News: Construction costs turning the corner

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Construction costs turning the corner

Friday, 30 April 2010

Official statistics show that construction costs have stopped falling in all states and are now starting to increase. From here construction costs are likely to resume their traditional upwards direction. In the first quarter building costs increased most in Victoria and least in Queensland.

Furthermore, for the year to March, building costs in the non-resources states, New South Wales and Victoria, have been increasing faster than the resources states, West Australia and Queensland.

This week saw the publication of the Australian Bureau of Statistics Producer Price Indices for March 2010. This useful source of information looks at the prices of the output of many industries. You can find indices for construction costs, materials costs, costs of manufactured items, mining costs, and costs of services such as freight transport, and professional services.

Together with the Bureau's Consumer Price Index, which represents prices of a weighted basket of goods bought by people like you and me, this is the way inflation in the economy is measured. Producer Price indices are generally a good indicator of the direction of the consumer price index, which is published a few days later, and usually accompanied by a flurry of news articles about the likely direction of interest rates.

The latest building costs indices have been summarised in the following table showing cost increase for the year and for the quarter. The chart shows that by the latest quarter (January to March 2010) overall building costs are rising in all states.

Overall building costs turn the corner

The building cost index on which these numbers are based includes housing, apartments, non-residential and infrastructure types of construction. There are differences in the rate at which costs are changing for the different sectors. Separate indices are provided for these sectors. For example we conducted the same analysis on non-residential construction. Notice how Queensland and West Australia still appear to be seeing costs fall, albeit at a slow rate.

While non-residential costs are still falling in the resources states

Furthermore Queensland and WA saw the biggest falls in construction costs for this sector over the course of the year. Perhaps this is because prior to the downturn these were the states experiencing the biggest increases. The higher you go the further you have to fall!

Queensland and WA could see a further quarter or two of negative growth in this sector. Both states invested heavily in offices and industrial construction during the resources booms. Even now they are still finishing up the larger projects and there may be a gap before investment re-starts with any momentum. Contractors will therefore continue to compete aggressively on margins.

Further into the future the resources states will quickly resume their status as cost leaders. Both states have plans for high levels of resource construction in coal, iron ore and LNG. These plans are currently moving through design and engineering to breaking ground and construction. This process takes time but with the levels of investment planned, skill shortages are likely to cause escalating trade costs by 2011.

Balancing the falls that have occurred in annual construction costs for non-residential are increases in house building costs. At the risk of overloading you with tables the numbers are shown here. Notice how house building costs have increased for twelve months despite the downturn, with Victoria the all out leader at 7%, and New South Wales next at nearly 5%. Once again the resources states are lagging, perhaps because their housing sectors have seen less action in terms of building approvals.

but house building costs have kept rising

By Gary Emmett

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