Cost to build a new home picks up pace in Perth, putting pressure on established market

The cost of building a new home in Perth has continued to climb, pushing the city’s depleted established residential property market to new highs.

CoreLogic’s latest Cordell Construction Cost Index, which tracks the cost to build a typical new dwelling, showed residential construction costs grew 1 per cent over the September quarter, in line with the pre-COVID decade average.

Demand has swelled at the same time as a construction slowdown has hit WA’s housing industry.Credit: Ross Swanborough

The latest data was up from a 0.5 per cent rise over the June quarter and was the strongest quarterly increase seen from the three months to December 2022 (1.9 per cent).

The 12 months to September saw costs rise 3.2 per cent, up from 2.6 per cent over the 12 months to June, although down from the rate at this time last year (4 per cent).

CoreLogic economist Kaytlin Ezzy said the data would likely put additional pressure on the federal government’s national housing target, which for WA is 125,000 new homes over five years to mid-2029.

“With the official start date for the government’s target for 1.2 million new well-located homes over five years kicking off in July, the recent re-acceleration of the CCCI could put additional pressure on an already difficult-to-achieve goal,” she said.

“Over the year to June, approximately 176,000 dwellings were completed, -26.6 per cent below the 240,000 annually needed to fulfil the target.

“While 250,000 homes remain within the construction pipeline nationally, the sluggish flow of new dwelling approvals suggests a shortfall of projects once the backlog is worked through.”

According to UDIA WA analysis, WA will be around 30,000 homes short of what is needed to meet year-on-year demand by mid-2029, and around 33,500 short of the national target.

It comes as new data from the HIA New Home Sales report found sales in WA were the second-worst in the nation.

It was led by NSW (-25.5 per cent), followed by WA (-18.4 per cent) and Victoria (-11.7 per cent).

Strategic Property Group managing director Trent Fleskens said it was “highly unlikely” WA would meet its target of building 125,000 homes before 2029.

“This is a boom fuelled by two things: cost inflation and mass immigration – neither of which are abating to levels our industry can handle any time soon,” he said.

“To reach our target of new homes would require us to build at rates we’ve never built at before with the lowest trade base per capita we’ve had in a generation.

“If demand remains constant, and we can’t build enough homes just to house the people coming into our state, there is only one way prices can go.”

Fleskens said for a consumer to see value in adding new supply to the market, the cost of a new house must be close to the cost of an established house.

Hence, as the cost of building a new house in WA continued to grow, the established market would continue to follow as the logical alternative.

Home loan expert Mansour Soltani from money.com.au said the latest mortgage insights report showed wage growth had failed to keep pace with the cost of building a new home.

“Over the last five years, wages have increased by just 15 per cent, while the purchase cost of new dwellings has risen by 39 per cent — almost three times faster than wage growth,” he said.

“This means that a household earning $100,000 five years ago, buying a new home for $700,000, would now be trying to buy a new home for $970,000 on a wage of $115,000.”

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