Australian construction material price outlook - Q1 2024

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Altus Group combines our market intelligence with a range of reliable and robust data sources to provide quarterly Australian construction material price indicators for the construction sector.

With localized expertise and global cost management experience, we can help ensure the viability and success of your development and construction projects.

Overview

Housing affordability, long considered a “barbecue stopper” in Australia, continues to capture headlines around the country.

Australia’s population grew by 659,800 people in the year to September 2023, following record migration. Housing starts have not kept pace with population growth, and just 172,000 dwellings were completed last year. This is 19.7% below the pre-pandemic annual rate of 214,000. While the migration target for 2024 has been lowered to 190,000, just 150,000 dwellings are expected to be completed.

The Australian Government’s ambitious target of 1.2 million new homes by June 2029 is increasingly at peril. The National Housing Supply and Affordability Council forecasts a shortfall of nearly 300,000 homes. Only 162,194 homes were approved for construction in the past year and this number is falling month on month, indicating that the numbers don't add up to achieving the goal. We are seeing Australia’s housing dilemma reflected in the price of materials and other construction costs. Products used earlier in construction, such as structural timber, are being discounted as demand drops off, for instance.

But materials costs are just one component of the cost of housing. Many residential projects are simply unviable as the end sale price or forecast rents do not cover the cost of land, construction labour, finance, government fees and taxes. This is leading to calls for governments to reconsider taxes, such as negative gearing and capital gains tax arrangements.

The Reserve Bank of Australia (RBA) remains “very alert” to sticky inflation and has signalled that interest rates may need to stay higher for longer, or may even rise to keep a lid on price escalation. Globally, economists are starting to suggest we are in for a prolonged period of high interest rates.

The high interest rate environment has done little to dampen house prices. House values have surged by nearly 40% since March 2020 and unit values have increased by 17.9%, according to CoreLogic. But the higher cost of capital makes it harder for residential developers to make the numbers stack up.

Meanwhile, sourcing labour continues to be a challenge across the construction sector. Some markets remain overheated, notably South East Queensland; trades are beginning to indicate some capacity in other markets.

Labour costs influence the prices of some materials. Costs for concrete-based structural components have risen on the back of high demand and higher energy costs, but also as a consequence of labour shortages, for instance.

Labour shortages have consequences for all sectors of the construction industry, but especially for residential construction. BuildSkills Australia estimates Australia needs an additional 90,000 skilled trades to build 60,000 new homes each quarter and stay on track with the 1.2 million homes target. But the volume of workers required to meet this ambitious housing target in itself creates a vicious circle, as it will only be achieved if these workers have somewhere to live. Meanwhile, the latest figures from the Productivity Commission show construction industry productivity fell by 1.8% last year, so businesses are working harder for less output.

The bottom line? Building costs have risen but buyers and renters can’t afford to pay more. Direct government intervention in social and affordable housing is increasingly looking like the only solution.

Material price snapshot

Figure 1 - A snapshot of Australian construction material price trends - Q1 2024

| | Figure 2 - Altus Materials Escalation Index (Australia)

Material price movements

Altus Group provides insight into the materials and commodities that are common across most projects and sectors, and that therefore have the greatest influence on costs. Of the eight materials we monitor, the costs of two have fallen, two are holding steady, and four have risen over the quarter.

Structural steel and rebar: Steel prices have stabilised this quarter, with sluggish demand from China and slowdowns in major steel-consuming sectors like industrial and logistics. Globally, the downturn in residential construction driven by high interest rates and high construction costs have also dampened steel demand, although the World Steel Association predicts a 1.7% rebound over the course of 2024.

Concrete: Concrete prices increased slightly this quarter. This was due to a combination of energy price hikes, and higher manufacturing and labour costs. Forecast decreases in demand are likely to see concrete prices remain stable in the short term. However, once building approvals pick up again, as the government's target to build 1.2 million new houses kicks off in July 2024, we expect early-stage materials like concrete, steel and timber to be in high demand, which could lead to an increase in supply prices.

Structural timber: Prices declined due to weak market demand and this trend is expected to continue over the short-term. Looking big picture, less structural timber is being produced in Australia than 15 years ago, according to Timber Trader News, and this is likely to impact imports and prices longer-term.

Plasterboard: In contrast to early-stage materials, later-stage materials such as plasterboard have seen supply price increases due to rising manufacturing costs, yet they still maintain high demand due to a strong pipeline of ongoing projects. We expect short-term plaster prices to continue rising as more approvals are released in the coming quarters.

