Building Costs

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EXPERT OBSERVER
Aussie businesses are operating under challenging conditions. Weaker sales and trading are restraining production and weighing on profit margins. A softening in demand is largely attributable to slowing economic activity in the lead up to the Federal election. But growth in producer prices remains subdued.
Cost pressures are continuing to build, however, and are mostly being absorbed by Aussie businesses. In fact, over the past two years, raw material and intermediate good prices have lifted by around 6 per cent, while final output prices have lifted by 3.5 per cent. Rising commodity prices, especially for crude oil, gas and iron ore have shown up in lifting input prices – particularly for the manufacturing sector – which experienced a contraction in activity earlier this year.
And Australian companies - especially in the services sector - are experiencing greater competition given the fact that consumers can buy goods whenever they want and wherever they are – domestically or from overseas.
The Aussie property market might be stabilising, but softness was evident prior to interest rate cuts and the Federal Election. Gaining access to credit was more difficult as bank lending standards were tightened. Builders reduced prices aggressively as budding home owners were discouraged from committing to new builds due to falling home prices. Costs fell by the most in Victoria, down 3.1 per cent over the year to June – the biggest annual decline in 6½ years. And over the year to June, Aussie housing costs fell by the most since June 1999.
Producer prices
The “final demand” component of producer prices (business inflation) rose by 0.4 per cent in the June quarter to stand 2.0 per cent higher than a year ago. Of final stage prices, domestic goods prices rose by 0.3 per cent (1.7 per cent annual), while import goods prices rose by 1.4 per cent in the quarter and by 3.8 per cent over the year.
According to the Australian Bureau of Statistics, the lift in final stage prices (excluding exports) was driven by increases in Petroleum refining and petroleum fuel manufacturing (up 11.7 per cent), “Other” transport equipment manufacturing (up 5.3 per cent) and Heavy and civil engineering construction (up 0.5 per cent).
Final stage prices increases were partly offset by falls in the prices received for “Other” agriculture (down 7.7 per cent), Electricity supply, gas supply, water supply, sewerage and drainage services (down 1.0 per cent) and Fishing (down 13.1 per cent).
Prices of intermediate goods were flat in the June quarter to stand 1.6 per cent higher over the year.
Preliminary stage materials rose by 0.2 per cent in the June quarter to be up 2.0 per cent over the year.
Manufacturing input prices rose by 2.2 per cent in the June quarter due to an increase in Oil and gas extraction (up 7.1 per cent), Metal ore mining manufacturing (up 5.9 per cent) and Agriculture to manufacturing (up 3.1 per cent) prices. Output prices rose by 1.0 per cent in the June quarter due primarily to a lift in Petroleum refining &amp; petroleum fuel manufacturing (up 9.3 per cent) prices. Output prices are up 3.0 per cent over the year with inputs up 3.9 per cent.
House construction input costs rose by 0.2 per cent in the June quarter to be up 1.8 per cent over the year – near the slowest annual pace in five years. Electrical equipment prices rose the most (up 6.1 per cent), followed by “Other” materials (up 2.5 per cent), timber, board &amp; joinery (up 1.2 per cent) and “Other” metal products (up 1.2 per cent).
House construction output prices fell by 0.5 per cent June the June quarter to be down 0.7 per cent over the year – the weakest annual growth rate in 20 years.
Building construction output prices rose by 0.4 per cent in the June quarter to be up 1.4 per cent over the year – the slowest annual growth rate in 3 years. Queensland building construction prices fell by 0.1 per cent over the year to June – the slowest pace in 7 years.
“Other” residential (apartments) building construction rose by 0.9 per cent in the June quarter and lifted by 2.7 per cent over the year to June.
Heavy and civil engineering costs lifted by 0.5 per cent in the June quarter to be up 3.0 per cent over the year.
Commercial building output prices rose by 0.8 per cent in the June quarter to be up 2.3 per cent over the year.
What are the implications for interest rates and investors?
Aussie business continues to absorb higher costs. The good news is that the cost increases have slowed. The hope is that businesses may get in a position where they can direct more dollars the way of their employees.
The Reserve Bank is expected to sit back for a few months before deciding the next move on rates.
RYAN FELSMAN is a Senior Economist for CommSec
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Cost of building a house posts biggest slide in 20 years: CommSec's Ryan Felsman

