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December 6, 2022

How Are Rising Construction Costs Affecting The Local Market?

Construction costs are climbing rapidly – as anyone looking to renovate or build a home already knows too well.

We take a look at what it means for homeowners, buyers, tenants and investors.

Despite rising interest rates and a growing cost of living, we’re in the midst of a full-blown construction boom. The number of new homes under construction reached an all-time high in June 2022, according to the latest ABS data. This surpasses the record set in the previous quarter and continues a trend that began in the final quarter of 2020.

Renovations are also on the rise, as any who has tried to book a trade recently will also tell you. In fact, with shows like The Block making celebrities out of tradies and DIYers, we’ve become something of a renovation nation.

In 2021, Australia spent a total of $12.3 billion on renovations. That was around $4 billion more than the previous year and double what we spent a decade earlier.

Record growth in construction costs

As we build more than ever before, construction costs are also growing. They climbed by a record rate of 11% across Australia in the year to September 2022. The pace of growth in construction costs is speeding up too – with 4.7% of this figure happening last quarter.

Here in Queensland, we outdid even that average, with construction costs lifting 5.8% in the September quarter – well above the State’s June quarter rise of 2.3%.

Some critics now believe the HomeBuilder scheme – so successful here in Toowoomba – may have contributed to the pace of growth by encouraging people to build to the point where it overstimulated the construction industry.

But we think there’s more to it than that.

The cost of inputs is rising

This growing demand for construction has been happening at the same time as the supply of construction materials has been disrupted – thanks to supply chain issues and global events such as Russia’s invasion of Ukraine.

This is leading to a spike in construction costs with ABS data showing that ‘input prices’ into the cost of construction rose 16.0% in the year to September 2022.

There were especially sharp price rises in the cost of timber, boards and joinery (which rose 21.2% over the past year), as well as concrete, sand and cement, which rose 6.8% just last quarter.

On top of this, the labour market is tightening. Unemployment in Queensland now sits at just 3.4% – the second lowest rate of any State.

That means construction companies looking for workers need to pay more than ever before. Then, of course, there are rising electricity, fuel and freight costs too.

Impact on the housing market

The growing cost of building or renovating a home doesn’t look as though it will cause a slowdown in the short term. There is still a strong pipeline of building work to get through here in Toowoomba.

That’s important given that we’re facing something of a rental crisis. Toowoomba’s vacancy rate is now just 0.4%, according to SQM data, and the median rent has grown 31.6% since March 2020. Put simply, people need somewhere to live. The only way this can happen is if we build more homes.

Without further construction, we’ll also put an artificial constraint on our population growth, with official estimates suggesting we’ll add another 55,000 people over the next three decades.

In the long term, however, the increased construction costs could force some people to think twice about building. That could lead to greater pressure on established homes and may impact people’s buying decisions.

We find that when the cost of construction is high, people are less inclined to build or buy ‘doer-uppers’. They want the finished product. So demand tends to shift to established homes in good condition.

On the building side, rising costs may also lead to higher-density constructions, as developers find they need to maximise their returns from the resources they have available.

A short-term spike?

In short, Toowoomba’s construction sector is a vital part of our local economy and something necessary for us to continue to grow as a city and community. Let’s hope that the supply chain issues and cost of living pressures resolve soon so that people remain incentivised to build the homes we need.

Are you looking to buy, sell, invest or rent in Toowoomba? Get in touch with our team today.

Article by Melita Bell

Melita Bell is a fully licensed real estate agent who has a reputation for delivering exceptional results that consistently exceed her clients’ expectations. Encompassing over ten years of real estate experience, Melita Bell’s background inclu… View profile

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