onto headline prices.”

Compounding the steep increase in construction costs was also the blow-out in delivery times – up by as much as 140 per cent in the four years to December 2023.

Housing Industry Association economist Maurice Tapang said despite the slowdown in growth, he did not expect home building costs to return to pre-pandemic prices.

He said prices of materials increased by only 1.1 per cent in the year to June on ABS data. That is a stark slowdown from the previous year when materials jumped 17.3 per cent in the 12 months to June 2022.

“We don’t expect an abnormal rate of cost growth any more, but we believe, going forward, it will be something like 3 to 5 per cent, which was the rate of pre-pandemic growth,” Tapang said.

“The cost of materials and labour in an economy don’t generally come down. It’s hard to convince anyone to accept less pay than they received last week or last month,” he said. “We also have inflation baked into the prices of goods and services, and they tend to be sticky downwards.”

Tapang said it would take an improbable change economic conditions for construction costs to slide.

“If we suddenly had an over-supply of them, and a lack of demand, it might be possible that costs would fall, but that will only happen if we see something atypically adverse happening, and in this economy, that’s very unlikely.”

He said while the industry would no longer face the supply chain disruptions experienced during the pandemic, it would record a much slower yet sustained period of growth. Tapang said overall materials prices increased just 0.4 per cent in the June quarter, and the price of all skilled trades rose by 1.7 per cent on ABS data.

Energy-intensive materials were still under pressure, he said, with the price of clay bricks, for instance, rising 9.8 per cent in the year to June on ABS data. There were also ongoing skilled trades shortages as the residential construction sector competed with public infrastructure, mining and commercial building.

Commonwealth Bank head of Australian Economics Gareth Aird said while home building costs were moderating, they would only rise.

“Certainly, the rate of growth of the cost of building a new home is moderating,” Aird said. “And while we do think that interest rates will come down, so borrowing will be cheaper, the cost of building a home won’t decrease.

“Some materials have come down in price from where they were, but it’s up to the builders whether they pass them on, and many have to rebuild their margins because of their difficulties on fixed-price contracts. Labour also very rarely goes down; it’s almost always upwards.”