Construction costs are accelerating again

The most current indication of where construction costs are heading comes from the monthly CPI measure of new home building costs. The latest data, for July, shows new dwelling prices were 5.7 per cent higher than a year earlier, compared with annual growth of just 0.7 per cent in June last year. The turnaround has been rapid, with the ABS attributing the increase to builders passing through higher labour and material costs.

The quarterly construction data gives us a better idea of why costs are rising again. Labour remains scarce, materials are becoming more expensive and a growing pipeline of public and private construction is competing for already constrained resources.

Skilled labour remains scarce

Labour is arguably the biggest constraint facing construction. The ABS continues to report shortages of skilled trades, particularly bricklayers, carpenters and concreters. More concerning is that the pipeline of new workers isn't keeping pace.

Apprentice completions have fallen 38 per cent over the past decade, while construction trades in training are down 9.5 per cent since 2021. Just 38 per cent of advertised construction trade vacancies are being filled, compared with 66 per cent across all occupations.

At the same time, demand for these workers is increasing. This isn't simply a temporary shortage caused by a strong construction cycle. Australia has a structural shortage of people able to build what we are planning to build.

Materials are getting expensive again

The extraordinary materials inflation of the pandemic has passed, but input costs are moving higher again.

Prices for inputs into house construction rose 2.1 per cent in the June quarter and 3.8 per cent over the year. Some individual increases were much larger. Electrical cable and conduit rose 11.2 per cent in just three months, electrical equipment increased 7.4 per cent and plaster products rose 4.6 per cent.

The longer-term increase is even more significant. Overall house construction input costs are now around 68 per cent higher than in 2012. Many individual building products have increased considerably more.

Government projects are competing for the same resources

Australia is trying to increase housing construction at the same time as governments are delivering major pipelines of transport infrastructure, hospitals, schools and other public projects. These projects frequently require the same workers and materials.

The ABS has specifically noted that ongoing public-sector activity is increasing competition for limited resources including labour, concrete and copper used in electrical work.

Australia needs this infrastructure, particularly with a growing population. But there is a limit to how much can be built at once when labour and other inputs are constrained. More projects don't automatically mean more construction. They can also mean higher costs.

Private-sector competition is growing too

The competition isn't just coming from government. Data centres, renewable energy, electricity transmission and resources projects are creating another significant source of demand for construction workers.

Electricians are perhaps the clearest example. A builder isn't simply competing with another builder for an electrician. They may now be competing with a data centre, transmission project, mine or major infrastructure project, often with a much greater capacity to pay.

The scale of the pipeline makes this particularly important. 

National major-project activity is estimated to peak at around $80 billion in FY26, while Queensland's construction pipeline over the next five years is estimated to be roughly double that of the previous five.

An industry already under pressure

These renewed cost pressures are hitting an industry that is already financially stretched.

External administration appointments in construction reached a record 941 in August. The size of the spike does need qualification, with 542 associated with the Bathla Group. But even excluding Bathla, the underlying number remains high compared with the levels recorded only a few years ago.

Builders have already absorbed years of rapidly rising labour and material costs, fixed-price contracts and squeezed margins. Another acceleration in costs will be difficult for parts of the industry to absorb.

There is also a broader economic consequence. Construction costs are once again becoming an important source of inflation. New home costs are rising 5.7 per cent annually, well ahead of headline inflation of 3.5 per cent, after having barely been growing a little over a year ago.

Australia wants to build more homes, more infrastructure, more renewable energy, more transmission, more data centres and more resources projects. Much of that construction is needed. 

The problem is that they are all competing for many of the same workers and materials. Australia increasingly has a construction capacity problem, and until that changes, building more will remain expensive.