When global energy prices rise, the impact can eventually reach much further than the petrol bowser.
For property investors, one of the most important transmission points is construction.
Fuel and energy costs are embedded throughout the building supply chain — from manufacturing materials to transporting them to site and operating equipment. When those costs increase, already-thin development margins can come under additional pressure.
The current Iran conflict and associated pressure on global energy markets have brought that relationship back into focus.
For investors in Canberra and the NSW South Coast, the bigger question isn't simply what happens to fuel prices next month. It's what persistently higher construction and replacement costs could mean for new housing supply, rents and established property values over the years ahead.
How Do Higher Energy Prices Affect Australian Construction Costs?
Building a home depends on a long and interconnected supply chain.
Materials must be manufactured. Products need to be transported between factories, distribution centres and construction sites. Tradespeople travel to projects. Heavy equipment needs fuel and energy.
As a result, higher energy costs can contribute to higher costs across areas including:
- Transport and freight
- Building materials
- Machinery and equipment
- Subcontractor and labour expenses
- Site preparation
- Overall project delivery
Energy isn't the only factor determining construction prices, of course. Labour availability, material shortages, regulation, financing costs and builder margins all matter.
But when several of these pressures occur simultaneously, the feasibility of new housing development can deteriorate quickly.
Why Construction Costs Don't Necessarily Return to Previous Levels
One of the most important concepts for property investors is the difference between cost inflation slowing down and costs actually falling.
Construction costs can stop increasing as quickly without returning to where they started.
Property analyst Michael Matusik has described this dynamic in the Matusik Missive, likening building cost movements to a staircase rather than a wave — each shock pushes the cost base higher, then it holds, until the next shock arrives.
That distinction matters because development feasibility is based on the current cost of delivering a property, not what it cost five years ago.
If land, construction, finance, professional fees and other expenses add up to more than the completed development is worth, developers have little incentive to proceed.
Rising Construction Costs Can Reduce New Housing Supply
Consider a simplified example.
Suppose a developer calculates that a project will cost $900,000 per dwelling to complete but the finished properties are expected to sell for only $850,000.
Building more homes doesn't solve the developer's problem. It simply increases the potential loss.
The logical response is to delay, redesign or cancel the project.
Across an entire market, this creates an important chain reaction:
Higher construction costs → weaker development feasibility → fewer viable projects → slower housing supply.
This is one reason construction costs matter even if you're buying an established property rather than building a new one.
Today's development feasibility can influence tomorrow's housing supply.
Why Housing Demand Doesn't Respond the Same Way
Supply can disappear surprisingly quickly when development stops stacking up financially.
Housing demand is more complicated.
People still need somewhere to live. When affordability becomes stretched, households may change how they satisfy that need — renting instead of buying, choosing a smaller home, living further from employment centres or sharing accommodation.
But the fundamental need for housing remains.
Australia has faced well-documented challenges in delivering sufficient housing to meet population and household demand, reflected in ABS building approvals data.
This means investors need to look at both sides of the equation.
It's not enough to find a market with population growth. The critical question is whether new housing supply can respond fast enough to that growth.
Why Replacement Cost Matters for Established Property
Higher construction costs can also influence the relative attractiveness of existing homes.
Imagine an established house can be purchased for substantially less than the cost of buying land and constructing an equivalent new dwelling nearby.
That replacement-cost gap can make established housing increasingly difficult to replicate at the same price.
It doesn't automatically mean the established property will increase in value. Interest rates, employment, credit availability, buyer confidence and local demand still matter.
But over time, rising replacement costs combined with constrained new supply can put upward pressure on the value of existing housing.
This dynamic can be particularly important in locations where land availability or planning constraints make new housing difficult to deliver.
What This Could Mean for Canberra Property Investors
Canberra is not one uniform property market.
Investors need to distinguish between established detached housing, townhouses, new land estates and apartment markets.
If higher construction costs make new projects less feasible, established properties in areas with limited competing supply may become increasingly difficult to replace.
However, investors should avoid assuming that construction inflation benefits every Canberra property equally.
A suburb with tightly held detached housing and limited developable land can behave very differently from an apartment precinct with a substantial development pipeline.
Investors should examine:
- Existing housing supply
- Approved and proposed developments
- Land availability
- Population and household growth
- Rental vacancy
- Employment accessibility
- Infrastructure
- The cost of comparable new construction
What About Property Investment on the NSW South Coast?
The NSW South Coast requires similarly localised analysis.
Wollongong, Shellharbour, Kiama, Nowra and smaller coastal communities can have very different supply-demand characteristics.
Some areas have geographic constraints that limit the amount of easily developable land. Others have opportunities for new estates, medium-density development or apartment construction.
Rising construction costs can make marginal projects in these markets harder to deliver.
For investors, that makes the future supply pipeline particularly important.
A market experiencing population growth isn't necessarily attractive if thousands of competing properties can easily be constructed. Conversely, a location with steady demand and genuine barriers to new supply may have stronger fundamentals.
