Should new home build prices be going down?

While you might have noticed that the price of some materials have dropped slightly, should you expect the price of new homes to come down? We explain why this is not the case.

Should prices be going down?

Undoubtedly you’d be aware that prices for homes went up drastically during COVID. Of course there were many reasons for this, mainly related to global pressures.

For example, with closed borders, raw materials couldn’t be brought into the country and transportation of materials was difficult even within Australia due to all the transport restrictions. While some prices, such as steel for example, may have come down recently, the overall reality is just not that simple.

When building a home, there are many costs that need to be factored in such as materials, labour, transport and overheads. So, even if the prices drop for a few components that are needed to build a house, all the other costs involved may still be going up or at least holding steady.

As one small example, even though there may have been a slight price drop in steel, other costs continue to rise, especially labour and transportation. As an example of prices going up, you might have noticed that fuel prices are still substantially high, and this affects the cost of transportation for materials.

Another classic case of upward pressure on costs is energy costs. The construction sector draws heavily on energy sources such as electricity to not only build the buildings, but for the manufacture of the raw materials such as aluminium and concrete. When you start to spread this cost across the many items in a home, it becomes quite extensive!

And while we’re talking about the manufacture of raw materials, bear in mind that all these businesses have their own costs to think of, including overheads. Many of these costs are continuing to rise for them, which in turn affects the building industry.

What this all means is that even though a few of the raw materials used for building may have dropped slightly in price, the other components haven’t, so although it would be nice, we really can’t expect prices on new homes to come down!

Inflation is still above the target.

If you’ve been following the news, you’ll know that inflation is currently sitting at around 4 per cent. This is still a fair way from the target of 2 to 3 per cent.

For example, a home that would have cost around $500,000 a year ago would now cost $525,000 at the current rate of inflation. So even if the cost of the steel, for example, came down by say $1,000, this would only reduce the overall price to $524,000.

So the reality is that the price of the home still went up by $24,000 over the course of a year even though some components have dropped in price!

As you can see from this example, a fair drop in price for just one component of a home doesn’t really have much effect on the overall price that you’re going to pay.

Labour costs continue to rise as shortages remain.

We mentioned labour costs earlier in this article – we think most people would be aware that costs associated with employing people is regularly creeping up, including things such as superannuation, insurance premiums and other on-costs.

It’s no secret that there has been and will continue to be, a noticeable shortage of labour in the construction industry. While migration has helped a little, this is not a problem that can easily be fixed overnight.

You’ll also find that even with bringing construction workers in from overseas, there’s the additional problem of finding housing for these workers as the current housing shortage crisis continues.

And because workers in the construction industry are in high demand, this has resulted in significant wage increases in some areas and certain situations. Plus many construction workers would be putting in extended hours which often results in penalty rates that need to be paid to these workers.

The good news is that price rises have slowed.

While you shouldn’t expect prices of new homes to come down, there is some good news.

What we are noticing is that price rises have slowed and are likely to continue to slow. This has seen many builders hold their current rates for longer than has been the case for a few years. But the reality is that there’s always going to be upward pressure on prices.

If you take a look back on house prices say 50 years ago, a house that now costs over half a million dollars would have cost well under $100,000 back then. This is the harsh reality that we’re faced with – prices will continue to rise both in the near and distant future.

According to an article in Australian Property Investor, building companies are still under pressure to maintain their margins, even with the recent price drop of some raw materials. Plus the constant rise of energy prices is putting a strain on construction costs and there’s no reprieve in sight in the foreseeable future.

With price rises slowing, now is the time to take action!

If you’ve been holding off having a new home built because you’re hoping that prices will come down, the truth is that this is just not going to happen. When you look at the bigger picture, it’s never happened in recorded history, and we don’t ever expect it to happen in the foreseeable future.

But as price rises have slowed and are predicted to hold steady (in other words, only slowly increase in price) in the foreseeable future, we’re seeing a lot of people take action now and lock in a new build at the current rates.

There are plenty of good reasons why you should make a move toward your new home sooner rather than later. While we can’t reliably predict what’s going to happen in the future, we can only take note of what’s happening right now and seize the current opportunities available.

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