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Construction activity remains upbeat, with more growth to follow over next four years
Pipeline of road and rail construction combines with big government health building programs to offset declines in housing construction
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After three years in decline, total construction work done began an upturn in 2021/22 with a modest 2% annual growth. Much of this was driven by the commencement of an extraordinary large pipeline in road and rail projects. The next wave of renewable energy construction then joined the surge in transport-related construction, lifting total construction activity to $244 billion or 6% growth over the year to 2022/23.
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Non-residential building has been steadily increasing over the last few years, with a surge in 2023/24 resulting largely from government funded hospitals. We have also seen growth in educational buildings, factories, warehouses and transport buildings. Meanwhile, transport infrastructure and electricity construction continue with their sharp rises. So for 2023/24, our forecasts indicate 6.6% annual growth, with total work done reaching $260 billion (in 2021/22 prices).
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So far the upswing cycle has been dominated by engineering construction. Residential building has undergone a large downward correction, spurred on by the end of the HomeBuilder scheme and rising interest rates. We believe the bottom of the cycle, in terms of the number dwellings commenced and approved, will be reached by June this year. Dwelling construction should start to strongly contribute to overall construction growth again from 2024/25, due to pent up demand from high immigration and falling in interest rates.
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Engineering construction takes centre stage
After several years of lacklustre growth, engineering construction rebounded strongly in 2022/23, with 13% annual growth. Largely in part due to:
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- A multi-year surge in road and rail infrastructure in the capital cities across the nation, which got started during 2021, and will build to a peak around 2026,
- Another wave of renewable energy construction supported by ambitious renewable energy targets, government commitments to achieving net-zero emissions by 2050, the development of renewable energy zones and investment in large-scale battery storage, and,
- Recovery in resources construction, driven by a focus on critical minerals investments.
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Transport infrastructure and electricity construction in particular, will remain elevated over the next three years, which should see total engineering construction reach a peak in 2025/26.
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Developments in non-residential building
Non-residential building has been increasing steadily over the past two years, reaching $51 billion in work done. However in 2023/24 we expect a strong uptick, with work done rising to peak of $59 billion, representing 15% annual growth. This spike is being largely driven by government work, mainly:
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- Hospital buildings funded from the government's earlier fiscal response to the pandemic, and
- Education construction reflecting an increase in university investment as international students return.
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Factories and warehouses are also on the rise, after many years of stagnation. The pandemic turbo-charged online commerce, which, in turn, triggered large changes in the logistics and industrial sectors. There has been a strong upswing in building of warehouses since 2022 and we forecast a further year of growth in 2024. This includes a trend towards multi-storey warehouses in urban areas. We are also currently seeing another spike in transport buildings as well, this coincides with the new Western Sydney Airport, with contribution also from new station elements of major rail projects underway across the nation.
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Governments are now facing budget pressures however, and this large investment in non-residential building has coincided with high cost inflation resulting in higher than expected project costs. Additionally, the slowing of the economy will result in weaker government revenue. As such, we forecast public sector commencements to fall from 2024/25. Following suit, overall non-residential building work done will enter a downswing cycle around the same time.
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Upcoming recovery in housing construction
The HomeBuilder scheme 'pulled forward' a considerable amount of demand that would have happened sometime in the future. This means a decline was inevitable after the end-date of the HomeBuilder program. And the decline was exacerbated by increases in interest rates starting in May 2022.
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In terms of dwellings commenced, we forecast a total decline of 28%, from a peak in calendar 2021 to a trough in calendar 2023.
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Interestingly, the value of work done has not followed the same cycle during this period. In the context of broader shortages and cost pressures in the domestic and international economies, we have seen a more protracted lag than usual from commencements through to work done. The chart below shows what the cycle in work done would have looked like under normal market conditions (the dashed line). Both dwelling approvals and commencements peaked in December Quarter of 2021, but residential building work done is not expected to pass its peak until December Quarter of 2024, three years later, as a result of this large backlog of work.
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After the current downward correction, we anticipate another large upturn in dwelling building, starting in late 2024. A key factor in the next upturn is the extraordinary strength of net overseas migration, which has significantly raised the demand for additional dwellings. Also, expected cuts in interest rates in the latter part of 2024 will support the next housing construction upturn. We expect a large increase, of more than 36%, in total dwelling starts between 2024 and 2027.
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The upshot of all of this means total construction work done will rise steadily, to a peak of $282 billion (in real prices), over the four years to 2027. After this time, we should see broad-based weakness across all segments of construction, weighing down overall construction activity as we get closer to the end of this decade.
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If your organisation requires help with construction sector forecasts or project cost escalation forecasts, please get in touch with us, at info@macromonitor.com.au.
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Our most recent reports:
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Australian Construction Outlook - Transport Infrastructure
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This report provides a detailed picture of the current upturn in infrastructure construction, including the timing of major projects, key drivers, and the expected timing of the peak and next downturn.
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Australian Construction Outlook - Overview
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The Overview report provides a summary of the construction sector in Australia. It contains the high level forecasts from Macromonitor’s reports on each of the sub-sectors of construction, adding up to total construction activity.
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Australian Construction Outlook - Non-Residential Building
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This report examines the current downturn underway in the non-residential building sector, describes its causes and forecasts the timing of the coming recovery, by sector and state.
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Australian Construction Outlook - Resources
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This report examines the outlook for all types of resources sector construction in Australia.
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Resources Sector Construction Costs Outlook
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This report examines the outlook for construction costs, in detail be sector and type of input.
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