Supply and demand dynamics in Australia to continue influencing construction costs: Report

Amidst escalating trade tensions driven by the Trump administration's tariff policies, and global geopolitical tensions in the Middle East and Ukraine adding further unpredictability, there is increasing concern about energy and material costs, supply chains and investor appetite. 

Adding to the uncertainty is the impact of measures that could slow Chinese economy, potentially reducing demand for Australian resources – China being Australia’s largest export market – and directly impacting mining revenues, government royalties and budgets, which could influence domestic investment decisions relating to infrastructure expenditures. 

In this scenario, the Reserve Bank of Australia’s decision to cut the cash rate to 4.1% – which was quickly matched by the banks – offers a small boost to confidence in the housing market. However, developers with stalled projects are likely to continue their wait-and-see approach, especially in the lead-up to the federal election. Lower interest rates may reduce financing costs for new developments, but the ongoing uncertainty may temper this potential benefit.

The Australian dollar hit a five-year low in February before recovering slightly – while a weaker dollar boosts export competitiveness, it also raises import costs.

The construction sector remains at the epicentre of Australia's insolvency challenge. According to ASIC, 1,943 construction companies have been liquidated in the financial year to January 2025, up from 1,518 the previous year. These insolvencies can lead to higher project costs through delays, disrupted supply chains and higher subcontractor costs as builders compete for reliable trades.

High-profile failures of material manufacturers, most recently Oceania Glass, show ongoing financial strain within the supply chain. Competitive pressures from cheaper Chinese imports, combined with elevated domestic energy and labour costs, suggest further turbulence ahead.

Dwelling approvals rose 0.7% in December 2024, up 12.2% year-on-year, driven by increased approvals for high-density dwellings. However, private-sector housing remains sluggish, with elevated costs and tight margins stalling new developments. Prefabricated construction offers some potential, with the Commonwealth Bank introducing mortgage products for prefab homes. 

Despite all the uncertainties, Australia’s jobs market remains strong and population growth continues to drive demand for real estate and construction.

Material prices 

While New South Wales and Victoria ease off on infrastructure spending, taking some heat out of the Sydney and Melbourne markets, Perth is pushing ahead with strong growth. Meanwhile, Queensland remains under pressure, driven by the 2032 Brisbane Olympics deadline and ongoing recovery efforts from recent natural disasters.

Energy-intensive materials, such as concrete and bricks, continue to increase in price, while imported materials from China continue to decline, offering some relief for builders sourcing international products.

Structural steel and rebar: Steel trading prices have fallen with weakening demand. Global steel production was down 0.8% in 2024, although the World Steel Association expects to see a broad-based recovery, excluding China in 2025. Global steel demand is forecast to rebound by 1.2% in 2025. Steel prices are expected to remain subdued.

Concrete: Rising concrete prices reflect the material’s energy-intensive production process amid persistent energy cost pressures. The World Cement Association forecasts global cement demand is likely to decline to 3 billion tonnes per annum by 2050, far below existing forecasts. Clinker demand, the main source of greenhouse gas emissions in cement production, is expected to decrease even more steeply. Softening demand in the near-term suggests prices may stabilise.

Structural timber: Australia’s housing construction slowdown and high inventory levels have kept timber prices relatively stable, with minimal volatility anticipated.

Plasterboard: Plasterboard prices have levelled off this quarter after a significant increase over the year. With demand remaining weak, no further price hikes are anticipated.

Bricks: Brick prices increased this quarter and annually. Brick manufacturing cost hikes have been driven by surging energy costs – as brick kilns are reliant on natural gas – and transport costs. Furthermore, brick production is labour-intensive.

Copper: Copper prices have stabilised this quarter after a period of significant growth. Demand remains strong, particularly in electrical equipment, wiring and electric vehicle manufacturing. The global energy transition and demand for data centres are both driven by copper consumption.

Diesel: Diesel prices have fallen to pre-pandemic levels due to lower global demand and increased production. This reduction provides some transportation and logistics cost relief. According to the Australian Institute of Petroleum, Australia has among the lowest diesel prices of all OECD countries.

Macro-economic review

Consumer Price Index

Australia’s Consumer Price Index (CPI) increased by 0.2% in the December 2024 quarter, bringing the annual inflation rate to 2.4%. Housing costs declined by 0.7% for the quarter but remained 1.0% higher over the year. Electricity prices were slightly lower and a slight drop in new dwelling costs was recorded. Insurance and financial services rose 0.8% for the quarter and 5.4% for the year.

While the overall inflation rate has moderated, underlying measures of inflation – like the trimmed mean and weighted median – are still rising. Both these measures increased by 0.5% for the quarter and remained above 3% for the year, suggesting that inflation is still a concern in core areas of the economy.

Producer Price Indexes – Input 

Housing construction input prices – encompassing land, materials, fees, permits, professional services, equipment and worker-related costs – have stabilised, rising by just 0.5% in the December 2024 quarter. Input prices have returned to pre-pandemic conditions, largely driven by lower demand for new construction. Over the past 12 months, input prices for house construction have grown by 1.6%.

Producer Price Indexes – Output

Output prices – the charges set by contractors for services including labour, profit margins and contingencies – continue to climb. The latest quarter saw a small increase of 0.4% in building construction prices, contributing to a 4.3% annual rise. Shortage of skilled tradespeople remains the primary driver of increasing output prices.

Wage Price Index

The seasonally adjusted Wage Price Index (WPI) for the construction industry grew by 1.1% in the September quarter of 2024 and 3.5% over the past year, equivalent to the national average of 3.5% annual growth. Wage pressures have been a significant contributor to the rise in the Construction Producer Price Index for output, further exacerbating overall construction cost increases.

Building approvals

In December 2024, total dwelling approvals increased by 0.7% monthly and 12.2% annually, while private sector house approvals fell by 3.0%. In contrast, approvals for non-house dwellings (e.g., apartments) surged by 15.2%, indicating a shift toward higher density living.

The decline in house approvals reflects a cautious market influenced by economic uncertainties and higher financing costs. Without targeted measures to boost private residential construction, achieving the national target of 1.2 million new homes by 2030 appears increasingly unlikely.

Conclusion

The months ahead will be shaped by global trade negotiations, domestic politics and broader macroeconomic forces – factors beyond the control of industry players. While headlines may amplify uncertainty, the fundamentals of supply and demand will continue to influence construction costs and budget bottom lines. 

Source: Altus Group’s Australian Construction Material Price Outlook for Q4 2024