Rising building costs causing more issues than interest rates
The price of construction across the board putting increased pressure on house prices.
SURGING construction costs are now having a bigger impact on property prices than interest rate moves, Australian Property Institute chief economist Sherman Chan said.
Speaking at the Australian Conveyancer What’s Next? Summit on Wednesday, Chan said a recent survey of institute members indicated the cost of construction had overtaken interest rates as the key price influencer.
“I think that’s actually quite easy to understand. If the cost is high then eventually it will be passed on to the end buyer and that is definitely the top driver,” Chan said.
The comments come after media reports last month that thousands of dwelling builds have stalled in western Sydney due to a lack of buyers willing to pay a price to cover the cost of construction of new apartments in the fast-growing region.
Chan, in explaining the uplift in construction costs, said they spiked during the Covid-19 pandemic due to supply chain issues and have not retreated.
Looking closer, she said the construction input prices, things like construction raw materials, had risen more slowly than output prices, especially wages.
“What you see is a deviation of these two lines in recent years,” the economist said.
“You can see the output prices rising faster than input prices meaning that wage costs have been one of the biggest contributors to construction costs remaining elevated.”
Behind the wage rises was a shortage of skilled workers in the sector, according to Chan.
She said on an occupation-by-occupation basis there was a skills shortage in the sector across all Australian states, covering metropolitan and rural areas.
“I’m talking about electricians, plumbers, painters, carpenters, all the necessary jobs are in shortage so we can understand why wage growth pressure is high. That is contributing to the end output of high construction costs.”
She said the rising costs were adding to housing affordability challenges, especially in Sydney, prompting many residents to move interstate.
“A lot of Sydneysiders actually have been moving up north to Queensland, so that’s probably why we’re seeing stronger momentum in the Queensland market.
“Western Australia is also starting to receive a lot of interstate migration as well which is why, if you look forward, you can see where the growth momentum is going to be and where the squeeze is going to be.”
