Construction costs rebound as builders warn confidence is faltering

Australia’s construction cost growth has returned to a more familiar pace, but the rebound is occurring against a backdrop of weakening confidence among home builders as higher interest rates and Federal Budget housing measures weigh on new home demand.

The latest Cordell Construction Cost Index (CCCI) from Cotality shows construction costs increased by 1.0 per cent nationally during the June quarter, rebounding sharply from the subdued 0.2 per cent increase recorded in the March quarter. Annually, construction costs rose 2.8 per cent over the 12 months to June, up from 2.3 per cent three months earlier, although still well below the rapid escalation experienced during the post-pandemic building boom.

Cotality’s Cordell Costings Estimation Manager, John Bennett, said the latest figures confirmed the earlier slowdown had been temporary rather than signalling the start of a prolonged easing cycle.

“The return to a 1.0 per cent quarterly increase brings cost escalation back to levels seen prior to the softer conditions seen at the start of 2026, highlighting the ongoing resilience of underlying construction cost pressures across the country,” Mr Bennett said.

While costs are once again rising at a steadier pace, Mr Bennett noted they remain well below the highs recorded during much of the post-pandemic period.

“Overall, the June quarter results indicate that construction cost escalation has returned to a more established growth pattern, albeit at rates that remain well below long-term historical averages.”

The rebound was evident across every major state.

New South Wales recorded the strongest quarterly increase at 1.1 per cent, while Queensland, South Australia and Western Australia each posted 1.0 per cent growth. Victoria remained the most subdued market at 0.9 per cent.

Despite the renewed momentum, Mr Bennett said longer-term trends continue to show a moderation in construction inflation.

“Looking at the longer-term trends, all states continue to track below their respective five-year average rates of cost growth.”

Nationally, cumulative construction cost growth over the past five years now sits at 29.5 per cent, down slightly from 30.1 per cent recorded in the previous quarter.

One of the more interesting findings was that widely anticipated increases in building material prices have yet to fully emerge despite ongoing global supply chain concerns.

Instead, Mr Bennett said suppliers appear to be adopting a cautious approach.

“Despite considerable media attention surrounding construction inflation and forecasts of rising building material costs, these pressures are not yet being fully reflected in observed material pricing,” he said.

“Instead, suppliers appear to be recovering costs through fuel levies, freight charges, logistics fees, and other surcharges, rather than implementing widespread price hikes.”

PVC and PEX pipe products were among the materials most affected during the quarter, while higher costs were also recorded for heavy plant, crane hire and associated machinery as the industry continued feeling the early impacts of supply chain disruptions linked to conflict in the Middle East.

“Right now, it’s a waiting game for suppliers, who are holding back on passing through the full force of cost increases until the global economy stabilises,” Mr Bennett said.

New home demand waning

While construction costs appear to be stabilising, demand for new homes is becoming a growing concern for the residential building sector.

The Housing Industry Association’s latest New Home Sales report found sales declined by 4.6 per cent in June, marking the second consecutive monthly fall as households became increasingly cautious in response to higher borrowing costs and uncertainty surrounding recent housing policy changes.

HIA Chief Economist Tim Reardon said the slowdown reflected confidence rather than underlying housing need.

“The recent decline in sales reflects households becoming more cautious in response to higher borrowing costs and increased uncertainty, rather than a reduction in Australia’s need for homes,” he said.

Although sales for the June quarter remained 4.6 per cent higher than a year earlier and were up 18.4 per cent across the full financial year, Reardon said the market had clearly lost momentum following the Federal Budget.

According to HIA, more than 80 per cent of builders now expect new home commencements to fall by at least five per cent, while half anticipate declines exceeding 10 per cent.

The industry also reported a 50 per cent increase in new home contract cancellations during June compared with the previous month, reflecting the impact of higher interest rates reducing borrowing capacity and finance approvals.

Mr Reardon warned that recent policy decisions restricting borrowing through some self-managed superannuation funds (SMSFs) could further weaken residential construction, estimating detached housing commencements alone could decline by between 3.5 and 5 per cent, with apartment construction potentially facing even greater impacts.

The contrasting reports paint a mixed picture for Australia’s residential construction sector.

Builders are no longer facing the extraordinary cost escalation that characterised the pandemic years, providing greater certainty around project pricing and feasibility.

If, however, buyer confidence continues to soften and fewer new homes commence construction, lower cost inflation alone may not be enough to support the industry’s longer-term pipeline.