The supply of construction materials was found to have the biggest impact on the current surge in building costs.

A study by the National Housing Finance and Investment Corporation (NHFIC), which covers the 2022 fiscal year, said supply constraints have pushed the building materials and labour cost inflation to rise at its fastest pace in nearly 50 years.

Using the San Francisco Federal Reserve Bank model, the NHFIC found that 83% of the material costs inflation during the 2022 fiscal year was driven by supply constraints.

Supply contributes to 30% of price movements in other electrical equipment, waterproofing materials, plastic pipes, concrete tiles, and fibre cement products.

On the other hand, 15% of price changes in insulation, shower screens, mirrors and other glass, ceramic tiles, aluminium windows, and structural timber are supply driven.

“Cost pressures may persist even as higher interest rates slow demand,” the NHFIC said.

The current circumstances are starkly different than during the early stages of the pandemic, when the demand accounted for 75% of the cost inflation during the 2021 fiscal year.

Timber, metal, and ceramic products, which are the main materials used in residential construction, recorded a significant growth in cost over the past year.

Meanwhile, steel, which is used less intensively, reported the greatest price increase over the year at 42%.

Over the year, the costs of structural timber, plywood, steel reinforcement, and structural steel went up by more than a quarter.

“It’s too early to tell whether cost pressures have peaked, given the strong increase in products such as metal garage doors, timber doors and windows, insulation, structural timber, plywood and mirrors in the June quarter,” the NHFIC said.

Despite the supply constraints being the current driver of cost inflation, the NHFIC said the demand has a longer-term impact on prices.

“During the period of the analysis, four-quarter ended material cost growth averaged 2.7%, with 0.6ppts driven by supply issues and 1.0ppts due to demand,” it said.

Still, the duopolistic and oligopolistic nature of the industry would likely to increase the proportion of price movements due to supply.

Hardware is dominated by Bunnings while the plasterboard industry consists of BGC, CSR Gyprock, Etex (Siniat), Knauf, and Winstone Wallboards.

Similarly, only BlueScope Steel supplies rolled steel sheet, and only Liberty One Steel supplies structural steel and reinforcing steel for reinforced concrete.

Meanwhile, Hanson, Holcim, Boral, CSR Barro group, and Hy-tech are the main redi-mix concrete suppliers in different geographic markets.

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