Australia’s inflation rate has surged to the highest levels since the early 1990’s driven by record consumer spending, steeply rising oil prices and significantly higher home building costs.
The ABS reported that annual inflation increased by 6.1% over the June quarter with new dwelling purchases, fuel and furniture the most significant contributors to sharply rising prices. New dwelling prices as measured by the ABS (houses only) increased by a record 20.3% over the year ending the June 2022 quarter.
Surging house building costs reflect the impact of the previous governments HomeBuilder policy that provided a grant to eligible applicants to construct a new home, and designed as a stimulus initiative to offset the negative economic influences of covid. Demand generated by the HomeBuilder policy however far outstripped supply capacity and created severe shortages of labour and materials resulting in the unprecedented cost increases.
According to the My Housing Market National House Building Cost Index, quarterly costs increased sharply from June 2021, with the annual rate of growth peaking at 24.3% over the April quarter 2022. However, we are now seeing the rate of building cost growth slow for 3 consecutive months in a row, and more is likely to follow.
Good news for the inflationary outlook (according to the Index), is with the rate of house building cost increases falling over the past two quarters, there are clear signs of possible longer-term easing of price pressures. As this unfolds in the coming months we should start to see further declines in Australia’s inflation rate, which will restore consumer confidence.
Although annual house building costs are still rising strongly, the recent decline in quarterly growth levels indicates that the construction boom driven by last year’s HomeBuilder is gradually being absorbed by the industry. Building approvals for houses have declined dramatically since the conclusion of HomeBuilder and have stagnated recently just above pre-covid levels, with supply now set to match demand over the medium-term.
Recently higher interest rates will also act to moderate demand for new housing, again acting to moderate current building cost pressures. All state capitals have reported strongly rising house building costs over the past year according to the Index, with Melbourne reporting the highest increase, rising by 25.7%.
Sydney however has the highest home building costs – higher by 12.7% compared to Melbourne, and 26.9% higher than Brisbane.
Melbourne and Sydney however recorded declines in home building costs over the July quarter falling by 1.5% and 0.5% respectively compared to the previous quarter. All other capitals reported higher costs over the quarter.
Regardless Australia remains the lucky country with inflation set to remain well below the levels reported in other similar economies, with the likes of the UK and US some 3-4% higher than Australia’s rate of inflation as at August 2022.
Dr Andrew Wilson – Chief Economist My Housing Market
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