Bricks: Prices rose with heightened demand and the ripple effects of previous energy price rises. Innovative products, such as a range of energy-efficient bricks developed by RMIT University with enhanced thermal efficiency, point to the possibilities of greener, more efficient products in the future. However, the recent liquidation of Lutum, which produced masonry and terracotta tiles, serves as a reminder of market volatility and materials that are closely related to residential projects.

Copper: Low demand for copper has placed downward pressure on prices. However, copper is currently trading at a two-year high and BHP’s $39 billion takeover bid for copper miner Anglo American is a vote of confidence in the future of a material that is essential to the clean energy transition.

Diesel: Global fuel prices have fluctuated due to ongoing tensions in the Middle East. Diesel prices, in particular, will hinge on the unfolding situation in the region. Longer term, several of Australia’s largest construction companies, notably Lendlease, are moving to biodiesel.

Macro-economic review

| | Figure 3 - All groups Consumer Price Index (CPI), Australia, quarterly and annual movement (%)

Australia’s Consumer Price Index (CPI) rose by 1.0% in the first quarter of 2024. Housing increased by 0.7%, while furnishings, household equipment and services decreased by 0.1%. This difference reflects continuing cost-of-living pressures and cautious consumers cutting back on discretionary spending.

Headline inflation rose by 3.6% over the 12 months to March 2024, outside the RBA’s target of 2-3%. Housing increased by 4.9%, whereas furnishings, household equipment and services remained stable at 0.2%.

Australia’s inflation rate is roughly in line with the United States, which increased by 0.4% over the quarter and 3.5% annually.

At its May 2024 meeting, the RBA board decided to leave the cash rate target unchanged at 4.35%, but noted that inflation “remains high and is falling more gradually than expected” and the outlook remains uncertain.

Producer Price Indices – Input

| | Figure 4 - Producer Price Indexes (PPI) – Input, Australia

Input prices – which in the context of housing construction includes land, materials, fees, permits, professional services and equipment, and the expenses associated with hiring construction workers – recorded a rise of 0.4% in the March 2024 quarter.

Reduced demand for new construction saw suppliers discount products used in early-stage construction, such as structural timber. This discounting partially offset overall rises. Over the past 12 months, input prices have increased by 1.3%.

Producer Price Indices – Output

| | Figure 5 - PPI – Output, Australia

Output prices refer to the rates or charges set by construction companies or contractors for their services, including labour, profit margin and contingency costs.

Building construction output prices rose by 1.6% this quarter and 5.9% over the past 12 months. This growth was driven by ongoing labour shortages for skilled tradespeople. The downward trend seems to be ending after six consecutive quarters, primarily due to reduced supply costs. However, as supply costs begin to stabilize with indications of future increases, combined with rising labour costs, output prices are being pushed upward once again.

Wage Price Index

| | Figure 6 - Wage Price Index (WPI), Australia

The seasonally adjusted Wage Price Index (WPI) increased by 0.8% for the quarter and 4.1% annually. The WPI for construction grew by 0.7% over the quarter and by 4.2% over the year. This wage growth has been a primary factor behind the rise in output prices.

Building approvals

| | Figure 7 - Building Approvals, Australia

The number of dwellings approved fell by -1.9% monthly and -5.8% for the year ending February 2024. In 2023, the federal government set an aspirational target of building 1.2 million well-located homes in the five years from July 2024. To achieve this target, 240,000 new homes will need to be built annually. Just 162,194 homes were signed off for construction in the 12 months to February 2024.

However, in a positive sign, the value of new loan commitments for housing rose 3.1% to $27.6 billion in March 2024 (in seasonally adjusted terms). This as 17.9% higher compared to a year ago. New loan commitments for owner-occupier housing rose 2.8% to $17.5 billion, 11.4% higher than the previous year.

Summary

How will construction costs unfold over the rest of 2024? The Reserve Bank of Australia noted several challenges in its latest statement on monetary policy that give us some clues.

Subdued economic growth will be counterbalanced by less spare capacity in the labour market, and this will continue to put pressure on labour costs. Stagnant productivity growth could see an uptick in consumer prices and inflation. Housing continues to run second place to the infrastructure sector, with continued government spending impacting the availability of key trades and resources for enabling works in the private sector.

The ongoing mismatch between supply and demand in housing markets is unlikely to be resolved any time soon. A softer near-term outlook for household consumption and dwelling investment will translate into further affordability constraints and high construction costs. Overall, economic conditions will continue to weigh down demand and activity in 2025 and beyond.

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

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