Australia’s building construction sector will experience a boom in the second half of this decade, the latest forecast indicates.

But weak conditions will persist over the next twelve months.

And the number of housing completions is expected to fall well short of the national housing target.

Published by Oxford Economics, the Building in Australia report has provided detailed forecasts of commencement activity in residential and non-residential building construction over the next five years.

According to the report, the overall market is expected to contract by a further 1.3 percent in the current financial year.

This will take the dollar value of commencements across all sectors in building construction from an already decade low of $123.1 billion in 2023/24 to a new decade low of $121.4 billion in 2024/25 (all amounts quoted in 2021/22 constant dollar terms).

Beyond that, however, a significant upturn is expected to take hold beginning in 2025/26.

This will see overall commencement values increase by 39.4 percent to reach record levels of $169.4 billion in FY2029.

(Note, the report covers building construction work only. Work on civil projects in areas such as transport, energy and water is not considered.)

Timothy Hibbert, Head of Property & Building Forecasting at Oxford Economics Australia and author of the report, said that the outlook beyond the current financial year is encouraging.

“While we will continue to experience a dwelling stock deficiency, activity will inevitably recover in the residential sector,” Hibbert said.

“All build forms will contribute, driving total dwelling commencements to a new record level by the end of the decade. And a recovery in non-residential is due from 2026, led by hospital asset renewals and a strong pipeline of data centre builds.”

“All told, from a weakened base, national total building construction is forecast to climb 39 per cent over the four years to FY2029, reaching a record $169.3 billion (constant FY2022 prices).”

In its report, Oxford said that the market for residential building will remain subdued over the current financial year.

After bottoming out at decade lows of 155,300 in 2023/24, the number of new home commencements is expected to increase only marginally by two percent to come in at a still low level of 158,700 in 2024/25.

This is happening amid the impact of higher interest rates and as existing labour shortages place a ‘speed limit’ on the early to middle stage of the housing recovery.

From 2025/26, however, a strong recovery will take hold. This will eventually see dwelling commencements reach record levels of 241,900 by 2028/29.

Initially, the recovery will be focused on detached house construction.

Stronger activity in this area will be driven by pent-up housing demand along with a likely easing in monetary policy beginning in early 2025.

At the front of the pack is Western Australia, where levels of land sales and new home construction lending are already well up compared with those seen twelve months ago.

Next will be Queensland.

However, the two largest states of NSW and Victoria will take longer to recover. In these states, the effect of rising interest rates is particularly severe on account of the higher dwelling values (and thus higher mortgage values) which are evident in these states. Markets in these states have also been affected by negative interstate migration – partly as households seek more affordable housing in smaller states.

From 2025/26 onward, detached housing will be joined by a recovery in the multi-unit sector. Upward momentum in this sector will be driven by falling interest rates, the upward rebasing of rents, increased investment in social housing, the impact of planning reforms and further momentum in build-to-rent developments.

Despite this, Australia is still expected to fall short long-term national housing targets.

Over the five years to June 2029, Oxford expects the overall number of dwelling completions to total only 940,000.

This is 22 percent short of the 1.2 million completions where are envisioned under the National Housing Accord.

Further, the current housing shortage is unlikely to ease anytime soon.

As at June 2024, Oxford puts the overall national housing shortage at 146,000.

By June 2027, this is expected to reach 164,000.

Turning to commercial/non-residential building, Oxford forecasts that the dollar value of commencements will contract by a further 3.98 percent in the current financial year to come in at a historically subdued level of $48.901 billion in 2024/25.

At this level, the value of commencements is only marginally above previously low levels experienced during the early period of COVID.

Moreover, the degree of weakness in this sector is being obscured in dollar value terms on account of higher construction costs.

Strip out the effect of an almost 25 percent (24.4 percent) rise in non-residential construction costs over the three years to March and the actual amount of non-residential building work that is forecast to be done in 2024/25 would be well below anything else seen over the past ten years.

As with the residential sector, however, a recovery in non-residential activity is expected to take hold from 2025/26 onward.

This will see the dollar value of commencements reach $58.15 billion by 2028/29.

In terms of subsectors:

• Industrial and warehouse construction is set to be the largest sector by commencement value in 2023/24 on account of a surge in work that has taken place on account of strong demand. Whilst normalisation in this sector is expected to occur throughout the middle of the decade, activity is expected to remain at elevated levels – albeit with some part of this reflecting high construction costs which are associated with the emerging multi-storey logistics market in Sydney
• Strong activity is also expected in the ‘other commercial activity’ sector on account of strong growth in demand for data centres. A series of large campus style developments are expected to commence in coming years – particularly concentrated around Western Sydney.
• In a public sector, ongoing elevated levels of activity are expected in healthcare as major states are undertaking a period of hospital asset renewal with a number of $500 million plus developments. At the same time, population growth continues to place pressure on social infrastructure.
• Toward the end of the decade, activity will be strong on Olympic related works in entertainment buildings in Queensland.

On the negative side, the slide in office building construction is set to continue.

All up, Oxford expects the dollar value of commencements in this sector to decline by a cumulative 41 percent over the three years to 2025/26.

According to Oxford, conditions in the office market are being impacted by numerous headwinds. These include high levels of office vacancy along with uncertainty about future office space requirements amid the shift toward hybrid working and higher construction costs.

In this environment, large office developments have become increasingly risky and difficult to justify without a significant level of pre-commitment.

Similarly, the slide in activity in retail construction is expected to continue as conditions in this sector are impacted by ongoing pressures on consumer budgets, the move toward online shopping and higher costs of project construction.

At the state level, Queensland and Western Australia are expected to see their relative shares of the national pie continue to lift over the medium to longer terms as activity in these states continues to benefit from interstate migration.

Early indications also suggest that projects which are focused on improving sovereign capability will also be clustered in these geographies.

By contrast, the outlook for New South Wales and Vicotria is expected to be more challenging over the second half of the decade.

This is because overall population growth is expected to be more subdued in these states whilst uncertainty is growing about the next found of public projects in these states.

Boom to Create More Capacity Constraints

The anticipated boom in building activity toward the latter half of the decade is expected to coincide with ongoing elevated conditions in civil construction.

That boom in civil will occur on account of ongoing work on energy transition projects, a solid volume of work in water projects and civil construction work associated with the Brisbane Olympics.

Asked about the potential for this to generate cost and capacity pressures, Hibbert acknowledged that this remains an ongoing concern and that trade and labour supply is expected to remain a lingering issue.

However, he notes that Oxford does expect sector capacity to adjust over time.

“Yes, that is correct,” Hibbert said, asked about cost pressures in the second half of the decade.

“The construction investment pipeline is strong across the board including engineering construction. Some areas will settle (i.e. transport works in some states) but other segments are positioned for robust growth (water, energy etc.).

“Capacity present downside risk to the outlook. We expect trade labour supply to be a lingering issue…but we do expect sector capacity to adjust over time.

“Cost growth has moderated from the extremes of 2021 and 2022. Another spurt is possible given the pipeline of work, especially in states like Queensland.”

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