6427.0 - Producer Price Indexes, Australia, Dec 2016 Quality Declaration 
ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 27/01/2017   
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The Australian Bureau of Statistics (ABS) collects, compiles and disseminates a range of economic, social and environment statistics. Data used to produce economic statistics are primarily obtained from Australian businesses. This process of data collection results in the ABS forming relationships with businesses. These relationships are utilised by the ABS to also obtain qualitative information to provide insights into the current economic conditions; and to support community understanding of published ABS statistics.

In addition, from time to time, the ABS undertakes targeted liaison activities with Australian businesses to better understand current economic conditions. Recent liaison activity has focused on the residential construction industry.


There has been considerable interest in the residential construction industry in recent years. The construction phase of the mining boom has peaked(footnote 1) ; residential property prices have increased strongly(footnote 2) ; and dwelling completions have been at record levels over the recent past(footnote 3) .

Over recent months, the ABS has conducted a liaison program with Project home builders, Property developers and Quantity surveyors. The discussions centred on the following five themes:

      1. The current state of the housing market and the medium term outlook;
      2. The setting of prices for houses and apartments, including the determination of margins;
      3. The pass through of input costs to final prices;
      4. Developments in the Labour market; and
      5. Innovation and productivity improvements in the Industry.


Current market conditions

ABS liaison found that the current condition of the new dwelling market varies across states and territories. Some respondents noted that competition in the new dwelling market was high, with bonus offers (e.g. the inclusion of free appliances; and upgrades to fixtures and fittings) being primarily used to attract sales.

The Sydney property market is strong. Sales of new detached dwellings are expected to remain strong in the medium term. A large number of new apartments are in the pipeline, either under construction or planned for construction in the next few years. Property developers expect sales of attached dwellings in Sydney to continue to be strong over the medium term.

The new dwelling market in Victoria was described by respondents as steady, with an expectation of a decline in attached dwelling sales over the medium term. Some respondents noted that competition in this market was high, with bonus offers being primarily used to attract new detached dwelling sales. Conversely, the Perth new dwelling market had experienced fairly sharp sales declines over the recent past. The reduction in construction activity associated with the mining industry was referenced by several Western Australian respondents as the point at which sales started to decline.

A number of respondents also noted that the market conditions for attached (i.e. apartments) and detached (i.e. project homes) dwelling markets were quite separate. Detached dwelling builders tend to be competing in the market for second and third home buyers. Moreover, apartments are also mostly concentrated in the inner cities while detached houses are generally located in the outer suburbs and so are not in direct competition.

Setting of final prices and margins by residential construction businesses

Residential construction businesses use long term contracts and hedging to limit the flow through of input cost increases to final prices(footnote 4) . Costs of materials are generally reviewed with suppliers annually, along with labour costs (including subcontractor rates). Of note, significant delays in construction times, primarily due to bad weather, impact margins and profitability.

Detached dwelling construction businesses target an average margin over a period, and these have been relatively stable over time. This target margin is achieved by maintaining a volume of sales. At times detached dwelling construction companies offer bonuses, upgrades or inclusions to maintain or increase sales.

For attached dwellings, margins are more flexible and move to reflect market conditions. For example, developers can reconfigure floor plans and inclusions in order to reflect demand, even after construction had commenced.

There are significant differences in materials and labour used to construct attached dwellings compared to detached dwellings. Attached dwellings (i.e. apartments) have significant costs on items including cranes, scaffolding, engineering services and other skilled labour. In addition, the planning and approvals process is significantly longer and more complex.

Pass through of input costs to final prices

Detached dwelling builders noted that pass through of increases to material and labour costs tended to take place gradually over time. Contracts with suppliers for periods up to 12 months provide some structure to the timing and size of final price increases. Short term changes in exchange rates have limited impact on final prices, in the short term, due to long term contracts or hedging strategies.

Labour costs have been relatively subdued, with builders noting that there has been a good supply of required labour and very little pressure on wage rates. For some Trades, particularly bricklayers, rates have increased dramatically over the recent period.

Overall, material cost increases have been relatively small in recent periods. For attached dwellings, respondents noted that pass through of costs tend to be smaller in comparison to the detached dwellings. This is due to a number of factors including: (i) the ability of the attached dwelling builders to enter into longer term contract which hedge against price increases; and (ii) an ability to negotiate significant discounts with their suppliers when ordering large quantities of materials, especially when they have a number of projects in progress at one time.

Developments in the labour market

Detached dwelling builders noted that sufficient labour is available to meet demand resulting in minimal pressure on wages and contractor rates. One of the factors keeping labour costs low is the degree of labour mobility. It was noted that tradesman frequently move between the regional and urban areas to undertake work. This degree of mobility occurs to a lesser extent with attached dwelling construction due to the specialised skills required.

In Perth, the availability of skilled tradesman previously employed on mining projects has increased labour supply, especially for attached dwelling construction. On the east coast, labour previously employed in mining construction has tended to move into the Heavy and Civil Engineering construction projects rather than residential construction.

Although labour costs have been subdued, a common theme across all attached and detached respondents was the shortage of skilled bricklayers. This has seen bricklayer rates increase significantly over the recent past.

Innovation and productivity

The shortage of bricklayers has resulted in some detached dwelling builders utilising alternate construction materials and methods, e.g. light-weight cladding. In an effort to reduce costs, some builders noted that they are outsourcing professional services, such as architectural services to countries including India.

For attached dwellings, builders prefer to utilise prefabricated products and building techniques, which may include pre-cast concrete and bathroom pods. These products and techniques reduce labour costs and improve build timeframes. These activities are designed to maintain or improve builder margins.


Inquiries relating to this article should be directed to Mr. Marcel van Kints, Program Manager, Prices Branch on (02) 6252 7785 or via email on prices.statistics@abs.gov.au.

1 Falls in actual expenditure (mining: buildings and structures - trend terms) have been prominent since December 2013. As published in 5625.0 Private New capital Expenditure and Expected Expenditure, Australia, June 2016. <back
2 Australian property prices have increased by 72.7% over the last ten years. As published in 6416.0 Residential Property Price Index: Weighted average of eight capital cities increased, June 2016. <back
3 8752.0 Building Activity, Australia, June 2016: No. of dwelling unit completions (total) recorded its highest level of completions in the history of the series and have been high since December 2014. <back
4 See section Pass through of input costs to final prices. <back