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High construction costs ‘not great’ for building new houses Popular Stories Latest Stories Related Stories

High construction costs ‘not great’ for building new houses Popular Stories Latest Stories Related Stories

Growth in construction costs could hit double digits this year as costs continue to rise at the fastest rate in almost four years, according to CoreLogic.

Last year alone, construction costs rose by 6.1 per cent.

The high costs are being driven by timber prices and record building consents, according to new data from CoreLogic’s Cordell Construction Cost Index.

With an already overheated housing market, expensive construction costs are expected to add further affordability challenges.

CoreLogic chief property economist Kelvin Davidson owed the increase to Covid-19 “tightening up that supply chain” and capacity restraints, as well as strong demand for housing encouraged by rules set out by the Government allowing investors to claim interest as a deductible expense and loan to value ratios encouraging new builds".

A loan-to-value ratio, or LVR, is the amount of money a person needs to borrow as a percentage of the total value of a property.

“It’s that perfect storm - if you want to call it that - of demand and supply,” Davidson told Breakfast.

Davidson said growth “really has accelerated in the past couple of years”, adding that while the Covid-19 pandemic is not the only factor involved, it is likely biggest.

He said he wouldn’t be surprised if growth rose to 10 per cent “because you speak to anybody in the industry - they’re so busy and materials are in short supply”.

“It looks to be like we’re on course for double-digit growth which yeah, not great for anybody wanting to build a house.”

It comes at a time where loan to value ratio rules favour lending for new builds, Davidson said.

High construction costs ‘not great’ for building new houses Popular Stories Latest Stories Related Stories

“Whether you’re an investor or an owner-occupier, you can get into a new build with a reduced deposit compared to if you were buying existing property so that does encourage it, as well as those tax rules which sort of push investors towards new builds too.

“There is a lot of Government incentive there to go the new build path. Just as costs rise, I think a few people will be turned off so there’s going to be a balancing act to be had.”

Davidson said the cost would not be the only factor turning potential buyers from new homes, with the need to borrow also making an impact.

“That debt is going to cost more, as well as the banks might look at your income expenses more closely, too," he said.

“It’s not just that it’s costing you more from the build perspective but it’s going to cost you more to finance it so there are a lot of pressures there coming on.”

He advised people to keep their sum insured - the maximum amount an insurance company will pay to rebuild their house should there be a total loss - up to date.

“People’s houses are insured for sum insured, not replacement value, so sum insured or the cost to rebuild is going up at 10 per cent annually, then you’ve got to make sure your sum insured is kept up to date.”

Davidson said growth "won't stay this high forever", adding that the supply chain "could reopen fairly quickly".

“We haven’t lost productive capacity - all it’s done is we’re taking longer to ship things and there’s not as much available.

“Once we get rid of Covid - hopefully, fingers crossed - then I think these supply chains could sort of reopen pretty quickly, gets that supply coming through again and I think at the same time, demand might start to tail off as well so this isn’t forever.

"Construction costs will slow but I think there is a bit more pressure in the short-term.”