How do supply and demand affect building material costs?

  • Economic stimuli, like the HomeBuilder program, have dramatically increased the demand for materials
  • This coincided with global supply disruptions
  • The price of materials has risen at its fastest rate since the 1970s

New data from the National Housing Finance and Investment Corporation (NHFIC) analyzed the impact of supply and demand market forces on building cost inflation during the pandemic.

where it all started

In the middle of March 2020, when the world really began to understand the seriousness of the pandemic, the federal government announced a wave of economic stimuli. This notably included the HomeBuilder program, which offered large grants to those building new homes or significantly renovating existing homes.

At various stages throughout 2021, this fiscal stimulus has gradually begun to be withdrawn, as have ultra-low interest rates.

The pandemic has also caused major disruptions to the global supply chain, which has impacted the supply of building materials to the construction industry.

The costs of building materials recorded their fastest rate of growth since the 1970s. The cost of labor also increased dramatically, although at a slower rate than that of materials.

Inflation of building materials and labor cost

Source – ABS, NHFIC

Over the past year, costs for lumber, plywood, reinforcing steel and structural steel have all increased by more than 25%.

The data shows that it is too early to tell whether cost pressures have peaked. During the June quarter, there were also strong increases in wood doors and windows, metal garage doors, insulation, structural lumber, mirrors and plywood.

Given that metal, wood and ceramic products are the main materials used in residential construction, each of these elements rose sharply during the year. Notably, steel recorded the largest increase (42%), but steel is used less intensively.

Weight of materials used in housing construction and inflation in Q2 2022

picture 3
Source – NHFIC, ABS

Approximately 83% of material cost inflation in fiscal year 2022 was due to supply constraints. This suggests that cost pressures could persist even as higher interest rates theoretically dampen demand.

In contrast, at the start of the pandemic, demand was the main driver of cost inflation, accounting for 75% of cost inflation in fiscal year 2021.

In the longer term, demand influenced price increases more than supply. During the period analyzed by the NHFIC, material cost growth averaged 2.7% per quarter, with 0.6 ppt due to supply issues and 1.00 ppt due to demand .

The remaining 1.1 points were in line with expectations.

Dominant players

The research noted that the structure of Australian industry is dominated by duopolies and oligopolies, which can lead to an increased proportion of supply-driven price movements.

For example, in the material, Bunnings is the major player. This was reinforced by the failure of Woolworths’ short-lived Masters business in the mid-2010s.

In the plasterboard sector, this is dominated by BGC, CSR, Gyprock, Etex (Siniat), Knauf and Winstone Wallboards. Only BlueScope Streel supplies rolled steel sheets and Liberty One Steel is the sole supplier of structural steel and reinforcing steel for reinforced concrete.

The main suppliers of redi-mix concrete (in different markets) are Hanson, Holcim, Boral, CSR Barro group and Hy-tech.

At least 30% of the price movements of other electrical equipment, sealing materials, plastic pipes, concrete tiles and fiber cement products are supply-driven.

Changes in the margin charged by developers and builders can be estimated using ABS data on labor and building material costs in the construction industry. The margin has increased sharply since mid-2021.

Home construction costs and homeowner’s purchase price

number 6
Source – ABS, NHFIC

About Jimmie T.

Check Also

OPINION: Despite anger, accusing grocers of ‘greed’ is pointless

Breadcrumb Links Columnists The notion of “greed” has emerged as one of the most discussed …