Australian construction price outlook – Q3 2024

Overview

With an Australian federal election on the horizon in 2025 and emerging geopolitical shifts including China’s economic stimulus, potential trade tensions, and the change of government in the US, there are a number of uncertainties that may influence Australia’s economic trajectory and, by extension, construction costs over the next quarter.

China’s 10 trillion yuan (US $1.4 trillion) economic stimulus, announced in November, is a double-edged sword. If successful, this could reignite demand for Australian iron ore and coal, driving up material prices and construction costs. Failure risks oversupply, with discounted exports flooding Australia’s market. The results of the US election have also fuelled speculation about rising US-China trade tensions and the impact of proposed tariffs, which could disrupt global trade and introduce more volatility into the market.

It’s important to note that these factors introduce uncertainty – not definitive risks – but successfully navigating shifting global and domestic tides demands informed decision-making to manage risks, control costs and capitalise on emerging opportunities.

Over the next quarter, Australia’s construction industry leaders should remain focused on sector-wide challenges that can be tackled head-on, such as bridging the skills gap, embracing innovation, and adapting to climate change.

Right now, Australia’s rate of escalation is easing; however, average profit margins hover at just 2-3% and the construction industry accounts for approximately 26% of all insolvencies. Recent enterprise bargaining agreement (EBA) negotiations in major states are set to sustain elevated wage growth through at least FY2027/28. Infrastructure Australia forecasts labour supply and demand balance is unlikely until late 2027. In this market, maintaining a sharp focus on cost control is crucial.

Altus Group’s data paints a nuanced picture of the current cost climate:

• Sydney: Escalation rates peaked at 7.5% per annum in 2022, driven by pandemic-related supply chain disruptions and material shortages. Since then, they have shown a gradual decline, with our projections indicating further easing to 4.5% per annum in 2025. This suggests a return to pre-pandemic escalation levels.

• Melbourne: Following a similar trajectory, Melbourne’s rates have fallen from a high of 7.5% per annum in 2022 to 4.75% in 2024. We expect 4.5% per annum in 2025.

• Brisbane: Peaking at 9.25% per annum in 2023, Brisbane experienced the sharpest escalation rates following sustained pressure from large government infrastructure projects and a tight labour market. While projected rates remain higher than other cities due to the Olympics, we still expect an easing to 7% in 2025.

• Perth: After spiking to 7.25% per annum in 2021, rates are projected to decline to 5.5% in 2024. While projects in Perth should account for short-term volatility, we expect escalation of 4.5% per annum by 2027.

For project teams, the message is clear: focus on the fundamentals. The implications of geopolitical shifts will take time to flow through to Australia. By relying on robust cost analysis and investing in workforce development, innovation, and sustainability in the interest of future-proofing the sector, projects can navigate uncertainty with confidence and clarity.

| |Figure 1 - Altus Group’s outlook on cost escalation

Note: These figures are general, and individual projects and asset classes may have dramatically different spreads of costs.

Source: Altus Group

Australia’s economy has faced significant escalation rates since entering the post-pandemic phase in 2022. While this has moderated in 2024, rising labour and installation costs are constraining more substantial reductions.

Projects involving Enterprise Bargaining Agreements (EBA) continue to experience significant cost pressures, often leading to higher escalation rates.

Looking ahead, we project escalation rates to ease gradually in 2025, though Queensland is likely to maintain high rates as preparations for the 2032 Olympics intensify from 2026. However, we have revised our forecasts to reflect the reduction in government project scoping and delays in commencement, which has diminished the pipeline of work and eased market pressures.

Escalation rates remain highly variable where we can see a range from 4% to 10%, depending on sector type, size, trade mix, capacity and location. Given these complexities, it is essential to consult professional quantity surveyors to evaluate project-specific costs and escalation factors. Tailored assessments ensure accurate forecasting and risk management in this evolving economic landscape. 

Figure 2 - A snapshot of Australian construction material price trends – Q3 2024

| | Figure 3 - Altus Materials Escalation Index (Australia)

Material price movements

Structural steel and rebar: Global steel trading prices have plummeted to their lowest levels since 2016, reflecting weakened demand, particularly in China, where domestic activity remains sluggish. With no significant recovery in demand forecast, steel prices are expected to remain subdued. 

Concrete: Concrete prices stabilised in Q3 2024 following upward pressure in the previous quarter driven by rising energy costs. With demand projected to decline in the near term, concrete prices are likely to remain steady. Energy pricing trends and construction activity forecasts further support this outlook. 

Structural Timber: Prices edged upward slightly this quarter, though underlying demand remains lacklustre. Housing construction slowdown and high inventory levels suggest limited price volatility ahead. 

Plasterboard: Plasterboard prices have levelled off this quarter after increasing by more than 7% over the year. With demand remaining weak, no further price hikes are anticipated.

Bricks: Prices stabilised this quarter after a 4.8% annual increase, largely driven by energy costs. With demand softening, further price rises appear unlikely. Forecasts of declining residential construction activity reinforce this trend.

Copper: Copper prices surged this quarter, nearing the record highs of March 2022. This is driven by strong demand in electrical equipment, wiring and electric vehicle (EV) manufacturing. The transition to renewable energy systems, such as wind and solar, has amplified copper demand.

