Another day, another sad story in the newspaper of a good builder going belly-up. The building industry is ruthless at the moment, slugged with price hikes, material shortages, wage hikes and trade shortages, all in one fell swoop. When just one increase occurs, it’s like an inconvenient storm that builders can weather. But when all combine simultaneously, it’s more like a tornado taking builders out with it.
Let’s take a look at why this is happening.
In the good old days, builders and designers could estimate project pricing without too much consideration for inflation. Based on stats released from the Australian Bureau of Statistics (ABS), the average quarterly increase in output prices for ‘House Construction Australia’ between 2016 and 2020 was 0.5%.
So, if you’d started designing in 2017 and then building in 2019, the inflation rate would only be about 2.0%. On a project worth $1M, that is a manageable increase of approximately $20k.
Fast forward to 2022, and the output rate is not nearly so kind or predictable. The first quarterly increase for 2022 alone was a staggering 4.9%.
The graph above demonstrates the quarterly increases since 2016. The vertical black line represents where we sit currently. The challenge now is forecasting where these increases are heading. I don’t foresee they could keep increasing, and certainly not at that rate. You will see my estimated trend on the right of the vertical black line. I predict rates will decrease in a similar vein to which they increased before settling at an average of 0.5% by mid-2023. But that’s just my guess.
So let’s take this information now and put it into a different graph. This graph reflects the incremental impact of those quarterly rate hikes. And again, the black line represents where we sit currently.
Based on my estimates, if you started designing in 2021 and were then looking to build in 2023, the estimated cost would be approx 30% more than initially anticipated. Therefore, if your project were budgeted to cost $1M, it’s much more likely to cost around $1.3M come construction time.
In Home Build Mentoring, we run an exercise where we estimate the start date for construction on your project. Once we know the start date, we factor in a ‘Start Date Inflation rate’, which brings us much closer to the actual cost of your project come construction time.
Home Build Mentoring is all about being in control of your project. So if you’d like to save a heap of time, money, and energy by getting your project right from the start, I’d love to help you get there.
