What are Costs looking like in QLD, NSW & VIC?

Source: Mitchell Brandtman - www.mitbrand.com 

14 January 2016

Key underlying factors for Australia in the medium term:


(Graph 1 – Current peak above previous pre-GFC peak; changing mix having different impacts on materials and labour)


(Graph 2 – Vic didn’t suffer the same GFC correction and NSW recovered strongly)

Confidence in the residential construction sector remains strong and increasing contractor and subcontractor work books are having upward pressure on margins and prices. In ‘hot’ markets, we are in a transition between a ‘competitive’ tender market and a ‘non-competitive’ market – the question is how long the transition will take and how stakeholders can best position themselves to take advantage of it.

Markets have absorbed new entrants and capacity is starting to shrink, leading to increased labour costs at a time when the volume of new and proposed stock is having a dampening effect on selling prices.

Material prices which have remained relatively flat over the last few years due to increased imports and economies of scale from ramped up production, are going to start to feel the pinch of the falling AUD.



(Graph 3 – the gap between the combined and the solid area indicates the contribution of the Gold Coast – this is now growing to pre-GFC levels, up from almost nil)

Key underlying factors for Queensland:

For the last 18 months we have been living on borrowed time and enjoying a low cost-growth environment despite indicators telling us it should be otherwise. Going back 12 months we forecast 3-5% growth across 2015 with a caveat that this could change dramatically when the Gold Coast market takes off. At that time the Gold Coast was operating at 20% of its peak capacity and was just starting to see an upswing in approvals. This trend has grown and with a number of $1B+ projects being talked about, it looks set to continue. The long line of utes clogging the M1 into Brisbane from 5am each morning has been keeping the heat out the Brisbane labour market, however this is about to change and that impact will be hard felt. For now, it is mainly the Gold Coast tradies who are swapping the long commute for a chance to catch a wave before work and happy to do so for similar money to what they would earn in Brisbane. However we are starting to hear reports of tradies being offered small premiums to work at the beach. If this takes hold we will end up in a pre-GFC situation with both Brisbane and GC markets operating at capacity and competing for labour.     

Tenders are getting less competitive and first choice builders are getting picky about the projects they compete for. This has been giving other contractors an opportunity to pick up work but they are doing so at higher preliminaries and more sustainable margins.

Broadly, the major banks are responding to APRA with tighter lending guidelines and reduced appetite for risk on new projects. However they are still lending if you know who to ask and have the right product. Talk to us if you need any advice. In the meantime, any slack is being taken up by smaller institutions and alternative funders – brokers are making their mark in the smaller deals.

Our cost forecast is two-tiered. At the larger end of town, which are exposed to EBA increases, and reduced competition for a smaller number of large contractors - increases upwards of 6% through to the end of 2016. For the rest of the market you should forecast 1% per quarter for a total of 4% throughout 2016. 

New South Wales


According to ACIF, NSW is in the enviable position of having the growth in Residential and non-residential construction exceeding the decline in Engineering Construction. This creates a situation where NSW will have net construction growth at a time when other States are in significant decline.

Residential approvals in NSW continue their strong growth driven by high demand in both houses and apartments. Outside of the greater Sydney area, Illawarra and Newcastle are both exceeding previous approval highs.

Civil projects including large residential sub-divisions on Sydney's outskirts continue to move ahead at a rapid pace. Key infrastructure projects will also put price pressure on the market in the next 1-2 years.

Illawarra is going strong with demand for good quality commercial tenancies and hotel accommodation, alongside a number of projects due to commence at the University in 2016. Various large multi-unit residential projects are underway in the Wollongong CBD, which has caused a squeeze on quality sub-contractors in this space.

The demand for residential apartments (in Wollongong CBD) and home and land packages in Illawarra fringe suburbs remain strong and will likely grow, this in turn will place upward pressure on labour and materials into 2017.

While there are localised signs that demand is starting to slow and clearance rates are down, pre-sales of new units and apartments are still strong and this is encouraging Developers to rapidly commit to new projects.

Using a printed cost guide for a generic cost per apartment is causing many novice developers grief. The change in product over this latest phase of the cycle is causing huge differences in cost per m2 with ranges touching on $1,600m2 - $5,000m2. While traditionally this has been explained away as the difference between owner occupier and investor stock; in the current market it more commonly reflects Developers needing to provide more high-end, upscale product on smaller tighter blocks and creating value for the higher selling prices. Developers are finding value in putting less units of a higher quality on a site rather than cramming in as many as possible; however this product can’t compare to what is being delivered at more traditional rates in the Western suburbs.  

This is creating a trade demand bubble, particularly in structural and finishing trades, and putting upward pressure on overall construction costs. Our forecast is for between 4-6% increases through to the end of 2016 depending on scale of project.



Key underlying factors for Victoria:

Residential construction remains strong but there are signs that the long run started pre-GFC is starting to taper off with growth forecasts slowing into 2017. While there remains talk of resi-bubbles, the growth in population, the demand for apartment living, and the growth of apartments in the inner ring rather than the CBD, will keep demand steady. The need to keep workbooks full will dampen potential cost rises.

Victoria’s Triple A credit rating along with long sustained residential construction and continued Government Investment to infrastructure continues to provide a consistent environment in which to operate. While EBA wage pressure is strong, the above National average growth over the last few years will keep a downward pressure on potential spikes.

While there remain strong numbers of projects under construction we are starting to see sites with approved DA’s on the market. Whether this is a sign of early profit taking, nerves, or a reflection of challenges in getting finance remains to be seen.

We are forecasting construction cost escalation of 3-4% through to the end of 2016.

This issue of Cost Solutions was written by Michael Ivey - Partner & CEO at Mitchell Brandtman.  



Mitchell Brandtman

T: 1800 808 289


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