Diesel: Diesel prices have dropped significantly, returning to pre-COVID levels. This decline is attributed to lower global demand and increased production. This reduction offers some relief to transportation and logistics costs in the construction sector.

Macro-economic review

Consumer Price Index

| |Figure 4 – All groups CPI, Australia, quarterly and annual movement (%) 

The Consumer Price Index (CPI) rose by 0.2% in the third quarter of 2024. Housing recorded a slight decline of 0.1%, while furnishings, household equipment and services increased by 0.9%. Over the 12 months to September 2024, the CPI grew by 2.8%, driven by a 2.8% rise in housing costs and a modest 0.7% increase in furnishings, household equipment and services. In contrast, insurance and financial services experienced robust growth of 6.2% year-over-year, suggesting rising preliminary costs for construction projects within the financial sector, amid softer inflation trends across other CPI categories.

Producer Price Indices – Input

| | Figure 5 - Producer Price Indexes (PPI) – Input, Australia

Housing construction input prices, encompassing land, materials, fees, permits, professional services, equipment and worker-related costs, have stabilised, rising by just 0.3% in the third quarter. This marks a return to pre-COVID conditions, largely driven by decreased demand for new construction. Suppliers have responded with discounts on early-stage materials, such as structural timber, partially offsetting increases in other areas. Over the past 12 months, input prices for house construction have grown by 1.4%. 

Producer Price Indices – Output

| | Figure 6 - PPI – Output, Australia

Output prices – the charges set by contractors for services including labour, profit margins and contingencies – continue to climb. The latest quarter saw a 0.9% increase in building construction prices, contributing to a 5.9% annual rise, marking the fifth consecutive quarter of growth. Labour shortages among skilled tradespeople remain the primary driver, as high demand keeps pushing output costs upward.

Wage Price Index

| | Figure 7 - Wage Price Index (WPI), Australia

The seasonally adjusted Wage Price Index (WPI) for the construction industry grew by 1.1% in Q3 2024 and 3.5% over the past year, equal to the national average of 3.5% annual growth. These wage pressures have been a significant contributor to the rise in the Construction Producer Price Index for output, further exacerbating overall cost increases. However, some stabilizing trends are beginning to emerge.

Building approvals

| | Figure 8 - Building Approvals, Australia

Dwellings approved for construction increased by 4.4% monthly and 6.8% annually in September 2024. However, the pace of approvals lags the federal government’s goal of delivering 1.2 million well-located homes by September 2029. Meeting this target requires the construction of 240,000 homes annually, but only 167,287 homes were approved over the past year, underscoring the gap between policy aspirations and current output.

Summary

As we head into 2025, one thing is clear – uncertain times are continuing; however, uncertainty doesn’t necessarily mean volatility. By focusing on the tangible factors within our control, Australia’s construction industry can confidently navigate uncertainty, mitigate some cost risks and position itself for sustainable growth.

While much attention is given to labour shortages, the real challenge is closing the skills gap. Investing in education and training, embracing a ‘digital by default’ approach on every site and addressing cultural issues to attract a more diverse workforce, including women, is all within the construction industry’s remit and responsibility.

Lean Construction offers another immediate solution to labour challenges. By maximising value and minimising waste, Lean principles streamline processes, optimise workflows and improve project efficiency. In sectors like build-to-rent and purpose-built student accommodation, Lean principles can have an outsized impact.

Extreme weather events are also disrupting programs and inflating costs, with contingency budgets rising 2% on some projects. Insurance premiums, up 6-8% over the last year, add another layer of financial pressure. Proactive leadership is key – taking decisive steps to reduce emissions and preparing workers not only mitigates risk but also strengthens the industry’s long-term resilience.

With costs remaining high but the rate of escalation easing, Australia’s construction industry can set a global benchmark for stability and growth by focusing on innovation, efficiency, inclusion and sustainable practices.

Methodology

Market research into the supply cost of core materials is conducted on a quarterly basis with manufacturers and suppliers. Our market assessment also involves a thorough analysis of secondary sources of market data on materials and labour prices.

These sources include the Australian Bureau of Statistics (ABS), the Australian Institute of Quantity Surveyors (AIQS), Fuel Price Index, Metal and Raw Material Price, and proprietary cost data from Altus Group.

Disclaimer

This publication has been prepared for general guidance on matters of interest only and does not constitute professional advice or services of Altus Group, its affiliates and its related entities (collectively “Altus Group”). You should not act upon the information contained in this publication without obtaining specific professional advice.

No representation or warranty (express or implied) is given as to the accuracy, completeness or reliability of the information contained in this publication, or the suitability of the information for a particular purpose. To the extent permitted by law, Altus Group does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

The distribution of this publication to you does not create, extend or revive a client relationship between Altus Group and you or any other person or entity. This publication, or any part thereof, may not be reproduced or distributed in any form for any purpose without the express written consent of Altus Group. 

References:

1. Reserve Bank of Australia. (2024, November 5). Statement by the Reserve Bank Board: Monetary policy decision.

2. Reuters. (2024, November 8). China unveils $1.4 trillion local debt package but no direct stimulus.

Want to be notified of our new and relevant CRE content, articles and events?