Rising construction costs: What does it mean for first home buyers?

As new builds and renovations trend upwards in pace with HomeBuilder timelines, a national shortage of skilled labour and supply chain disruptions have created the perfect storm to fuel rising construction costs. 

The property analysts at CoreLogic this month recorded the largest quarterly increase in residential construction costs since the introduction of GST in 2000, amounting to a 3.8% rise in the three months to September. 

CoreLogic’s research director Tim Lawless said home build approvals peaked this March following the $25,000 cash grant incentives for new builds and renovations offered through the HomeBuilder scheme from June 2020. But the commencement of these builds continues to surge, especially in light of HomeBuilder construction deadlines being extended by 12 months in April.

“The quarterly rate of growth in construction costs is happening everywhere and is not restricted to one city or state, it’s a national trend,” Lawless said.

“For anyone who is looking to build or to renovate, or for someone who owns a business involved in the residential construction industry, it means they are all likely to be facing significantly higher costs.”

RELATED: Bank of Mum and Dad report 2021: Property boom puts parents under pressure.

Construction costs and First Home Owner Grant eligibility

While first home buyers have flocked to the property market in droves over the last 18 months of record-low home loan interest rates, it seems this enthusiasm is waning in the face of soaring property prices. The Australian Bureau of Statistics (ABS) recorded a 5.6% monthly drop in new loan commitments from August to September, which was an 11.4% year-on-year decrease. 

But what do ballooning construction costs mean for first home buyers still keen to get onto the homeownership ladder?

If you’re looking at buying an older dwelling that doesn’t require renovations, this obviously won’t mean much to you. For everyone else, it’ll mean higher building invoices for some time.

“This construction cost inflation could continue for another 12 to 18 months,” Lawless said. “It’s unlikely the industry can absorb a cost increase this significant into their margins and higher construction costs will ultimately be passed on to the consumer, placing further upwards pressure on the price of a new dwelling or renovation.”

It could also impact your eligibility for the First Home Owner Grant (FHOG). While criteria to access these lump-sum government grants differs between the states and territories (as does the dollar figure), it generally requires applicants to purchase a newly built home or renovate one under a certain price threshold.

For example, in NSW the $10,000 grant is only available on properties valued under $600,000 (or up to $750,000 when buying land to build your home). So, in theory, if the price to build that new home has risen substantially and the cost is passed onto the buyer so it exceeds this cap, you won’t be eligible for the FHOG.

Whether or not you qualify for the grant or other government support schemes, a good way to minimise the cost of a property purchase is to find a suitable home loan with a top interest rate. Check out some of the mortgage options below as a starting point for your research.