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New report on construction costs due next month - will show current inflation burst is temporary
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Australia’s current acceleration in construction costs is expected to be relatively short-lived, with the rate of cost inflation expected to peak in late 2021 or mid-2022 (depending on the sector), before doping back to relatively normal rates by the end of next year.
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Next month, Macromonitor will publish the new edition of our report; Australian Construction Cost Trends - 2021. In this newsletter we present some selected preliminary findings from this report.
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The annual increase in house building costs is expected to peak at around 8% in the latter part of 2021, while non-residential building costs should peak at 7% (with differences between the various building segments). Road and bridge construction cost increases are expected to peak at around 6% in mid-2022.
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The main reasons for this temporary spike in cost inflation are:
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- A strong recovery in the world economy, which has led to a surge in most commodity prices, as demand, and expectations of future demand, have jumped higher.
- A positive outlook for Australian construction, due to increased Government spending on infrastructure and a boom in house building as a result of the HomeBuilder program, other incentives and low interest rates.
- Supply chain delays and disruptions in some areas.
- A generally higher inflationary environment in the Australian and global economy (driven by highly stimulatory fiscal and monetary policies).
- The end of the appreciation of the Australian dollar, and the beginning, in June 2021, of a gradual depreciation.
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Beyond the next 12 months however, we expect most of these factors to either moderate or reverse themselves. Key commodity prices, including steel, oil, copper and aluminium, have shown signs of peaking, and are generally expected to decline over the next two years – due to moderating growth in demand and increases in production in response to recent strong demand.
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In the building industry (houses and non-residential building) we expect to see declines in activity in Australia from 2022/23 onwards. In particular, the conclusion of the HomeBuilder scheme will lead to large declines in house starts from the current record levels. This downturn will be exacerbated by very low population growth (because of the lack of overseas migration arrivals). And non-residential building will also finally have a downturn from the boom levels of recent years.
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Supply constraints in Australia will likely be gradually addressed, and monetary policy will be tightened, possibly from early 2023, with the aim of keeping inflation in check. These factors will all lead to a normalisation of cost increases from 2023 onwards.
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Our new Australian Construction Cost Trends report, to be published next month, will provide complete forecasts of cost increases, by all sectors, by state and territory and for each input to building and construction (covering wages, all types of materials, equipment and services).
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If you have a need for cost escalation forecasts, for use in project feasibility, cost estimation or project planning, please visit the page for this report on our web site, or send us an email at info@macromonitor.com.au.
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Our most recent reports:
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Australian Construction Cost Trends
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This report examines the outlook for construction costs, in detail be sector and type of input.
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Australian Construction Projects Database
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This latest list of projects corresponds with our fully revised set of forecasts published in November 2023.
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Australian Regional Construction Outlook
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Our latest regional forecasts for residential building and construction have just been released.
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Australian Construction Materials Forecasts
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Our latest forecasts assess the implications for construction materials demand of the current outlook for building and construction.
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Australian Road and Bridge Works
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This report examines the strength and composition of the current upturn, and determines the likely timing of the peak, and subsequent decline.
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