Will construction costs stabilise? How will this affect investors?

Construction costs might be easing off a bit, but they're still higher than what we saw before the pandemic hit. What does this mean for you? Simply put, building new homes is still a pricey affair, and developers are feeling the pinch. Expect house prices to stay high and even climb further, and don't hold your breath for construction costs to drop back to those pre-pandemic levels anytime soon. 

This is putting a tight leash on the supply of new homes. So, if you're looking to make a move in the Australian property market, now's the time to get informed and strategise. Let's dive into the current scenario and see where things are headed.

Overview of Current Market Trends

The Australian property market is showing some interesting moves. Properties are typically getting snapped up in about 30 days. But not in regional Australia – homes there are taking a tad longer to sell. And here's something you can't ignore: rents are skyrocketing, with a whopping 8.4% growth over the past year. 

As of the end of September, the total value of residential properties hit a jaw-dropping $10.1 trillion. Home prices went up by 2.2% in the last three months, albeit a bit slower than the previous quarter.

There was an improvement in dwelling approvals, which grew 7.0% in August. Although it should be noted that new dwelling approvals have remained at around 21% below the decade average since the beginning of 2023. . 

For September, sales in both regional areas and big cities weren't at their peak. In fact, they were down by 6.1% in the regions and 1.8% in the cities compared to the five-year average. But here's the silver lining: capital city property values still climbed by 0.9%. 

And a final tidbit: Sellers are gaining some confidence. Why do I think this? The national median vendor discount was -3.8% in the last three months leading up to September. That's an improvement from the -4.3% we saw at the end of last year. What's it mean? Sellers are standing their ground on prices because they sense the demand. 

With Construction Costs Normalising, What Lies Ahead?

Keep a close eye on construction costs – they're a crucial part of being able to understand where the market's headed. Lately, these costs haven’t been climbing as rapidly as previous years, mainly due to softening and stabilisation of input prices. Surprisingly, even as home values climbed in August, construction costs didn't rise in tandem as one might think.

Now that material supplies are flowing smoother than before, what’s happening with skyrocketing construction costs? They're starting to level out. Now, it’s not time to celebrate – costs are still high but they're just not climbing as fast. CoreLogic Chief Property Economist Kelvin Davidson said that we've now entered a more subdued phase for construction cost inflation, reflecting the marked easing in materials supply chains, compared to the Covid-affected period over 2021 and 2022. 

Eliza Owen, Head of Research at CoreLogic Australia discussed that while construction costs are levelling out, they're still elevated. And she flagged both hurdles and hotspots of the construction costs. While costs have continued to increase over the last quarter, the growth rate is substantially lower than previous quarters, coming in at an average increase of just 0.5 per cent for the September quarter.

The latest data from ABS also points to the same trend - the index for September 2023 is at 157.4, which is still significantly higher than the pre-pandemic level (December 2019 - 118.4). Although we can see a slowdown in the growth of input prices starting mid-2023.

The elevated construction costs means that it’s still expensive to build homes, and developers are less likely to invest in new projects. As a result, there will be fewer homes on the market to meet the demand, and in high-demand markets (like the recent housing market), this increased demand will put upward pressure on home values. Overall, elevated construction costs will still contribute to the problem of housing affordability by limiting the supply and pushing property prices upwards.

Here's the game plan for the Aussie property scene: knowledge is power. Construction costs are just one of the many factors that drive the performance of the property market. With uncertainties still in the market, it is paramount to make well-informed choices. Turning to experts like us is not only a smart, but an essential move. We bring a wealth of knowledge and experience to the table, helping you navigate the ever-changing landscape of real estate. With Freedom Property, you are not only investing in a property; but also in our expertise, reinforcing the importance of conducting thorough research and seeking professional advice for your property ventures.