The rising cost of construction: Why building a house costs as much as ever

Have you noticed costs in the construction industry going up? You wouldn’t be the only one.

Construction costs have increased on average by 32 per cent over the last four years. Experts warn that they won’t return to pre-pandemic levels anytime soon, posing a significant challenge for the construction industry.

Thanks to the Australian Financial Review, the ABC, and the Sydney Morning Herald we explore the reasons behind this issue and how it can be addressed.

Rising construction costs have been one of the key drivers of rising inflation in Australia. During the pandemic, construction costs rose by more than 20 percent due to supply chain issues around the globe. While construction inflation fell between mid-2022 and mid-2023, it has since become entrenched at around 5 percent.

Increasing construction costs are partially driven by a substantial pipeline of government-funded infrastructure projects. Currently, there are not enough workers to meet demand. In particular, there is a shortage of workers in skilled trades, engineering and labouring.

The cost of materials has also been a key driver of rising construction costs. Materials have gone up 25 to 40 per cent in the last few years, with energy increases a key culprit.  Energy inflation could drive the cost of cement, plasterboard, and windows up by more than 10 per cent. The cost of steel imports and terracotta tiles has also risen dramatically in the last couple of years.

Bosses in the construction industry have also been required to deal with higher wages.  Upcoming enterprise bargain agreements are expected to lock in higher wages, which are already being factored into construction costs.

New building regulations have also driven up the cost of construction in many states.

Building accessibility standards have been introduced in all states except NSW and WA. Under new regulations, all new home builds must include modifications such as step-free entrances and corridors that can fit wheelchairs. This has added $25,000 to $70,000 to the cost of building a new house.

Transition to lower carbon initiatives is also driving up costs.

Due to high costs, many projects that have received approval are not being built. This means that pressures on Australia’s housing supply are unlikely to ease any time soon.

The cost of building new houses, combined with higher interest rates, has impeded the ability to build new stock. This is because there is increasingly a gap between what developers must charge for a project and what buyers are willing to pay.  As a result,  the government’s ability to meet its target of 1.2 million new homes by 2029 is in doubt. In addition, many construction companies have gone broke over the last couple of years.

However, there are some things the construction industry can do to help ease cost pressures. For example, the industry can become more efficient at managing risks.  When mistakes are made, the cost of fixing them is very high. Additionally, mistakes push back projects which subjects them to further cost increases. Therefore, reducing mistakes will go a long way to boosting productivity in the construction industry. Experts also say increased use of techniques such as prefabrication and addressing skills shortages in the construction sector will also help to drive down construction costs. Governments also have a significant role to play in addressing this issue.  For example, federal and state governments should also work in partnership to improve major infrastructure projects’ supply and demand balance. Domestic capacity should also be developed for low-emissions construction materials, as this would take the pressure off local supply chains.

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