Pressures in relation to prices and costs in Australia’s construction market are set to remain elevated until at least 2028, new forecasts suggest.

Unveiling the latest edition of its semi-annual Australian Construction Market Conditions Report, international cost management and advisory firm WT has provided three-year forecast for construction cost escalation across major capital and significant regional city markets.

It warns that cost growth will remain at elevated levels for at least the next three years.

Pressures are likely to ease only in 2028 as improving economic and construction conditions from 2026 onward support confidence from which to underpin the necessary investment that will deliver greater industry capacity and productivity.

“Our three-year base-case outlook includes a forecast of an average around 5.5 per cent 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,” says Damon Roast, WT’s construction economist.

“From a weighted national average of 4.8 per cent this year, we forecast escalation in infrastructure to move back around the 5.5 per cent mark to 2026, remaining above 5 per cent in 2027.”

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

“However, labour remains the most pivotal input to cost escalation, with the outcome of recent EBA negotiations in the larger states to underpin elevated wages growth until at least FY2027/28.”

“A return to the long-term escalation average heading back towards 3 per cent is possible from 2028, but this is contingent on the necessary investment in the sector’s capability coming through.

“A key opportunity to encourage investment in sector capacity would be for governments to develop a rigorous, legislated medium-to-long-term project pipeline.”

Speaking about the near-term outlook for the remainder of 2024 and into 2025, WT said that elevated levels of cost escalation will be driven by several factors.

These include:

• Busy conditions throughout the overall industry (notwithstanding a slowdown in residential commencements) as a strong project flow has led to near record levels of work under construction. This is placing ongoing pressure upon the sector’s resources.
• Record or near record levels of contractor insolvencies along with ongoing pressures on profit margins. Contractors and subcontractors have responded to this by being more selective about the projects for which they bid and building greater conservatism into their margins.
• Lingering supply chain pressures. Whilst material prices rises that originated out of COVID have now mostly subsided, cost pressures remain in several areas as freight costs jumped off a low base in 2024 and a global shortage of electrical components has persisted since the pandemic.
• Weakness in the broader economic landscape as sub-par economic performance has weighted on sentiment for sector investment since the early 2010s. This has impacted the capacity of the sector to deliver upon workloads.

Longer term, the forecasts suggest that pressures will remain high as mentioned above.

In its report, WT notes risks to its outlook on both the positive and negative side.

On the positive side, the rise of China as a sophisticated producer of electric vehicles and renewable energy equipment means that China could emerge as a source for further cost escalation relief for Australian’s construction sector.

On the negative side, housing which is needed to accommodate key construction workers remains difficult and costly to secure.

The latest forecasts come as Australia’s construction industry is expected to remain busy over coming years despite the recent slowdown in housing starts.

In its recent forecast, Australia Construction Industry Forum said that it expected overall levels of construction activity to remain elevated across the next two years.

This will happen as the focus of opportunities shifts away from the record pipeline of public road and rail projects and toward a massive increase in renewable energy investment as well as a strong pipeline of water developments.

In its report, WT provided a breakdown of likely escalation according to various locations.

In Brisbane and the Gold Coast, high levels of escalation are expected amid ongoing market tightness, a strong pipeline of work and a shortage of key trades.

This will have a flow on effect on Sydney and Melbourne as skilled workers head north to try their opportunities.

In Perth, meanwhile, elevated levels of price escalation (above 5 percent) are expected to continue as healthy market fundamentals continue to exacerbate difficulties in attracting and keeping labour and the new enterprise bargaining agreement adds to labour cost pressures.

Finally, high levels of escalation are expected in Cairns as a range of factors place pressure upon key trades.

These include a healthy recovery in tourism, rebuild from the impact of Cyclone Jasper, elevated levels of local government spending and strong market conditions in Townsville.

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