Building materials cost pressures are easing but rising wages are still driving up construction costs

Residential construction costs continued to moderate in the third quarter, dipping well below their 10 year average according to the Cordell Construction Cost Index, compiled by CoreLogic.

The Index monitors the cost to build a stand alone, three bedroom/two bathroom house, which increased by 0.5% in the September quarter of this year.

That was down from a 0.6% increase in both the March and June quarters, and was the lowest quarterly building cost increase since the fourth quarter (Q4) of 2020 when it was 0.4%.

That pushed the annual rate of increase down to 3.4% over the 12 months to September, well down from the annual peak of 10.4% in Q4 last year.

It also means annual building cost growth is now running well below the 10 year average of 4.5%.

The Cordell report said the industry had entered what it described as a "much more subdued phase for construction cost inflation," following an easing in the supply chain disruptions that occurred in 2021 and 2022, and the wider slowdown in new residential consents and actual construction workloads.

While the cost of many building components remained flat in the September quarter there were also scattered increases and decreases across both metal and timber products.

Much of the increase in costs had come from ongoing wage growth, with labour typically accounting for 40% to 50% of a project's total cost.

"Looking ahead, it seems likely that new dwelling consents will fall further and that actual construction workloads will also continue to moderate over the next... two to three years," the report said.

"This will keep some kind of restraint on construction costs too, as capacity in the industry slowly starts to open up again, although the migration flows (both in and out) of builders will need to be watched closely.

"On balance, it wouldn't it wouldn't be a surprise to see the quarterly rate of change in the Index continue in the vicinity of 0.5% for the next few quarters," the report said.

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