CoreLogic’s Cordell Housing Index Price (CHIP) report for the December quarter showed that construction costs rose by 0.4%, down slightly from 0.6% in Q3 and also the smallest quarterly rise since Q2 2016 (0.3%).

The annual rate of cost inflation also slowed, and at 3.0% was the lowest since Q4 2016, when it was 2.6%. For context, that figure topped out at 6.9% in the year to December 2017.

The CHIP report measures the rate of change of construction costs within the residential market and covers freestanding and semi-detached single and two storey dwelling homes.

In the latest CHIP Report, Kelvin Davidson, CoreLogic’s Senior Property Economist, says “The economy has continued to recover in the past few months and most sectors are expanding, apart from anything related to tourism such as accommodation and hospitality. Construction is certainly one of the areas that is seeing growth, although cost pressures did moderate a little in the fourth quarter of 2020.

“Unfortunately, it seems likely that this could mark the low-point for construction cost inflation in this mini-cycle. Indeed, the industry remains very busy – new dwelling consents have risen back above 38,000 on an annual basis, which is the highest since the mid-1970s and reports of capacity constraints (especially to do with finding new staff) are becoming more common. There are also delays in getting some materials, related to global supply chain and shipping problems.

“Meanwhile, work on consented alterations & additions is also running at the highest levels in 10-15 years, let alone any projects being done that don’t require consent. That just reinforces how busy the industry is.

“Therefore, it wouldn’t be a surprise if construction cost pressures pick up over the coming quarters, especially with the Government keen to increase the pipeline of new social housing coming on stream. Meanwhile, the lack of available listings of existing property for sale (alongside low mortgage interest rates) is likely to continue to encourage households to build a new home, and keep the pressure up on construction industry capacity.

“One potential constraint on demand to build new houses could be stringent attitudes from the banks towards mortgages for construction. However, there are few signs yet that this has become a problem, and with plenty of funding available to lenders, it seems fair to suggest that construction loan restrictions will emerge to any significant degree,” says Mr Davidson.