Construction cost surge to strike again, says Oxford Economics

The respite from rising ­construction costs could be brief as the industry’s poor productivity and pressure from higher wages kick in, says Oxford ­Economics.

Although building costs appear to have plateaued, Oxford Economics says they may take off again. Picture: Getty Images

The brief respite from rising ­construction costs could soon come to an end as the industry’s poor productivity and pressure from higher wages comes home to roost, forecaster Oxford ­Economics says.

The researcher said that inflation in the sector may jump to more than 4 per cent per annum after the 2028 financial year, ­potentially adding $200m on top of a $1bn project.

These expectations of rising costs are already being felt on the ground as developers can’t find builders to complete large apartment projects and some builders are not bidding on longer term work.

Rising costs add to the cocktail of high interest rates, planning delays and a tough debt market that has already put the federal government’s housing targets in doubt and added to the woes of commercial property projects that face weak demand.

Oxford Economics said the drivers of rising costs had shifted from international factors, like supply chain disruptions and commodity volatility, to domestic problems including lagging productivity and the infrastructure building boom.

Construction cost escalation had slowed from the unprecedented inflationary spike that hit the sector in 2021-22 and 2022-23. But the forecaster said inflationary pressures endured, with construction cost growth expected to re-accelerate later this decade, hitting property and infrastructure projects.

“The recent surge in construction costs was primarily driven by supply-side factors; commodity market volatility and the energy cost crisis has shifted up manufacturing and transport costs, compounded by supply-chain disruptions from the lingering impacts of the pandemic,” Oxford Economics Australia senior economist Thomas Westrup said.

“However, cost growth now is increasingly being driven by domestic factors. Without substantial improvements in construction industry productivity, this presents risks for a significant re-acceleration in construction cost escalation later this decade.“

Construction costs grew at record rates over the 2022 and 2023 financial years, as the economy was hit by severe shocks as the world reopened after the pandemic and sanctions were placed on Russian exports.

Oxford Economics said that, while there had been a significant fall in some key construction input prices, overall construction cost escalation had merely slowed rather than reversed.

Mr Hart said the latest data showed annual construction costs rises may be bottoming out at a rate above 2 per cent and were now starting to re-accelerate.

“Instead of international factors driving escalation, domestic price pressures are now driving escalation based on sustained high demands from construction activity,” he said. Strong demand for construction labour and local materials was driving stronger growth in construction wages and prices for inputs such as quarry materials, cement and concrete.

Wage growth in the construction sector has accelerated from a low of 1.5 per cent in 2020 to 4 per cent now, while prices for quarry products had risen more than 20 per cent over the same period.

“We see significant risks of cost escalation once more surprising on the upside in coming years – even if the RBA is successful at quarantining CPI growth within its 2-3 per cent target band,” Mr Hart said. “From as early as the 2026 financial year, we are forecasting another decoupling of construction cost escalation and the CPI.”

The forecaster sees cost escalation heading towards 4 per cent per annum by fiscal 2028 and pushing even higher towards the end of the decade. Mr Hart said cost growth would likely be even higher in states such as Queensland and WA where growth in construction activity and demand will be strongest.

Originally published as Construction cost surge to strike again, says Oxford Economics