Australian Construction Costs Rise, Testing Project Feasibility
Australian home-building costs rose by 1.0 per cent in the September quarter, lifting annual construction cost growth to 3.2 per cent, according to Cotality’s latest Cordell Construction Cost Index. It was the second consecutive quarterly increase of 1.0 per cent after the much softer 0.2 per cent rise recorded in March.
The pace remains well below the extreme increases seen during the pandemic-era building boom. Even so, the latest result matters because developers are absorbing the increase from an already elevated cost base while the benchmark cash rate is higher and housing prices have fallen in most capital cities.
Materials, freight and labour keep pressure on budgets
The September-quarter increase was linked to higher fuel and freight costs, with petroleum-based building products particularly exposed. Plastics increased broadly, while plasterboard and other materials transported over long distances also contributed. Skilled labour remains another pressure point, with major infrastructure and data-centre projects competing for plumbers, electricians and heating, ventilation and air-conditioning trades.
Western Australia recorded the fastest annual construction cost growth at 3.6 per cent, followed by South Australia at 3.5 per cent. These figures do not mean every project will experience the same increase. Location, design, procurement method, builder capacity, contractual arrangements and construction timing can produce materially different outcomes.
For a development feasibility, however, even a modest cost movement can have an outsized effect. A project may have been assessed using a fixed land value and forecast gross realisation value, while construction costs, professional fees, interest and selling time continue to move.
When contingency allowances are too small, a further cost increase can reduce the developer’s equity buffer and change the loan-to-cost position used by the lender. It may also affect the amount of undrawn funding available to complete the project.
Higher financing costs add another layer of pressure
The Reserve Bank of Australia increased the cash rate target by 25 basis points to 4.60 per cent on 29 September. In its decision, the RBA said housing prices had fallen in most capital cities and new housing loans had declined noticeably. That creates a difficult combination for developers: delivery costs are rising while buyer borrowing capacity and end-value assumptions may be under pressure.
The impact is not limited to the headline interest rate. Higher funding costs can increase capitalised interest, enlarge the required interest reserve and make delays more expensive. A project that remains profitable on paper may still encounter a liquidity gap if progress claims, cost overruns or sales settlements occur later than expected.
The RBA’s October Financial Stability Review also found that Australian private-credit funds are comparatively exposed to real estate, including construction and development. It said weaker investor appetite could affect the supply of new financing to real-estate construction, although the implications for the stability of the wider financial system would be limited.
Australia’s housing pipeline is improving but remains vulnerable
Recent housing-supply data presents a mixed picture. The Australian Bureau of Statistics reported that dwelling commencements rose 7.0 per cent in the June quarter to 52,201, while the value of total building work completed increased 1.1 per cent. Housing ministers subsequently reported a record 248,733 homes under construction and a 15.9 per cent annual increase in dwelling completions.
At the same time, total dwelling approvals fell 6.1 per cent in August, driven by a 21.2 per cent decline in private-sector dwellings excluding houses. UDIA National said approximately 355,820 homes had been completed during the first two years of the National Housing Accord—about 124,000 below the straight-line pace required to reach 1.2 million homes by June 2029.
UDIA also cited industry estimates suggesting that financing capacity for new projects and prospective buyers’ spending power had each declined by approximately 10 per cent. Those figures should be understood as industry estimates and advocacy commentary, rather than statistics independently reported by the ABS.
Government reforms may improve the medium-term position. Commonwealth, state and territory ministers agreed on 16 October to modernise the National Construction Code, reduce unnecessary regulatory burdens and support modern construction methods. They also highlighted a $2 billion Local Infrastructure Fund intended to unlock up to 65,000 homes over the coming decade.
These initiatives may improve productivity and land activation over time, but they do not remove the immediate requirement for each project to be commercially viable and adequately funded.
Developers should refresh the full capital plan
The latest construction cost data gives developers a reason to update—not simply reprint—an earlier feasibility. Current builder and supplier pricing should be obtained, the quantity surveyor’s cost-to-complete estimate reconciled, the remaining contingency tested and the approved facility checked against the revised construction program.
A practical internal stress test could examine the effect of another construction-cost increase, softer end values and a longer sales period. These are scenarios rather than forecasts, but they help establish whether the project can absorb adverse movements without relying on an uncommitted extension or future refinance.
Funding should also be reviewed as a complete capital stack. Senior construction debt may not cover the entire revised requirement. Depending on the project, the remaining gap could be addressed through additional sponsor equity, mezzanine finance, preferred equity or a joint-venture structure.
Each option changes pricing, control, security and profit participation. Maximum leverage should therefore not be treated as the automatic objective. The appropriate structure is the one that provides sufficient funding through construction, completion and repayment while preserving an acceptable risk margin.
Australian construction costs have not returned to pandemic-era growth rates, but the September figures indicate that assumptions made early in 2026 may already be stale. Projects supported by realistic costs, adequate contingency, committed funding and more than one credible exit strategy will be better positioned to proceed in a market where both construction delivery and finance remain selective.
Source attribution: Based on Cotality’s Cordell Construction Cost Index as reported by AAP on 21 October 2026, with supporting information from the Australian Bureau of Statistics, Reserve Bank of Australia, Australian Treasury and UDIA National.
