The rate at which construction costs are skyrocketing, contributing to a string of high-profile builder busts, will slow next year, according to new forecasts from global consultancy RLB.
Construction cost inflation in Melbourne is expected to halve, falling from 8% this year to 4% in 2023, and in Sydney it is expected to slow to 3.9% from 6.9%.
An even bigger drop is forecast for the Gold Coast, with cost growth falling to 5.5 percent from 11.5 percent. Similarly, in Brisbane it is likely to fall from 10.5 per cent this year to 5.1 per cent in 2023, according to projections published this week in the RLB International report for the second quarter of 2022.
RLB research and development director Domenic Schiafone said the expectation that costs will fall over the next year is due to falling demand, likely caused by inflationary pressures.
“This drop in demand should allow manufacturing and logistics to get back to ‘normal’ or pre-Covid levels,” he said.
“The easing of demand should also lead to a softening of material prices, with the high levels of ‘demand-driven markups’ diminishing.”
Association of Professional Builders co-founder Russ Stephens, whose clients are home builders, agreed escalating costs could halve over the next year, but from a much higher base.
He said the cost of building a dwelling had risen much more than non-residential or commercial construction due to the higher percentage of wood used, and that temporary price increases caused by supply and demand were not reflected in the reports we saw.
Australia’s typical house building costs have risen by more than $94,000 in 15 months, according to figures released earlier this month in an analysis by the Housing Industry Association and News Corp Australia.
The national inflation rate hit 6.1 percent in the year to June, with new housing and car fuel being the top contributors, new figures released this week by Statistics Australia showed. New homes rose by 20.3 percent.
Warning to Australians who want to build
While construction cost inflation is expected to ease sometime next year, the pain will continue in the meantime.
Mr Stephens said because costs were rising so quickly, consumers needed to be aware that building prices would not last long.
“If they had a price quote older than 30 days, they should expect that price to be renegotiated,” he said.
He also said consumers would see more builders including rise and fall clauses, also known as cost escalation clauses, in contracts.
“It gives a builder the opportunity to pass an increase in material costs on to the consumer,” explained Stephens, adding that this is common in other countries but not typically used in Australia.
“What I would say to consumers is that this isn’t necessarily a negative thing because if builders don’t put these clauses in, they have to calculate the price more to protect themselves from potential price increases.
“So move up and down clauses are probably a good thing for consumers because they mean they only pay the cost of the increase and not an overprediction of what increases might be, especially as we are now seeing evidence that the increases are starting.” will slow down next year.”
Factors contributing to the construction industry crisis
The construction industry is facing such great challenges that top-class construction companies are dropping like flies.
Mr Schiafone said problems in the fragmented supply chain had not been resolved and labor shortages continued across the country as a result of the pandemic.
The consultancy’s report found that delivery times for some overseas products were present
16 to 20 weeks, while traditionally they have been half that at eight to 10 weeks.
In addition, the need for construction workers and materials following the recent flood damage will exacerbate existing shortages across the country, it said.
Mr Schiafone said higher fuel prices, rising energy costs and wood shortages are all symptoms of the war in Ukraine and are likely to continue for some time.
RLB global chairman Andrew Reynolds said significant cost increases, global supply uncertainties, variable weather events causing significant construction delays and labor shortages are common challenges in the industry around the world.
failed construction company
The latest company to collapse earlier this week was prominent Melbourne housing developer Caydon, who blamed it on “one difficult market situation after another”.
The next day, on Wednesday, ASX-listed developer Cedar Woods put a major townhouse and apartment project in downtown Brisbane on hold due to rising costs and delays.
It comes less than a week after Perth developer Sirona Urban demolished a $165 million luxury tower in which more than 50 percent of the apartments had been bought off-plan, blaming skyrocketing construction costs and labor shortages.
It was the second major housing project to collapse in Australia last week.
A Melbourne developer, Central Equity, abandoned plans to build a $500 million residential tower on the Gold Coast, blaming the construction industry crisis and rising construction costs for making the project unviable.
Earlier this year, two major Australian construction companies, Gold Coast-based Condev and industry giant Probuild, went into liquidation.
The dismal list has only grown since then as a number of other high profile companies have also collapsed including Inside Out Construction, Dyldam Developments, Home Innovation Builders, ABG Group, New Sensation Homes, Next, Pindan, ABD Group and Pivotal Homes.
Others joined the list including Solido Builders, Waterford Homes, Affordable Modular Homes and Statement Builders.
Then two Victorian home builders were other victims of the crisis after they went into liquidation in late June and a homeowner spent $300,000 on a semi-finished house.
Hotondo Homes Horsham, a franchisee of a national construction company, collapsed two weeks ago, leaving 11 homeowners with $1.2 million in outstanding debt.
It is the second Hotondo Homes franchisee to go under this year, according to a report by bankruptcy trustee Revive Financial. The Hobart branch collapsed in January because it owed creditors $1.3 million.
Meanwhile, a Sydney family faces never being able to build their dream home after their home builder Jada Group collapsed over $2.4 million in March, taking the cost to build their home to $1.9 million are a whopping $800,000 more than the original offer.
Snowdon Developments has been ordered to liquidate by the Supreme Court with 52 employees, 550 houses and more than 250 creditors that owe nearly $18 million, despite being partially bought out less than 24 hours after it went bust.
Dozens of homeowners and hundreds of trades have been reeling after a Victorian homebuilder called Langford Jones Homes went into liquidation on July 4, owing $14.2 million to 300 creditors.
News.com.au also posed questions about NSW builder Willoughby Homes, which is under investigation by the Government after construction stalled and debt rose to 90 days.
There are between 10,000 and 12,000 homebuilders in Australia undertaking new homes or major renovation projects, a figure estimated by the Association of Professional Builders.
– with Sarah Sharples