Quarterly rise in building expenses adds pressure to inflation outlook and housing targets
Australia’s construction costs rose 0.5% in the June quarter, according to the latest Cordell Construction Cost Index (CCCI) from Cotality, up slightly from the 0.4% increase recorded in the previous quarter.
The modest uptick comes as the Reserve Bank of Australia (RBA) faces renewed pressure on inflation, with the cost of new dwellings remaining a significant factor in the Consumer Price Index. The annual growth rate for construction costs reached 2.9% over the year to June 2025, compared to 2.6% in the previous 12 months.
“Growth in residential construction costs has increased a little compared to the previous quarter,” said Tim Lawless (pictured), research director at Cotality. “However, when compared to the long-term average, the increase is tracking at half the pre-pandemic decade average of 1.0%.”
“That being said, the reacceleration is likely to weigh on inflation outcomes with the cost of new dwellings comprising the largest weight in the CPI calculation.”
The RBA recently kept the cash rate steady at 3.85%, citing concerns about renewed growth in new dwelling costs. Governor Michele Bullock said some inflation components, especially home building costs, were “slightly stronger than expected,” contributing to the decision to hold rates.
Major banks are divided on the timing of future rate cuts. NAB and CommBank expect reductions in August, while Westpac has shifted its forecast to November. ANZ no longer anticipates further cuts this year.
Persistently high construction expenses are making it more difficult to meet the government’s target of building 1.2 million new homes by July 2029. “With the cost of building a new home continuing to rise, the stretch target of building 1.2 million new homes by July 2029 is looking harder and harder,” Lawless said. “Builders are struggling with feasibility assessments amid a combination of high material and labour costs.”
Competition for skilled trades remains strong, driven by record public infrastructure investment. Infrastructure Australia expects the gap between labour demand and supply to persist until at least mid-2028.
Lawless pointed out that this would likely keep upward pressure on building costs, particularly in the labour market. “Higher construction costs remain a key blocker for getting more desperately needed housing supply into the market,” he said. “High costs have eroded builder margins and contributed to the housing affordability crisis.”
Rising insurance costs are also a concern, as more expensive builds mean higher premiums for homeowners. “Given the 31% increase in residential building costs over the past five years, homeowners may need to consult with their insurer to make sure they are adequately insured,” Lawless said.
John Bennett, Cotality’s construction cost estimation manager, noted that the June quarter saw price rises in materials such as insulation and floor coverings, both up 2%. In contrast, heating and cooling products fell by just over 3%.
State-by-state, Western Australia posted the highest quarterly increase in construction costs at 0.7%, followed by Victoria at 0.6%. New South Wales and South Australia matched the national average with 0.5% growth, while Queensland recorded the smallest rise at 0.4%. All states remain below the pre-pandemic decade average of 1.0% for quarterly growth.
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