The historically close relationship between changes in construction activity and the cost of building will prove very interesting for many in the property industry during 2009 - with the cost of building looking to decrease further.
In prosperous times, an increase in construction activity leads the construction industry to draw down on resources, with the competitiveness of the tender market reduced. Builders, subcontractors and suppliers who compete for increasingly scarce resources, increase their margins as opportunities become more abundant.
Conversely, falling activity increases the competitiveness of the tender market as resources become more abundant. Builders, subcontractors and suppliers reduce margins as they compete for increasingly scarce opportunities. This was evident is the last few months of 2008.
A key example of this close relationship is the annual value of building approvals in Western Australia rose by 70% from January 2004 to December 2007. During the same period, according to the Rider Levett Bucknall Tender Price Index, the cost of building in Perth rose by 40%. The Consumer Price Index for Perth rose by 15% during the same period.
By contrast, over the same period - from January 2004 to December 2007 the annual value of building approvals in New South Wales rose by 12.5%, with the Rider Levett Bucknall Sydney Tender Price Index rising by 19.5% during the same period. The Sydney Consumer Price Index rose by just over 11%.
During the recession of the early 1990's, the cost of building was impacted by decreasing construction activity levels. In Victoria, the value of monthly building approvals fell by over 66% from the peak of May 1990 to the trough of April 1991. The cost of building in Melbourne, according to the Rider Levett Bucknall Tender Price Index, fell by over 9% between December 1990 and December 1992. The Melbourne Consumer Price Index rose by just over 1.5% during this 2-year period.
Dr. Andrew Wilson, Senior Economist at Rider Levett Bucknall commented, "Reduced building demand is expected to have an impact on construction cost increases in 2009."
"Building activity fell sharply in most states during 2008. In Victoria, the Australian Bureau of Statistics reported the value of building approvals recorded for November 2008 was 46% below that recorded for January 2008 and 10% below the levels recorded for November 2007. In line with expectations of reduced construction activity, Rider Levett Bucknall is forecasting a 0% increase in building costs for Melbourne in 2009," he said.
Rider Levett Bucknall found that another key area building activity levels impact is on the price of base building components such as bricks, steel, concrete and timber.
According to the Rider Levett Bucknall research, the cost of brickwork has fluctuated in Australia since 1982, although increasing by almost double the inflation rate over this period. In Perth and Sydney, brickwork costs fell during the recession of 1990 to 1992. Since 2003 however, brickwork costs have increased sharply in Perth and Brisbane coinciding with increased construction activity in those markets. Recently however, indications are that price increases are moderating in line with reduced building demand in most states.
For further information, contact Carly McIver on +61 2 9922 2277 or email carly.mciver@au.rlb.com