Will Rising Interest Rates and CGT Changes Push Construction Costs Up or Down?
Three forces are now converging on the Sydney building market: the highest interest rates in well over a decade, a major rewrite of capital gains tax, and household cost of living pressure that shows no sign of easing. Anyone planning a new home, renovation or small development is asking the same question. Will building get cheaper or dearer? What is the relationship between construction costs and interest rates?
The short answer is that these forces pull in different directions. Softer demand can ease tender pricing, but the underlying cost of materials, labour and finance keeps rising. For most owners the net result is not a cheaper build. It is a build with more budget risk, which makes current cost advice more valuable, not less.
Where Things Stand
The Reserve Bank has raised the cash rate four times in 2026, reaching 4.85 per cent at the 3 November 2026 meeting, the highest level since 2011. Inflation has followed. The ABS reported CPI up 4.3 per cent in the 12 months to September 2026, and new dwelling prices rose 4.7 per cent over the same period as builders passed on higher materials and labour costs.
On the tax side, the May 2026 Federal Budget announced that the 50 per cent CGT discount will be replaced by cost base indexation and a 30 per cent minimum tax on net capital gains, with the new regime starting from 1 July 2027. Changes to negative gearing for residential property were announced at the same time.
Construction Costs and Interest Rates: Two Effects Pulling in Opposite Directions
The demand effect. Every 0.25 percentage point rise adds roughly $160 a month to repayments on a $1 million loan. As borrowing capacity shrinks, fewer owners and investors proceed with projects. National building approvals have been softening, and the Housing Industry Association has pointed to rising interest rates, fuel costs and tax changes feeding through to leading indicators. In Sydney, a thinner pipeline means more builders and subcontractors chasing fewer jobs, which tends to sharpen tender pricing for well documented projects.
The cost effect. Softer demand does not remove the cost of building. Materials, freight and labour have not stopped rising. Industry analysts have reported imported cement up around 15 per cent this year, and the ABS figure above shows builders are still passing costs through. That is why prices have kept climbing even as activity cools.
The finance effect on your own project. Construction loans are drawn progressively over the build, usually at a variable rate. If rates move during a 12 month build, the interest you pay can differ materially from what you modelled at the start. Developers and small investors carry same exposure through holding costs on land and work in progress.
Cost of Living Pressure
When inflation runs above 4 per cent, it reaches every input a builder buys. Trade wage claims follow living costs, fuel increases the cost of every material delivery, and energy-intensive products such as concrete, bricks and glass are exposed to higher power and freight costs.
It also changes client behaviour. Households under budget pressure are cutting scope, staging works, downgrading finishes or deferring projects. Those are all sensible responses, but they are best made deliberately through proper cost planning rather than forced on a project after tenders come back over budget.
What the CGT Changes Mean for Construction
The main residence exemption has not changed, so owner-occupiers building or renovating their own home are not directly affected. The changes primarily target individuals, trusts and partnerships holding investment assets. Two flow-on effects matter for construction.
Feasibility for investors and small developers. Duplex builds, knockdown rebuilds and renovate-and-sell projects all rely on a margin between total project cost and end value. When after-tax returns change, margins tighten, and the accuracy of the cost figure used in the feasibility becomes critical. A feasibility that assumed a build cost twelve months ago, before this year’s increases, may no longer stack up.
The cost base matters more. Indexation works off the cost base of an asset, which includes capital expenditure on construction and improvements. Evidence of what was actually spent building or renovating a property becomes more valuable. Where records are incomplete, a retrospective cost estimate prepared by a quantity surveyor can help establish construction costs for that purpose. CPP does not provide tax advice, so the treatment of any specific property should be confirmed with your accountant.
Details and transitional arrangements are still working their way through the legislative process, so check the current position with a tax professional before making decisions.
What This Means for Your Budget
Refresh any estimate more than six months old. Figures prepared before this year’s rate rises and cost movements are likely stale.
Model finance at a higher rate than today. Build a buffer for further increases during construction, not just at settlement.
Hold a realistic contingency. Uncertainty is higher than it was, particularly for renovations and complex sites.
Read the contract for escalation clauses. Understand whether your price is genuinely fixed or can be adjusted for cost movements.
Check the builder, not just the price. In a tightening cycle, builders with thin margins and fewer jobs are under more pressure, so the cheapest tender is not always the safest.
Time the tender. Fully documented projects tend to attract the sharpest pricing when builders are looking for work.
Stress-test developer feasibilities. Use current build costs, current finance costs and a realistic sales assumption.
Get a Current, Independent Estimate
CPP Quantity Surveyors prepares independent construction cost estimates and feasibility cost advice for homeowners, architects and small developers across Sydney and Regional NSW. If you are planning a project and want a figure that reflects today’s market rather than last year’s, contact us to discuss your project or request a fee proposal.
By Gary Uys, FAIQS CQS, Director - CPP Quantity Surveyors
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