Apr 29, 2022 | ,

Unprecedented escalation in Construction Market

Recently we reported a significant uptick in sales activity across off plan projects but remained cautious with respect to the construction industry. This month it is unfortunate to report that we are starting to see unprecedented construction cost escalation materialising significantly above expectations which is affecting the viability of a number of projects across Perth. Given the severe housing supply shortage, particularly in the rental and new apartment market this is the last thing Perth needs as it will further exacerbate the shortage of housing, placing significant upward pressure on prices. Positively, we are extremely fortunate to remain the most affordable capital city in Australia and therefore our incomes can support the continued lift in prices, even as interest rates rise. To date price escalation in the established house market has far outweighed the apartment market and this anomaly will need to correct.

There is no question build prices have had to rise after almost no escalation in pricing in the previous 10 years. Our Consultants and even Builders have been reporting cost escalations of between 30 – 35% over the past 12 months however price indications coming through this month are, in many cases, well in excess of this level of increase. Whilst everyone had factored in Covid, no one predicted the war in Ukraine and significant flooding on the Eastern seaboard. These two events further exacerbate costs with the Ukraine war impacting on freight charges and timber supplies out of Russia, amongst other things and the flooding on the East Coast requiring very significant rebuilding of communities which will keep tradies busy for many months meaning even open borders is unlikely to attract labour from the East Coast. We need the government to fast track visa applications and get labour in from overseas now. Where they will live whilst we build some more housing is a problem for another article!

So what does this mean? Well some projects will be unable to proceed in the current climate. Unfortunately The Terraces in Jolimont by Giorgi Group is one such project that has been taken off the market with end value pricing currently being well short of what was required to match the current construction costs. With some projects unable to proceed and the housing stimulus coming to an end, we expect some of the supply pressure to diminish and costs to stabilise or in fact retreat. At the same time end values must continue to rise. This will be aided by increased demand due to net migration returning to normal levels over the coming 2 years and an aging population looking to right size their housing having seen significant escalation in the price of their family home.

Projects that are able to proceed in the current market will have a significant competitive edge with housing supply coming into a very tight market. At Celsius we are working extremely hard with Elysian Subiaco and the Developers of Elia Como to ensure these two projects are able to commence construction in the near term.

Construction moves in cycles and whilst we are faced with unprecedented events impacting this market sector right now, this time will pass and the market will return to more normal conditions at some point in the future. In the meantime we are all in this together and the whole industry needs to support one another, working collaboratively to assist however we can.


All the very best,