The construction industry in Australia has experienced unprecedented growth in recent years, with construction costs skyrocketing due to the high demand for both materials and labor, combined with supply chain issues.
However, since the year 2021, we've seen a noticeable decline in demand, resulting in fewer new projects and renovation engagements, as well as some planned projects no longer feasible due to funding constraints.
This shift has had a significant impact on small and medium-sized businesses in the construction sector, who had anticipated a full book of projects for the year but now find themselves with capacity. As a result, pricing is sharpening, although it may take some time for wages to come down and for the supply chain to catch up, making it easier to get quality trades.
Despite some improvements in project costings, the current construction climate remains an expensive one with 11.9% growth in construction costs in the year to Q4 2022. This means that any new construction project needs to be well-researched and thoroughly evaluated for feasibility. The high costs also mean that it may not be an easy time for property developers and investors looking to enter the market.
Overall, the impact of the rising construction costs on property markets in Australia has been significant. The decrease in demand for new projects and renovation engagements has led to a decrease in construction starts and fewer projects going ahead. While this may ultimately lead to a reduction in pricing, it may take some time for this to occur, and in the meantime, it is critical for aspiring property developers and investors to exercise caution and carefully consider the feasibility of any new construction projects.
But it’s not all bad news.
According to Cordell’s Construction Cost Index, the cost of building a home in Australia has risen at its slowest quarterly pace in a year, climbing by just 1.9% nationwide over the December 2022 quarter. And as demand for construction tapers off, the growth in construction costs is likely to slow further in the next 12 months, which would go a long way to help cool inflation this year.
Looking ahead, it is expected that the construction industry will continue to face challenges in the near future, particularly as wages and supply chain issues continue to be a factor. However, with a decline in demand and fewer new projects starting, the industry will begin to stabilize, and pricing is likely to soften in 2023. Nonetheless, it is essential to remain vigilant and continue to monitor the state of the construction industry and its impact on property markets in Australia.
And remember, a reduction in new property commitments and rising population means we are primed for another growth cycle in property values very soon!
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