How Rising Building Costs Change Property Markets - July 2023

By Rich Harvey, CEO & Founder, propertybuyer.com.au

Property markets throughout the nation are dealing with various positive and negative price drivers. Rising interest rates, exploding overseas migration, negative economic news, work-from-home demands… the list of “push-me, pull-you” influences across every location feels exhausting.

But common to every location is the impact of inflated construction costs and blow outs in building times. These are influencing decisions across almost every property type… even those that don’t directly rely on a contractor’s skills.

Here’s why construction prices have risen and how professional buyers’ advocates can leverage this to their clients’ advantage.

Cost increases

The pandemic years saw an unusual confluence of factors which resulted in driving the cost of building higher.

There were the manufacturing shutdowns in 2020 and 2021. Builders simply couldn’t source cheap materials and fittings, either from overseas or within Australia. In addition, shipping and freight prices more than doubled in many instances, while deliveries from offshore became less frequent. This meant tight supplies which of course saw costs skyrocket.

There was also the ramping up of financial incentives designed to stimulate the economy during the pandemic. Grants from the federal government to help fund upgrade works were intended to keep money flowing into the construction industry – and it was exceedingly effective! Builders found themselves with plenty of work.

In addition, discretionary household spending fell, and that meant owners had more funds available for home upgrades.

So, costs rose. It’s been reported the price of building has risen by around 30 per cent overall since the start of 2021 alone – and that’s on the back of the 2020 uptick.

The Cordell Construction Cost Index rose 11.9 per cent in 2022 – close to double the rate of inflation.

Recent numbers show increases are slowing, but there’s no suggestion they’ll ever retreat.

The winners and losers

Construction costs appear to be finding their new elevated level, and it’s causing widespread change in property markets with some differing outcomes for various property types.

First up, let’s look at those benefiting from construction cost and time blowouts.

Construction constraints are compelling buyers to pay a premium for ready-to-move-in property.

For example, certain types of new units are enjoying a value surge. Those where the layout, design and building facilities appeal to homebuyers as opposed to investors are reaping the rewards. These apartments and townhouses are a step up in quality over generic investor-style stock. Downsizing buyers are eager to cash out of existing homes which are too big and expensive to maintain. Instead, a well-located unit that’s fresh, new and easy to live in will get them to sign on the dotted line.

In the same vein, recently completed homes (or dwellings under two years old at least) are being eagerly acquired. Those in master-planned estates with comprehensive community facilities are doing well. These new homes allow residents to enjoy a move-in-ready product – no need to wait for a builder or to pay elevated construction costs.

We are also seeing extraordinary prices being achieved for luxury spec homes across most capital cities. There are several builders successfully creating architecturally-designed wonders with mind-blowing features – and they’re making millions selling to cashed-up buyers who want the very best.

Of course, there are some property types which are being penalised by building cost increases.

The first is vacant land. Site sales ran hot across most capital cities during the pandemic as building grants stimulated activity. Buyers were eager to sign up for a piece of land and create a dream home that would have no doubt included a separate office and second living space for a bit of family separation.

Those housing estates enjoying all the attention during COVID are now seeing their sale rates drop. Today’s land buyers must be patient and able to service a loan over the long term without needing to rely on a rental income.

Similarly, house-and-land packages are struggling to secure buyers. You only need to see the collapse of some of our major building companies to understand. Project-home builders’ margins are razor thin due to the cost rises. Now, buyers are shying away from building new. Low demand coupled with high costs and tight margins have depleted volumes. I wouldn’t be surprised to see more building companies collapse over the next 12 months as a result.

The third sector where prices are dropping is property requiring extensive renovation – especially if it’s currently uninhabitable. If a buyer looks at a home that needs major work, they are factoring that in their offers.

The buying opportunity

While all this may sound cut-and-dried, experienced buyers’ advocates know that you can leverage these situations in a client’s favour.

Properties currently discounted by rising costs could be a golden opportunity for the right kind of purchaser. Someone who has the funds to hold on and enjoy the inevitable upswing in value would be the ideal buyer.

Conversely, completed homes boosted by cost increases can seem expensive to some purchasers. Fortunately, a buyers’ advocate can put the situation in perspective. They can assess the true value of avoiding construction pain and help assess the value price of a favourite listing more accurately.

A knowledgeable, experienced buyers’ agent can analyse the state of the market and work it to your advantage. In the end you’ll secure the right property for you at a price that makes good sense.

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