Residential construction in Australia is at a crossroads.
Amid the nation's continued housing shortage, easing inflation and a dip in building material prices have offered a glimmer of optimism for would-be home builders. But a persistent lack of skilled labor might be hindering opportunities to capitalize off the current market dynamics.
"We are seeing some easing in the pricing of the construction of new homes. This could be a signal that capacity constraints in that sector are easing a little bit," Adelaide Timbrell, senior economist at ANZ, told Australian Broker. "Although labor constraints are going to continue."
Some signs of hope include inflation, which hit a three-year low during 2025's first quarter, as measured by the consumer price index (CPI). The nation's trimmed mean inflation fell to 2.9%, well within the Reserve Bank of Australia's (RBA) target inflationary ban. That's good news for property owners and investors, many of whom are expecting the central bank to chop a few percentage points off the official cash rate (OCR) at the bank's upcoming May meeting.
The RBA held off reducing the rate at its April meeting, instead opting to hold the current 4.10% OCR. The bank previously said it wouldn't adjust rates until inflation was within its target range.
Also on the downtick are home construction costs, which rose just 0.4% during Q1. That's the lowest quarterly increase in residential construction costs since March 2010, according to CoreLogic's Cordell Construction Cost Index (CCCI). Annually, construction costs grew just 2.9%, in the 12 months leading up to March 2025, down from 3.4% the year before.
Any easing of inflationary pressures is welcome news to the construction industry.
But Tim Lawless, CoreLogic Asia Pacific head of research, pointed out that while expensive construction costs are becoming less so, prices are still coming off an already high base. In fact, prices surged more than 31% at the start of COVID-19, which Lawless said has since "created ongoing liquidity and feasibility challenges for builders."
Timbrell added that "there's a lot of demand for infrastructure work in Australia at the moment, which takes some of the resources in labor that would otherwise potentially be in the private sector."
Australia's tight labor market is evident in nearly every sector. The current unemployment rate stands at 4.10%, although some economists forecast a slight increase in the back half of the year. But the problem is even more pronounced among tradies.
Nonprofit organization Master Builders Australia estimates that an additional 130,000 workers are needed to meet the nation's target of 1.2 million new homes by mid-2029. The Housing Industry Association (HIA) has also pointed out the need for an additional 83,000 skilled workers — a 30% jump on current employment levels — to meet the housing goals. And the numbers are only exacerbated by a mix of fewer apprenticeships and more tradespeople retiring.
That means tradies are in demand — and they don't come cheap. Higher labor costs makes it challenging for developers and single-occupant owners alike to undertake new residential projects.
There are other knock-off effects too, including project delays, reduced capacity for new builds and quality concerns.
In response, the government has announced a series of initiatives in an effort to boost the construction workforce. These include increased funding for vocational education and apprenticeship programs, streamlined immigration processes to attract more tradespeople from abroad and initiatives that appeal to younger people entering trade-related jobs. But these measures take time.
Meanwhile, lenders, both traditional and non-banks, are eager to capitalize off the moment. Brighten, Orde Financial and National Australia Bank (NAB) have all reported increased demand for residential construction loans in the past year. Commonwealth Bank (CBA) recently revealed that starting this month, the bank will increase its maximum construction loan-to-value ratio.
Baber Zaka, CBA general manager of third-party distribution, said the updated loan policies are meant to help more Australians achieve their goals of homeownership.
"Broadening our construction loan policy will help brokers to have discussions with customers who are interested in building their homes, while also helping our brokers to expand their portfolios and grow their businesses," he said.
Timbrell described the situation as a bit of a "feedback loop."
"When construction costs are going down, it tends to be that there's more capacity constraints," she said. "When you can't find labor and you can't find materials, everyone is competing for those materials, which means the prices are going up. When the prices are going down, it's like a sign that there's less competition for those resources. The less people want to do something, the cheaper it is, which means the more attractive it is, which means more people do it. And then that's kind of how prices become stable over time."