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Construction costs in Brisbane are 30 to 40% above Sydney and Melbourne, and have spun out of control, says developer Tim Gurner.
According to him, despite a firm market, high construction costs are holding back development in Brisbane.
This despite the concerns of an oversupply of apartments in Brisbane and some builders selling at discounts. 
Ahead of a topping out ceremony for the $600 million FV twin towers in Brisbane’s Fortitude Valley, Gurner told The Australian that “it is not the market that is the problem, it is that construction prices are totally out of control”. 
“There have been a huge number of projects in Brisbane that will not get off the ground, not necessarily through the fault of the developer,” he said. 
“No one would have expected construction ­prices to rise 45%, it is unheard of.”
Gurner, who has built more than 5,500 apartments in Victoria and Queensland, said the second stage of FV had construction costs 45% higher than the first, the twin towers Flatiron and Valley House. 
The third building is currently under construction.
Quantity surveyor BMT also said in a recent report that Brisbane construction costs were up to 15% higher than Sydney.
Valuation firm Herron Todd White recently noted that units in Brisbane are in a declining market.
Meanwhile, Metro Property Development recently sold an apartment development site in Manning Street for a huge 35% discount after buying it for $20 million just two years back.  
Brisbane’s off-the-plan apartment sales have been in decline throughout 2016, plunging 37% in the last quarter according to Urbis. Supply of new stock and approvals have reached their lowest level since 2014.
Gurner said the slowdown showed the market regulating itself, as well as the restrictions from the major banks that had dried up funding for Brisbane developments.
FV was underwritten by ANZ, initially for the joint venture with Gurner and Singapore-based Thakral. 
“Although I don’t believe there is an oversupply in Brisbane, and in two years’ time we will be saying there is an undersupply again, if the momentum had continued it would have been a problem,” he said.
“We sold 980 apartments in about 12 weeks and that’s pretty fast. If that momentum did continue for three to five years, I think there could have potentially been a problem.”
Gurner was there to celebrate construction of the complex reaching its 30-storey peak for the 651-apartment towers. 
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High building costs in Brisbane holding back development: Tim Gurner 

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Shrinking lot sizes and rising building costs are not only forcing house hunters in Sydney to shop around for the best deals, they are also making developers come up with homes that promise “more for less”.
The newest offering is in Sydney’s south west, where Metricon Homes has partnered with Dahua to launched the Maza design (Maza) in the $1 billion development New Breeze.
Maza is a compact two-storey home available in either 24 or 26 squares and designed for small land lots. Several builders are also offering similar designs in New Breeze which focus on offering home buyers large homes on lots from 200 sqm.
New Breeze will comprise 1,280 homes with a range of housing types to suit all lifestyles and budgets.
Jesse Johnson, sales manager for New Breeze said, “We have a broad range of purchasers in New Breeze ranging from first home buyers, upsizers, downsizers and investors.” 
“Purchasers are requesting bigger houses on smaller lots which drove the decision to launch Maza… we are already receiving strong enquiry for this housing solution from a mix of buyers.”
Lot sizes in New Breeze range from 250 sqm to more than 647 sqm with prices starting from $330,000 to $670,000. All of the lots are easy build and include NBN access, according to the media release.
Maza homes are priced from $266,800. These four-bed double storey homes feature frontages up to 10 metres. A fifth bedroom option is also available downstairs. 
Other features include open plan alfresco spaces, large family/theatre room, butler’s pantry, large bedrooms and balcony options.
Construction started in July 2016 and the houses are expected to be built from mid 2017.  
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2016/09/23/Dahua2.jpg" alt="">
Metricon’s design director, Adrian Popple, added, “New Breeze is one of the fastest growing communities in Sydney’s South West growth corridor which is also a significant growth area for Metricon. It made smart business sense to work with Dahua who is emerging as one of the biggest developers in the South West. 
“The Maza presents a really smart design solution, fitting a large amount of accommodation into a compact block, whilst still offering a sense of light and spaciousness.” 
New Breeze will comprise parks and playgrounds, a sports oval, bike and cycle paths and 40 hectares of open spaces for recreational activities.
It is close to Bardia Public School and Edmondson Park Train Station. 
For more information, <a href="https://www.newbreeze.com.au" target="_blank">click here</a>.
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