Construction costs picked up slightly to grow 0.5% over the June quarter, according to Cotality’s latest Cordell Construction Cost Index (CCCI).
The latest data follows a 0.4% rise in the March quarter - the lowest quarterly increase since March 2010 (also 0.4%).
“Growth in residential construction costs has increased a little compared to the previous quarter; however, when compared to the long-term average, the increase is tracking at half the pre-pandemic decade average of 1.0%," said Tim Lawless, Cotality’s research director.
“That being said, the reacceleration is likely to weigh on inflation outcomes with the cost of new dwellings comprising the largest weight in the CPI calculation.”
He pointed to the annual rate of growth (ending June 2025), which saw construction costs increase by 2.9%, up from 2.6% over the 12 months to June 2024.
The latest data reinforces commentary from last week’s RBA decision to maintain the cash rate at 3.85%, which explicitly highlighted the reacceleration of growth in the cost of new dwellings via the monthly CPI indicator as a concern.
Governor Michele Bullock noted that certain components of monthly inflation - particularly home building costs - had been "slightly stronger than expected", which contributed to the decision to hold rates.
The RBA added that high construction expenses continue to exert upward pressure on inflation, reinforcing its cautious stance.
“With the cost of building a new home continuing to rise, the stretch target of building 1.2 million new homes by July 2029 is looking harder and harder,” said Tim.
“Builders are struggling with feasibility assessments amid a combination of high material and labour costs.”
Competition for skilled trades also remains intense amid a record level of public infrastructure spending, with Infrastructure Australia forecasting a mismatch between the demand and supply of labour until mid-2028.
Tim said this will mean we will likely continue to see upward pressure from building costs centred in the labour market.
“Higher construction costs remain a key blocker for getting more desperately needed housing supply into the market. High costs have eroded builder margins and contributed to the housing affordability crisis.”
Peripherally, there is also the cost of insurance that needs to be considered amid rising build costs.
Higher construction costs imply ongoing increases in repair and rebuild costs at a time when severe weather events are becoming more frequent and severe.
“Given the 31% increase in residential building costs over the past five years, homeowners may need to consult with their insurer to make sure they are adequately insured,” he said.
Beyond labour, Cotality Construction Cost Estimation manager John Bennett said the quarter’s data was driven by increases in materials, including insulation and floor coverings, with both rising by 2%.
He said heating and cooling products showed a decline of just over 3%.
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