Cost of Construction remains eleveated

Builders’ key pressure points remain materials and labour

The Housing Industry Association (HIA) recently conducted a survey of its members on questions around business and building conditions and their outlook for where the industry is headed.

The HIA Omnibus 2023 survey responses came from home and renovation builders, suppliers, manufacturers, developers, and trade contractors.

More than half of respondents indicated that the key pressure points that they faced in the first half of 2023 were the availability of skilled labour and the price of materials. These two responses are also at the top of the ranks when asked about expectations of pressure points in the next 12 months.

The difficulty in getting construction materials and severe labour shortages during the pandemic put upwards pressure on the cost of building a home. While the sources of these pressures — supply chain bottlenecks and an inability to access skilled workers — have somewhat eased, their spillover effects on work on the ground and builders’ expectations continue to linger.

HIA’s most recent Trades Report found that the acute shortage of skilled tradespeople in Australia increased the price of trades by almost a quarter since the pandemic began, while ABS data shows that supply chain constraints blew out the cost of home building materials by a third.

The outlook is expected to improve over the next 12 months, evidenced by a fall in the percentage of respondents who said these pain points would remain, however, because the price of materials rarely goes backwards. Although the magnitude of the differences may fall, the ongoing pressures will remain for at least the next few years.

Build times remain elevated, but a tale of two markets emerged out of the pandemic

Extended build times adversely impact a builders’ ability to properly price building a home and adds uncertainty to their operating environment. The longer it takes to build a home, the greater the risk that builders must cop cost blowouts associated with skyrocketing materials prices. This was particularly acute during the pandemic.

On the plus side, the easing of these pressure points has trickled into improvements in building conditions. Builders across

Australia have indicated that it now takes just under a year, on average, to construct a typical detached home. This is certainly an improvement compared to 2022 but remains well above the 8 months it took to build pre-pandemic.

The pandemic produced an interesting divergence in build times across markets. In 2019, build times across all jurisdictions were consistent with the national average of 8 months, and the difference between the quickest and slowest jurisdiction was just 3 months. Now, the discrepancy has blown out to over 6 months, revealing a clear tale of two markets.

Over the past year, build times in New South Wales and Victoria have improved, while those in South Australia and Queensland have worsened. Western Australia has seen a marginal improvement in the last year, though it remains considerably higher than before the pandemic.

The HIA Trades Report confirms this. While the availability of skilled trades has worsened across all jurisdictions, the difference between now and 2019 is far wider in South Australia and Western Australia than it is in the Eastern states.

This comes as no surprise. The smaller states saw the most impressive increases in demand for housing during the pandemic, and it can be expected that the available labour would start to concentrate around the larger markets on the East coast.

What have builders been doing to mitigate the risk of build time blowouts?

Survey responses suggested that educating clients has never been more important than now. One builder indicated that their strategy had been to manage client expectations by informing them of the current state of the industry prior to signing a contract.

Another said that there was a lack of information on increased regulatory costs from relevant government departments, which led clients to question why the cost of building a home was higher than one or two years ago. While these are very astute measures that protect builders and their clients, there remains a louder call for builder and consumer protections from government.

There is light at the end of the tunnel. The results from the Omnibus survey indicate that responses are skewed towards optimistic future business conditions. With rapid population growth and pre-existing shortages of housing, there is no greater need for home building than now, and easing build times should help here. The market just needs to be propelled by the right amount of confidence and policy reform for the industry.