Construction Focus Predicted to Shift to Residential

Construction work is slowly edging up as the industry reaches the limits of its capacity and the cost of building continues to grow.

According to the ABS, total construction work done increased by 1.6 per cent during the September quarter.

This was driven by engineering work, which is expected to peak by the end of next year as residential work picks up from the lows of 2023.

Engineering work done was up 2.6 per cent in the quarter and by 6 per cent compared to the same time last year.

Building work rose  0.7 per cent for the quarter and 0.8 per cent compared to last year.

The value of building work for residential and total non-residential has also starting to even out, with residential improving from 2020 and 2022 blips and non-residential looking likely to plateau. 

Oxford Economics Australia economist Michael Dyer said the result was largely unchanged from a year ago.

“Capacity constraints continue to weigh on the flow of work and push back the conclusion of projects,” Dyer said.

“Trade labour shortages remain the key concern, and will likely place a speed limit on activity medium term.”

Dyer said the backlog of work was starting to clear up but was still running well above the long term average.

“This will offset the headwinds of higher interest rates, delays, and cost escalation on new dwelling demand,” Dyer said.

WT construction economist Damon Roast said while construction activity was at near record levels, they expected cost escalation to remain stubbornly elevated to 2027.

“Our base case outlook is for recovery in construction activity and the broader economy to become quite apparent by 2026,” Roast said.

“This would make the necessary and overdue increase in sector investment more attractive, likely paying dividends in the form of downward pressure on escalation from 2028.”

Investment in sector capability was required for changes in construction cost escalation but eventually this could shift according to WT’s Construction Market Conditions Report.

“Our three-year base-case outlook includes a forecast of an average around 5.5 per cent [cost increase] in 2024 across capital city markets for building, remaining above 5 per cent through 2026, despite a broader moderation in construction activity, before jumping to 5.7 per cent in 2027,” Roast said.