B Invested

Why Has The Cost Of Building New Houses Gone Up?

Nathan Birch, co-founder of BInvested, looks into the tumultuous arena that is the Australian property market and explains why the cost of building new houses has increased.

Over the past few years, the cost of building and renovating has soared in Sydney and Melbourne – but it’s not the cost of raw materials that has pushed up prices. Tradespeople are charging more for their labour.
Why? It’s all about supply and demand.

The construction boom

Over the last 10 years in Sydney and Melbourne, there hasn’t been that much happening construction-wise – until now. Population growth, coupled with a severe housing shortage, has seen increased demand for housing.
This demand has sent house prices soaring and restricted supply to those who can afford it. It has also caused a construction boom, with multi-story complexes creeping up all over Sydney and Melbourne.

The construction drought of the last decade has turned into a torrential downpour – meaning decent tradies have so much work to choose from that they can turn down anything not worth their while.

Why would a tradesman do a household renovation if they can get big bucks working for a big developer?

How much more does it cost?

Bricklayers

Three years ago, it cost approximately 80 to 90 cents per brick to be laid. Now, the price of labour has gone up to around $1.50 per brick – despite the cost of bricks only increasing by about 20 per cent.

Renovations

Renovating a two bedroom unit in Sydney now costs around $30,000 – twice the price of only a few years ago.

Building a house

Three years ago, I was quoted $200,000 to build a new house. Now, the same company tells me they charge $300,000.

The challenge of finding a tradie

It is also a challenge just to find a tradesman. I recently needed a shed built, and I went with a professional shed-builder who quoted me $6,000 for the job.

It took about two weeks of me calling him with no response before I realised that, just like a crazy ex, I had no chance – he wasn’t interested. I ended up getting it built by a different company (who charged me $15,000).

What does this mean for property prices?

The good thing for investors and homeowners alike, is that all of this extra construction will increase the value of existing properties.

It’s simple – new dwellings cost more to buy than old ones. This prompts purchasers to buy existing properties, which increases demand. This pushes up the value of older properties – increasing the value of new ones. And the cycle continues…

To renovate or what?

It is wise not to renovate an investment property (unless absolutely necessary) until construction costs start to drop and you can be sure an increase in weekly rent will cover it.

Make sure you do your sums and don’t overcapitalise.

Buying land and building on it?

There are still opportunities to make money by buying cheap land and building on it. I recently purchased cheap land in Sydney’s north-western suburb, Kellyville, for $460,000.

If I can get a house built for $250,000 – $350,000, I’ll have an investment worth $1.2 million – that’s around $400,000 profit.