How much does it cost to build a new home in 2023?

Building a new house this year is likely to be more expensive than it would have been in 2022, but the good news is that costs are rising more slowly.

While the price of materials is generally falling from the heady heights reached during the pandemic and the supply chain is stabilising, the critical shortage of skilled labour, compounded by the collapse of a number of building companies, is keeping costs elevated.

“The rate of increases is slowing,” said Stephen Mee, managing director of quantity surveyors Rider Levett Bucknall (RLB). “Cost increases are now in line with long-term averages.”

“We’ve seen exponential rises in some costs, like shipping containers to bring large goods to site going up from $US2000 or $US3000 to $US10,000 or $US11,000, and steel and reinforcements and timber, but they’re now all easing. Labour is still a problem.”

RLB forecasts that house-building prices this year will rise by as little as 3.9 per cent in Sydney to as much as 7.5 per cent on the Gold Coast.

But the rate of price rises has halved in some cities as supply chain pressures subside and material cost escalation eases. Cost increases are expected to be smaller in the coming years.

How fast are building costs rising?
City	2022	2023 (forecast)	2024 (forecast)
Adelaide	12.5%	5%	3.7%
Brisbane	10.5%	5.1%	5.1%
Canberra	5%	4.5%	3.8%
Darwin	8%	5.5%	4.5%
Gold Coast	15.5%	7.5%	5%
Melbourne	8%	5%	3.5%
Perth	9.4%	5.6%	4.4%
Sydney	6.9%	4%	3.5%
Townsville	12.6%	8%	5%

Source: Tender Price Index, annual change (%) as at Q1 2023, Rider Levett Bucknall 1st Quarter 2023 Australia Report.

Mee says the challenges will continue to be persistent labour shortages – with government, union and political influences driving up the demand and cost of labour – climate change and bad weather, and more stringent financial requirements. 

In addition, the failure of a number of large building companies, like Porter Davis, have put the whole industry under pressure.

Tristan Angelini, the managing director of house builders and renovators Hillbrook, says such collapses have a snowball effect on all construction activity. “It then means a lot of sub-contractors have had heavy hits with not being paid, so they can be wary of other builders,” he said. “Some are now asking for a 20 per cent commitment up front, which can lead to difficulties with cash flow.

“With insolvencies increasing, especially among builders on fixed-price contracts who are walking off jobs and terminating contracts because the cost increases mean it’s not worth their while, those contracts are often now 30 per cent higher. They were signed before the escalation in costs and anyone finishing off their work has to engage engineers and consultants and warranty the work, and what if there’s a leak from earlier work not done properly?”

Latest figures from the Australian Bureau of Statistics (ABS) put the cost of building a house in February this year at $449,436, slightly higher than it was the month before, at $445,664. In February 2022, that figure was $391,937, and in February 2021 it stood at $319,261.

Those figures will obviously depend, however, on whether it’s a volume build or a bespoke home, as well as the size of the land, its location and the quality of finishes. 

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While price growth has eased, the shortage of timber remains a problem for the construction industry. Photo: iStock

RLB has also produced a new report on the price of a home-build per square metre based on different states, which identifies Brisbane as the most expensive city for home building, with the price ranging from $2500 to $4500. Sydney has a lower start price but a higher range, from $2100 to $6400, with Melbourne a more modest $2000 to $4300.

“Prices in Brisbane will remain strong because they have such a big pipeline of new health projects in Queensland, including 15 hospitals, and that pipeline will continue to the 2032 Olympics,” Mee said. “The link between the commercial and domestic markets is that they both use the same resource pool.”

How much it costs to build a home around Australia
City	Cost per square metre – single and double-storey dwellings
	Low	High
Adelaide	$1,740	$3,800
Brisbane	$2,500	$4,500
Canberra	$1,840	$3,650
Darwin	$1,900	$2,950
Melbourne	$2,000	$4,300
Perth	$2,200	$4,100
Sydney	$2,100	$6,400
Gold Coast	$1,600	$4,400
Source: Price range Q1 2023, Rider Levett Bucknall.

Houses, in addition, will take much longer to build than they would have done pre-pandemic, says Housing Industry Association chief economist Tim Reardon. Back then, it would generally take around seven months. “Now, it’s more than 12 months, but that’s about the same as last year,” he said.

“With the record-low interest rates previously, we had an elevated demand for housing. We have double the number of homes now under construction compared to before COVID. Supply chain disruptions also lengthened build times, as well as the acute shortage of labour.

“With the rises in the cash rate, we’ll see demand for homes come off, which will reduce pressure on land prices and slow down the increases in other costs.”

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Building costs are still going up, but not as quickly as last year. Photo: iStock

The major cost culprits are the price of timber – which Reardon says went up 25-30 per cent over the past year – and those materials with a high energy content, like aluminium, cement and glass. While steel is energy-intensive, and the price soared last year, the stabilisation of the supply chain, he believes, will offset the rising cost of that energy.

Megan Peacock, executive director policy of the Master Builders Association of Victoria, agrees. “The times for the delivery of materials had really blown out before,” she said. 

“At one stage, for instance, people were waiting four months for windows to be manufactured. Now it’s come back to about eight weeks. Everything is still taking longer than it did before COVID, but the wait times are shortening.”

Building approvals for new houses have also bounced slightly this year, going up 3.8 per cent from 2524 in January 2022 to 2620 in January this year, according to the ABS.

It’s all cause for optimism Peacock believes. “As interest rates settle down and inflation comes under control, the situation will improve,” she said. “And people will always aspire to build their own homes.”

Article source: Queensland Property Investor