Australia’s construction industry is set to deliver over $300 billion in annual opportunities over coming years, new forecasts suggest.

The Australian Industry Construction Forum (ACIF) has released the May 2024 edition of its Australian Construction Market Report.

Produced in conjunction with CoreLogic and Future Place, the report provides detailed national and state/territory forecasts of construction activity across 20 subsectors covering residential building, commercial/non-residential building and civil/heavy engineering construction.

Overall, the report provides an optimistic picture as stronger than expected volumes of work has led to ACIF to upgrade expectations for 2023/24.

Accordingly, ACIF now expects the dollar value of work done to have expanded by 5 percent in 2023/24 to come in at larger than expected $298 billion.

Moving forward, a further expansion of activity will see activity levels rise to over $300 billion for the next three years.

Leading the way is civil/engineering construction and non-residential building construction (see chart).

Conditions in these sectors are expected to offset subdued activity levels in residential building.

In a statement, ACIF acknowledged challenges across many parts of the industry along with risks associated with its forecast.

But it said that bright spots remain.

“This optimistic outlook may come as a surprise to some,” ACIF said.

“The industry has been grappling with a difficult economic environment. Rising inflation and high interest rates have placed a heavy burden on builders’ shoulders. Builders are also having to confront the impact of recent industrial relations changes at the same time as they are dealing with sustained labour shortages. While a sharp spike in inflation in materials’ prices has moderated, prices remain at elevated levels.

“While there are areas that are struggling, there are also categories of building and construction activity where the industry still has a large backlog and pipeline of work in hand. While governments are trimming their spending – cutting and deferring projects – they are mid-way through many large-scale public infrastructure projects and programs that still have some way to go, sustaining work well into this year and next.

“Structural and policy change driving the transition to clean energy is already boosting construction work, and more is on the way.

“Of course, there are many risks that could still upset these forecasts. Fiscal policy and monetary policy settings are pulling in opposite directions and major adjustments may be required. The next resources surge may not play out as expected.

“(However,) Not all of the risk is on the downside. Government initiatives to combat the housing crisis could mobilise a larger increase in housing supply and this may arrive sooner than expected in these forecasts.”

Areas of Opportunity

According to the forecasts, buoyant conditions are expected in several sectors.

For example:

• In the energy sector, ACIF is forecasting sustained activity growth as a wave of new renewable projects is adding to a significant volume of work to be done and a substantial number of transmission and pumped hydro investments which are already in train. Whilst not all projects in the pipeline will eventually proceed, expectations in this area are being supported by a flood of new potential projects which are entering the Cordell database.
• Turning to roads, ACIF expects that the current pipeline of projects will be sufficient to sustain activity at near record levels over the near term before the volume of work tapers off (but remains at extremely elevated levels) from 2026 onward.
• Next is railways, bridges and harbours, where the value of work is likely to remain at peak levels over the next two years before beginning to taper off from 2026/27 onward. Whilst new project flow has tailed off, extraordinary levels of activity will be maintained over coming years on account of projects such as Inland Rail, Sydney Metro extensions, METRONET, Melbourne Airport Rail (currently delayed) and many others.
• In water and sewerage, historically elevated levels of activity are expected on account of a surge in large projects which are designed to enhance water security. These include Hells Gate Dam (QLD, $5.4 billion), Paradise Dam Upgrade (QLD, $1.2 billion), Urannah Dam and pipeline project (QLD, $9 billion) and Alkimos Seawater Desalination (WA, $2.8 billion).
• In health and aged care, ACIF expects the dollar value of work done to increase from $5.625 billion in 2022/23 to more than $8 billion by 2026/27. In this sector, there has been a build-up in approvals and work in hand along with a significant list of new projects such as Ipswich Hospital Expansion ($710m, QLD), West Gippsland Hospital ($675m, VIC), and Albury Base Hospital ($558m, NSW).
• In the industrial sector, the value of work has surged over the past two years as demand for online retail and significant supply-chain shocks have led to a surge in investment in warehousing and logistics hubs. Going forward, healthy levels approvals and a substantial pipeline of work are set to sustain activity at elevated levels until at least 2026/27.

Will the Energy Boom Actually Come Through?

Whilst there is a lot of activity around Australia’s energy transition, questions remain about the timing and magnitude of the boom in activity which this will deliver to the nation’s construction sector.

