This latest list of projects included in our forecasts corresponds with the fully revised set of forecasts published in November 2019.
Our latest forecasts assess the implications for construction materials demand of the outlook for each segment of building and construction work. Demand for construction materials is mid-way through a large decline, caused largely by the continuing downturn in residential building, and negative impacts from the coronavirus. The main area of strength was non-residential building, but this segment is entering a decline that is expected to continue for a couple of years. However, road construction is starting to pick up which will help to increase construction materials demand going forward.
Utilities construction activity in Australia remains in the middle of quite a strong period of activity. This began with large increases in 2017 and 2018, driven by construction of the NBN and a boom in renewable energy investment, along with smaller upturns in water and gas pipeline work. Activity began to fall at the start of calendar 2019, however, and real declines in work done were recorded in the last two financial years; 2018/19 and 2019/20.
We now expect another leg to this period of stronger construction, however, with growth forecast for 2020/21 and 2021/22, prior to another downturn.
The most consequential development in the residential building sector over the past year has been the COVID-19 pandemic and the responses to it by governments, households and businesses. Residential building was in a downturn prior to the upheaval caused by COVID-19, but we now expect investment to fall further and recover slower, impacted by lower rates of population growth (as a result of near zero overseas migration) and elevated levels of unemployment. Government incentives such as HomeBuilder will bring forward some demand in the short term, but the conditions in the policy itself will limit its reach, and we don’t expect it to go far in offsetting the other forces at play.
In the overall residential building sector, we expect the number of dwelling starts to drop to around 141,000 in financial year 2020/21, down from an estimated 167,000 in 2019/20, and from a peak level of more than 230,000 in 2018. We anticipate most of this decline to occur in the attached dwelling segment, falling from 67,800 starts in 2019/20 to 52,600 in 2020/21, while detached houses fall from 99,400 to 88,400. Further ahead, we expect starts to remain flat in 2021/22, before lifting from the 2022/23 financial year.
Australia is in the middle of our biggest ever transport infrastructure boom, featuring:
- An unprecedented collection of big capital city projects (road and rail),
- A ramping-up of urban renewal, maintenance and improvement programs (including arterial road upgrades and level crossing removal programs), and
- A general improvement, on a less splashy scale, of regional works (including Inland Rail and ongoing, large scale upgrades on the Bruce, Pacific, and Princes Highways).
It is important to note that transport infrastructure is one of the areas of building & construction that is least impacted by the implications of COVID-19. This report provides a concise explanation of the nature and magnitude of the impacts in the various segments of transport-related construction. It also provides a fully revised set of forecasts, and corresponding project list, for all segments of transport infrastructure construction looking ahead ten years.
In the electricity, gas and water (EGW) sector, the outlook is for subdued cost inflation over the next few years. The inflationary environment in the Australian economy is expected to remain weak for a few years. The outbreak of Coronavirus (COVID-19) and the restrictions put in place to slow its spread have caused big shifts in the labour market. Some of this weakness is forecast to flow through to lower cost growth in the coming quarters.
It is important to note that there is likely to be only a small and short-term impact from COVID-19 on the utilities construction sector, in comparison to other construction sectors. A large proportion of construction work is government funded and much of the rest is undertaken by private sector owned utilities businesses, which should not be greatly affected by weaker demand during the pandemic.
Non-residential building went through a substantial boom in the value of work commenced from 2015/16 through to early 2020. The coinciding commencement of a large number of projects influenced the rise in work done, which saw total work done reach an all-time record high in 2018/19.
This boom has now come to an end. We expect a substantial contraction over the next two years, due to the impact of Coronavirus (COVID-19) on the construction sector. A sharp downturn was already expected to follow this boom, as a result of the completion of substantial new space, combined with an economy that was already showing signs of slowing, and weakening government revenues resulting from the residential property downturn. COVID-19 has brought forward this downturn by 6 to 12 months (depending on the sector and state), on our forecasts, and made it a much larger overall decline. We are forecasting total commencements to fall 17%, in real terms, in 2020/21, prior to a recovery in 2021/22.
The outlook for construction cost growth has changed markedly over the last six months, owing to the outbreak of COVID-19 and the restrictions put in place to slow its spread. Construction cost inflation was 2.4% in 2018/19, but we now expect it to come in at negative 0.2% in 2019/20, and around 0.7% in 2020/21. The drivers of this slowdown include:
- Lower commodity prices, particularly crude oil
- A downturn in construction activity, most notably residential and non-residential building
- A much weaker labour market
- A stabilisation of the Australian dollar
The COVID-19 pandemic has dramatically changed the outlook for building and construction activity. Whilst total construction is expected to fall over the next couple of years, not all segments are forecasted to decline, as the impacts of COVID-19 varies from segment to segment. The following recovery in total construction is expected to largely be driven by growth in residential building, oil & gas, mining, road and rail.
The metropolitan areas of Sydney and Melbourne plateaued in 2018/19 and we are expecting downturns in both regions over the next couple of years driven by the falling residential sector. However, we expect that both downturns will be softened by booming commercial building sectors and a number of large urban transport infrastructure projects (road and rail) in each city.
The Brisbane market was previously expected to be entering an upturn, but is now forecasted to fall the next couple of years. This is largely due to more dramatic declines in residential than previously expected.
Perth has declined over the past few years, mainly due to a big drop in residential building and a weak economy (related to the mining downturn). Transport projects and a small upturn in non-residential building should slow the decline in 2019/20. Following the trough, strong improvements in the residential sector are then expected to drive a recovery in total activity.
The resources-dominated Pilbara has seen enormous downturns in activity and big outflows of people but is expected to rebound reasonably strongly from 2020/21 and then plateau for most of the forecast period.