How Government Housing Incentives Affect Demand
Construction costs are only one side of today's property equation.
Governments can simultaneously stimulate housing demand through first-home buyer programs, grants, guarantees, stamp-duty concessions and other policies.
Australia saw a particularly strong example during COVID through the HomeBuilder program.
HomeBuilder provided eligible owner-occupiers with grants for building new homes or substantially renovating existing properties. The program stimulated construction demand at a time when supply chains and the building industry were experiencing significant disruption.
This history matters because government support can increase purchasing capacity or buyer activity without necessarily solving the underlying problem of how quickly additional housing can be delivered.
Are Today's Conditions the Same as the COVID Property Boom?
No — and this distinction is important.
There are some parallels.
The COVID period involved substantial construction-cost increases, supply constraints and strong housing demand.
But the broader economic settings were unusual, including very low interest rates and extensive fiscal and monetary support.
Today's environment includes different pressures, including periods of higher borrowing costs and persistent inflation concerns.
That can produce short-term property market volatility even when longer-term supply constraints remain.
Investors shouldn't assume that rising construction costs automatically produce an immediate property boom.
Markets rarely move in straight lines.
Interest Rates Can Change the Short-Term Picture
Higher interest rates affect both developers and property buyers.
For developers, higher financing costs can further weaken project feasibility. For buyers and investors, higher mortgage repayments can reduce borrowing capacity and purchasing power.
This can produce a seemingly contradictory environment where housing is expensive to build but buyers are simultaneously constrained in what they can afford to pay.
That tension can persist for some time.
It helps explain why an undersupplied housing market doesn't necessarily translate into rapid price growth every year.
The supply-demand imbalance may be structurally supportive, while interest rates and credit conditions create shorter-term headwinds.
What Should Property Investors Look for?
Rather than simply assuming "construction costs are rising, therefore property prices will rise", investors can use construction costs as one component of a broader market assessment.
Three questions are particularly useful.
1. Is Demand Persistent?
Look for genuine drivers such as employment, household formation, population trends, rental demand and infrastructure — not simply recent price growth.
2. Is New Supply Difficult to Deliver?
Investigate development approvals, available land, construction feasibility, planning restrictions and the existing development pipeline.
3. What Would It Cost to Replace the Property?
Compare established property prices with the cost of land and equivalent new construction.
Where persistent demand, constrained supply and high replacement costs occur together, the long-term investment case can become considerably more interesting.
The Investor Takeaway
Global events such as the Iran conflict can feel far removed from a house in Canberra or an investment property on the NSW South Coast.
But energy markets, construction costs and housing supply are connected.
If higher input costs make development less viable, fewer new homes may reach the market. If housing demand remains resilient at the same time, competition for available properties can intensify.
Over the longer term, that can contribute to pressure on both rents and property values.
It won't happen evenly across Australia, and short-term movements will continue to be influenced by interest rates, credit conditions and local economic factors.
For investors, the opportunity is therefore not simply to "buy property because construction costs are rising."
It's to identify markets where replacement costs are rising, supply is genuinely difficult to expand and underlying housing demand remains strong.
That's where careful market selection becomes critical.
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About Aiden Haworth
Aiden Haworth is the founder of iStrategic, a property investing business focused on helping investors identify high-quality opportunities across Australia using data-driven market analysis and strategic insight.
Learn more about Aiden on the About Aiden page, or see the About iStrategic page for more on the team.
Financial Disclaimer
This content is for informational and educational purposes only and does not constitute financial, investment, tax or legal advice. Property investment involves risk, and past market behaviour is not a guarantee of future performance. Investors should consider their circumstances and seek appropriate professional advice before making investment decisions.
Frequently Asked Questions
1. Do rising construction costs cause Australian property prices to increase?
Not automatically. However, higher construction costs can make new developments financially unviable, reducing future housing supply. Where demand remains strong and supply is constrained, this can contribute to upward pressure on established property prices over time.
2. How do higher fuel and energy prices affect property investors?
Higher energy prices can increase manufacturing, freight and construction costs. If these costs make new housing more expensive to deliver, fewer projects may proceed, potentially tightening housing supply in markets where demand remains strong.
3. Why do higher construction costs affect established homes?
If it costs substantially more to build an equivalent new home than to buy an established one, existing housing becomes harder to replace at the same price. Combined with strong demand and limited supply, this can support established property values.
4. Could rising construction costs affect Canberra and NSW South Coast property prices?
Yes, but the effect will vary by location and property type. Investors should focus on areas where development is difficult, future supply is constrained and underlying housing demand remains strong rather than assuming every suburb will benefit.
5. What should investors look for in a supply-constrained property market?
Investors should assess population and household demand, rental vacancy, employment, land availability, planning constraints, construction costs and the future development pipeline. The strongest fundamentals often occur where persistent demand meets genuine barriers to additional housing supply.