Such questions were highlighted as data from the Clean Energy Council in March indicated that there was in fact a slump in the number of large scale solar and wind projects that reached financial close in 2023.

Asked about this, Peter Downes, Director of Outlook Economics and Lead forecaster for the ACIF forecasts, said that several points are relevant.

First, many of the projects under consideration are speculative in nature and will compete with each other for similar resources. As such, only some of these projects will end up being built.

However, the pipeline of investment is massive, with $133 billion worth of prospective projects having entered the Cordell database over the last six months alone.

Indeed, the boom could be even stronger than forecast if projects such as the $100 billion Western Green Energy Hub or $30 billion Evergreen Hydrogen Hub on the Eyre Peninsula make it through to construction.

However, Downes cautioned that much of the dollar value associated with renewable projects reflects capital equipment and materials such as turbines and solar panels which are imported rather than produced locally.

As such, the degree of value add and local business and employment opportunities that will be created by renewable energy construction will be less significant compared with that which would be generated with a similar overall dollar value of investment in sectors such as home building or home renovations.

“There are a huge number of (clean energy) projects in planning out there, but only a fraction of them will ever be required and will come to fruition,” Downes told Sourceable in an interview.

“There are a lot of speculative projects being floated. I’m not sure why that is. There must be a reason for it.

“(However,) We have got a huge lift in demand compared with a few years ago and there is a lot of generation being installed. These are huge projects on the books. If some of those get up, that will be an upside risk for the second half of the decade.

“That said, they (huge renewable projects) are not generating a lot of construction value add.

Our forecast is for work done, which includes inputs. A lot of the value in work done (on wind and solar projects) is the cost of the imported wind turbines and solar panels.

“It’s all coming in on ships and being bolted into place. The impact on construction value add is not as large as you might imagine.

“So it is not going to generate the same level of employment or value add as residential or non-residential construction.”

(forecasts may have room for upside if projects such as the $100 billion Western Green Energy Hub in WA proceed to construction)

Are Green Shoots Emerging Yet in Housing?

Another interesting question surrounds new housing construction.

In this sector, approvals and construction lending remain at near decade lows.

However, some signs of green shoots may have surfaced in recent months. Stronger volumes of land sales are being recorded in cities such as Brisbane, Adelaide and Perth – a potential sign of improving activity in detached housing. Meanwhile, confidence surrounding the housing outlook in property industry surveys has been rising.

In this sector, Downes describes a competition in priorities as the Reserve Bank seeks to tame inflation via high interest rates in the short-term at the same time as the Commonwealth Government is seeking to build more homes over the longer term.

From a viewpoint of work done, Downes says ACIF expects activity in detached housing to continue to ease back through until 2025/26 as the record pipeline of work that was associated with previous low interest rates and the Commonwealth HomeBuilder program continues to wind down.

In multi-residential, however, ACIF expects subdued activity in the short term  on the back of extremely weak approval data followed by a strong uplift in work commencing from 2025/26 as this sector is expected to be the primary focus of Commonwealth, state and local government efforts to deliver new housing supply.

Is 1.2 million homes achievable or a pipe dream?

A final question involves whether or not Commonwealth and State Government targets in terms of new home delivery will in fact be able to be achieved.

At their National Cabinet meeting in August 2023, Commonwealth and State Governments agreed to a target of delivering 1.2 million new homes in well-located areas over the five years from 1 July 2024.

To deliver upon that goal, the nation would need to deliver an annual average of 240,000 homes.

However, the latest ACIF forecast up to 2027/28 does not have new housing completions reaching even 200,000 in any year – let alone 240,000 in a year.

This is broadly consistent with forecasts from other organisations such as Master Builders Australia, the Housing Industry Association and the National Housing Supply and Affordability Council – all of which have suggested that the nation will fall well short of the 1.2 million target.

Asked whether or not 1.2 million homes could be realistically achieved, Downes said that depends largely on factors such as the direction of interest rates and household income. The latter, in turn, will depend on productivity and employment growth.

That said, Downes says that the Commonwealth does have significant capacity to boost construction activity of new homes should they wish to do so – as evidence by past initiatives such as HomeBuilder.

However, he said that the Government is constrained at the moment as stimulating housing would interfere with efforts to tame inflation.

“They do have the power to meet their goal if they put their mind to it,” Downes said.

“They are not doing it now because they can’t do it because of what the Reserve Bank is doing.”