Australia’s building sector is set for a deep downturn as high interest rates impact demand for new housing and softer private sector investment affects commercial and non-residential building, new forecasts show

And the Commonwealth target of delivering one million new homes over five years will rely upon an upturn in activity from 2026/27 onward.

In its latest Building in Australia report, Oxford Economics Australia said that the nation’s building sector is set for a downturn over coming years.

All up, it expects the dollar value of work done on building activity to decline by 21 percent over three years to 2024/25 before bottoming out at $104.5 billion in constant 2020/21 prices during that year.

Beyond that, a subsequent upturn will see activity reach $146.26 billion in 2027/28.

(Note: the forecast relate to building activity specifically and do not include civil or engineering construction work.)

Leading the decline will be the residential sector, where new dwelling commencements are expected to contract from 167,400 in 2022/23 to 146,800 in 2023/24.

This represents the lowest level of starts since 2011/12.

Particularly impacted will be detached home building (see chart), which has been affected by falling demand, rising costs, delays in build times and builder insolvencies.

In multi-residential, Oxford expects commencements to continue to contract through to FY25 from already modest levels following a sharp decline in 2022/23.

However, the decline in this sector is expected to be more moderate as subdued conditions in the build-to-sell market are partly offset by build-to-rent developments.

Finally, activity in home renovation will continue to ease back from historically elevated levels. This is due to a normalisation of activity following COVID stimulus along with the combined effect of higher costs/longer delivery timeframes, a lower volume of property market turnover and higher borrowing costs.

Outside of housing, the value of work done in commercial and non-residential building is expected to contract by four percent and two percent over the next two years as healthy levels of public sector building activity are offset by softer conditions in private investment.

Beyond the short term, however, Oxford expects that a renewed upturn in work will take hold from 2025/26.

This will occur as interest rates ease back, industry capacity normalises, pent up demand in housing is released and non-residential building is supported by a renewed upturn in private investment and work on 2032 Olympic Infrastructure.

The latest forecasts come as Australia’s construction market has been impacted by challenges over recent years.

Of these, the most significant to emerge over the past twelve months has been the increase in interest rates.

All up, official interest rates have risen from 0.1 percent in April 2022 to 4.1 percent in June as the Reserve Bank of Australia has sought to bring inflation under control. In its report, Oxford Economics Australia said it expects two more interest rate increases before the official cash rate peaks at 4.6 percent in September.

Rising interest rates have impacted not only the affordability of mortgages and thus buyer demand but also the cost of finance and thus the feasibility of new housing development projects.

As a result, levels of new home sales, building approvals and housing construction lending are all historically low despite having stabilised in May.

This has come as the construction sector continues to deal with capacity constraints, cost blowouts and delays – albeit with the pace of cost growth having eased.

Over the two years to March, Producer Price Index from the Australian Bureau of Statistics indicates that construction prices increased by 20.5 percent for the building construction sector overall and by almost 30 percent (29.6 percent) in the detached house sector specifically (see link above).

This has created challenges in terms of project margins and industry sustainability. The upshot has been a whopping 2,117 construction firms entering external administration over the year to June 30, according to data from the Australian Securities and Investments Commission (ASIC).

Meanwhile, the forecast highlights challenges associated with delivering on the National Housing Accord, through which all levels of government in partnership with industry are aiming to deliver one million homes over the five years from FY 2024.

To achieve this goal, the industry will need to deliver around 200,000 new homes each year over the period. However, Oxford Economics Australia expects that the annual number of commencements will remain well below this level until at least 2026/27 (see chart).

As a result, achievement of the goal will depend upon strong activity levels during the latter part of the five-year period.

In a statement, Timothy Hibbert, Head of Construction & Property Forecasting at Oxford Economics Australia, said that challenges facing the sector should not be underestimated.

“New home sales, dwelling approvals, and home construction loans have deteriorated, setting the scene for a deep residential downturn,” Hibbert said.

“Commencements are expected to fall to 167,400 dwellings in FY2023, with a further decline anticipated for FY2024 to 146,800 – the lowest activity since FY2012.

“Record migration is boosting underlying housing demand, supporting the established home market. The relay to new dwellings will take a few years. Elsewhere, buyer confidence is suppressed as cost escalation, delays, builder administrations, and rising borrowing costs all impact.

“Total building is also forecast to decline, falling a cumulative 21 percent over the three years to FY2025.”