Material shock to continue inflating building costs in Australia

By Our Reporter
Photo by Danist Soh on Unsplash

Supply chain bottleneck and geopolitical tensions to push costs of construction to new highs

Rising costs of construction due to an increase in steel and copper prices and timber shortage will make 2022 an expensive year for construction in Australia. Last year, building costs rose over 7 per cent, the highest annual growth rate since March 2005.

Due to supply chain difficulties, the surge in building costs was one of the primary reasons new homes and home renovations got a lot dearer in 2021. This year, the war raging in Ukraine, sanctions against Russia, and further supply chain disruptions are adding to housing affordability problems.

A substantial pipeline of residential construction work is also likely to keep both building materials and trades in short supply for an extended period, likely to continue till 2025.

“There is a significant amount of residential construction work in the pipeline that has been approved but not yet completed. With some materials such as timber and metal products reportedly remaining in short supply, there is the possibility some residential projects will be delayed or run over budget,” said CoreLogic Asia Pacific Head of research Tim Lawless. As supply chain disruptions continue, the data company is expecting further price growth in the coming months.

Russia and China are two major steel exporters, and a temporary export tax to discourage steel exports has forced a supply crunch in the global markets for steel in 2021. Even before war broke out in Ukraine, the Russian steel industry had imposed taxes on steel exports causing a flow-on effect in Australia. The decrease in supply from Russia and China, added with the US’s need for new housing, had created a supply crunch for steel in the global market.

With some materials such as timber and metal products remaining in short supply, there is the possibility some residential projects will be delayed or run over budget

It’s not just the price of metals, but engineered timber is in short supply too. Bushfires earlier damaged Australia’s domestic supply. Moreover, there hasn’t been an increase in Australian softwood plantations for over two decades. New Zealand and United States exports barely meet global demands. Even though the government had expected the building industry to underpin the economic recovery in 2022, material scarcity is equally frustrating for builders and renovators.

The most significant cost increases were in Western Australia and South Australia (both up 7.9 per cent), followed by Queensland (7.3 per cent), Victoria (7.1 per cent) and NSW (7 per cent).

Potential home buyers should factor in changing costs and keep a buffer to insulate such price shocks. They should also mentally prepare for delays in handing over of new homes. Rising construction costs affect existing homeowners just as investors and potential first home buyers. Homeowners should always assess if their property is insured adequately. When undertaking renovations, they should factor in the delays and keep an excess buffer of funds to complete their planned work.

On a more positive note, rising building costs will encourage new home buyers to explore the existing home market for a bargain. Families planning on downsizing and retirees are likely to get better returns on their sales in 2022.

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