Australia’s construction sector may experience a contraction in activity this year as global uncertainty and higher interest rates and inflation affect demand, feasibility and profit margins, a new forecast suggests.

The Australian Construction Industry Forum has released the May 2026 edition of its semi-annual Australian Construction Market Report.

According to the report, the dollar value of construction work done throughout the nation is forecast to contract by 0.8 percent across calander 2026 to go from $358.5 billion in 2025 to $355.6 billion in 2026 (2023/24 constant prices).

According to the report:

  • The residential sector remains central to the industry’s outlook but has the greatest exposure to changes in household borrowing capacity and confidence. Higher interest rates are expected to slow growth in new houses and existing home renovations even as demand for housing remains underpinned by population growth and the continuing need to address Australia’s housing supply challenge. However, the recent momentum in multi-residential construction is expected to show greater resilience. This will be supported by public priorities, planning reform and the ongoing need for greater and more diverse housing supply.
  • For commercial and non-residential building, the outlook is mixed overall as activity is supported by high levels of investment in data centres, defence facilities, healthcare facilities and selected commercial projects but is being offset by weakness in offices, industrial facilities and retail and wholesale trade.
  • Some relief will be provided through infrastructure construction notwithstanding the completion of major transport projects as work continues electricity, pipeline, water and sewerage projects in order to support the clean energy transition and improve water security.

Nerida Conisbee, Chair of ACIF’s Construction Forecasting Council, said that the outlook has changed since the last report six months ago.

“Since the November 2025 report, the operating environment has shifted materially,” Conisbee said.

“What had looked like a cautiously managed soft landing has become a more difficult and volatile outlook.

“The surge in fuel prices, renewed inflationary pressure and the prospect of higher interest rates are expected to weigh heavily on demand, project feasibility and margins”.

“After solid growth in 2025, the May 2026 forecasts point to total building and construction work potentially moving backwards in 2026.”

ACIF Chief Forecaster Kerry Barwise said that the outlook is uncertain.

“There are many uncertainties in these forecasts,” Barwise said.

“The possibility of a prolonged conflict in Iran weighs heavily on the outlook for the building and construction industry, as it does for the economy at large.

“The forecasts reflect the knowledge that this industry is particularly exposed to the impact of changes in interest rates. This impacts on demand and on costs, compressing margins and placing more stress on an industry that already tops the industry count for insolvencies. It is also very difficult to assess the full impact of recent policy changes.

“Withdrawal of budget “tax expenditures”, such as negative gearing provisions in personal income taxation, may discourage investment in residential building, but it may also redirect investment into other asset classes, including commercial property, property trusts and managed funds. The increase in uncertainty is possibly the gravest threat. It is very difficult for buyers and sellers to anticipate all the myriad fundamentals that are shifting in the winds of change right now. It is hard to anticipate how this plays out, but higher costs and higher risk generally result in less investment and growth.”

The report highlights ongoing challenges in meeting national housing targets of delivering 1.2 million new homes over the five years to June 30 2029.

In its five-year forecast to June 30, ACIF says it expects that the number of new home completions will come in at just 961,000.

 

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