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Ray White Economics Update

By Rowena Hernandez

Nerida Conisbee,
Ray White Chief Economist

It has been a stressful time for the construction industry, and by extension for housing supply and affordability. Over the past two years, the cost of building a new home has increased on average by 28.2 per cent. In Brisbane, the worst affected city, this increase was close to 40 per cent. Finally we are beginning to see some respite from these increases.

Construction cost increases are finally starting to slow. Although they increased by 12.7 per cent over the past 12 months, the quarterly increase was 1.2 per cent, the lowest increase in almost two years. By capital city, Melbourne even saw a slight reduction in construction costs, declining 0.1 per cent.

A big driver of the slowdown has been cheaper materials. Supply chains have been running smoothly for more than a year and many goods produced overseas, in particular in China, are no longer seeing Covid driven disruptions. Many raw materials are also cheaper. Steel in particular has come back in price. And those materials that aren’t yet seeing a decline in prices are likely to come back now that fuel prices are declining.

While cheaper materials are helping things, labour supply remains a problem with too few workers. Over the past quarter there were 33,100 job vacancies in the construction industry. This however is a reduction from the 40,000 vacancies 12 months ago. The number of jobs being created has slowed down. Migration has also helped with labour supply. A shortage of labour is likely to continue to be less of an issue over the next year.

While it’s great news that construction costs are slowing, there will continue to be challenges in getting enough homes built over the next two years. Building approvals are currently at a decade low and it will take some time for the pipeline to build. In the meantime, population growth is particularly strong. Last year, we saw an increase of almost 500,000 people. That means that in just one year, we need roughly an additional 200,000 homes. With 173,000 homes built last year, we are falling short in just one year by 27,000 homes. Reaching greater affordability for buyers and renters is unlikely to happen anytime soon with such a shortfall.

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