Spiking construction costs – what it means for the property market.

09 September 2021

One of the most common topics that has been popping up from my conversations with developers is the recent increase in the cost of building materials. In the last fortnight alone, I have come across 16 projects that have been shelved due to builders not committing to a build price, due to the uncertainty around the cost of materials. A global boom in construction and the resultant bottlenecks in the supply chain has seen container shipping rates triple or quadruple since the beginning of the year. A quick look at just about any freight index will show you just how expensive it has gotten to send a 40ft container from one end of the world to another.

Drewry’s world container index indicates that shipping costs have increased 344% over the past 12 months.

Similarly, the Baltic Dry Index has increased from 1347 to 3707 over the past 12 months.

This shipping crisis began in 2019, well before the coronavirus pandemic began. Shipping lines were poor investments at that time, highlighted by Danish shipper Maersk reporting a US $44million loss. The leasing companies that provided ships to shipping lines cancelled new builds to conserve cash.

This was exacerbated by the economic shutdowns when COVID hit. But the massive stimulus packages that followed – mainly from the debt-spiraling USA – created a significant boost as trade lanes opened amid the backdrop of a vessel shortage. This is evident in the US, where the demand for containerised freight has risen 40%. And as containerised freight runs hot across the world’s most popular trade routes, ships which ran from routes like Shanghai to Australia, New Zealand and South America are increasingly being diverted to the routes with the highest demand.

What does this mean for Australian property?

Unsurprisingly, this has seen a flow-on effect to the prices of containerised goods in Australia. Construction materials have seen hefty price increases with the cost of steel rebar increasing by around 250% since the beginning of COVID. There are also shortages in concrete and glass with the cost of concrete increasing by 15% and glazing forecasted to increase by 25%.

Overall, the cost of construction has reportedly increased by about 30%. Due to the long lead times in building container ships and the fact that every ship that can carry containers is currently being deployed, BIMCO doesn’t see any easing in the supply-demand crunch until mid-2022. On the supply side, new container ships are being built at a record pace and capacity is expected to increase by 5 to 6% in 2023.

For those who I have spoken to over the last 6 months, I have been saying that we probably have a 12 to 18 month window before we might need to get accustomed to paying close to $10,000 per square metre for apartments.

What does that mean? A typical 50m2 apartment in a middle-ring suburb is now range from $8,300-$9,000 per square metre. I’m sure you can do the math, but that’s an increase of around $85,000 for a one-bedder.

Right now is the best time to get into the market at pre-COVID rates.