Valuations Market Update

Overview

Over the last 12 months, Australia has seen significant cost increases across almost all sectors of the economy. In particular, building construction has seen substantial price growth across most States, due to a broad range of factors including a tight labour market, input cost increases and increased demand on the back of government incentives.

The Aon Valuations team has put together the following information sourced from the last release by the Australian Bureau of Statistics, to highlight current cost movements in the Australian market and help understand how they can impact valuations at insurance renewal time.

Building Construction

Overall, building construction cost increases have remained above long-term averages over the last 12 months as demonstrated by the table below (based on Australian Bureau of Statistics (ABS) Producer Price Indices (PPI) data to March 2024).¹

These price increases have primarily been driven by skilled labour shortages, and this challenge to the Australian construction sector is unfortunately likely to get worse before it gets any better, with costs increases for the next 12 months predicted to be in the order of 4-6% for most States, up to a high of 7.5% for Queensland.²

There is some concern that higher construction costs driven by skilled labour shortages, higher financing costs, the continuing issue of insolvencies within the sector and the current pipeline of construction projects across Australia, could start to impact the viability of some private sector projects.

On a longer-term basis, we believe that Australia is likely to see a decrease in construction activity other than in some sectors particularly social and affordable housing.

Plant & Equipment

Like the building construction sector, the worst of plant and equipment price increases appear to now be over, however, average plant and equipment price increases across a range of sectors remain higher than the ABS published Consumer Price Index.³

Based on the ABS, Aon has compiled plant and equipment cost increases for the last 12 months for a range of industry sectors as follows:

The industry impacted the most over the last 12 months by plant and equipment price increases has been Mining, this is due to one component of our blended cost increase for this sector – a more than 10.75% cost increase in mining specific equipment. At the other end of the cost increase range are office and the education sectors, which benefited from negligible to no price increases for computer and IT related assets.

Revaluation

Cost movements, like the above are pivotal when calculating insured values because these costs directly impact the replacement and repair expenses in the event of a loss. If the insured values are not updated to reflect current costs, businesses may find themselves underinsured, which can lead to significant financial strain. Standard industry practice is for businesses to complete a revaluation every 3 years, to ensure sufficient coverage, alignment with real-world costs and mitigation from the risk of financial shortfalls after loss.

For a discussion around cost movements and how it might impact your business revaluation, please contact the relevant region contact:

• NSW: Amy Wadsworth
• QLD: Jack Ledlin
• VIC, TAS, ACT: Sarah Hyman
• SA: Nick Clarke
• WA: Mark Klenke

¹Australian Bureau of Statistics, Producer Price Indexes, March 2024 Reference Period, Table 17 Output of the Construction Industries, subdivision and class index numbers

²Rawlinsons April 2024 Market Insight, WT Partnership, Australian Construction Market Conditions Report May 2024, Rider Levett Bucknall, Construction Market Update Australia / New Zealand First Quarter 2024, Slattery National Market Update – Tackling uncertainty in a transitional year, March 2024

³Australian Bureau of Statistics, Producer Price Indexes, March 2024 Reference Period, Table 12 Output of the Manufacturing industries, division, subdividion, group and class index numbers