A key building industry group in Australia has unveiled a mixed outlook for construction activity over the next three years as a decline in resource and engineering work is largely offset by a stronger residential sector.

Releasing its latest three-year Building and Construction Industry Forecasts, Master Builders Australia says the outlook for the industry is set against a backdrop of a two-speed economy characterised by subdued activity outside of mining, fiscal consolidation, weak sentiment, a relatively high Australian dollar and a soft labour market.

The report cautions that overall industry conditions are unlikely to lift substantially in the near term notwithstanding the recent upturn in home building and adds that states such as New South Wales, Queensland and parts of Western Australia are set to enjoy better times  while conditions remain subdued elsewhere.

“The return to more positive conditions for residential and commercial apartment builders implicit in the forecasts signals light at end of what has been a very long tunnel,” Master Builders says in its report. “However, subdued prospects for many parts of non-residential building and a fall-back in engineering construction means overall industry conditions will fail to lift over the forecast period.”

In terms of sectors, by far and away the best performing area is housing, where Master Builders says the overall value of residential building work done will rise from $48 billion in 2012/13 to $62 billion in 2015/16 – by which time the annual number of new dwelling commencements (160,810 in 2012/13) will draw close to 200,000.

This growth, which will occur almost entirely in four states, will be driven by pent up demand which has built up amid a period of strong population growth and low levels of building activity and which will be released by the low interest rate environment, Master Builders says.

Asked about the types of housing where activity is likely to be strongest, Master Builders Australia chief economist Peter Jones said stronger conditions are expected across all types of dwellings notwithstanding disparities among geographic regions.

“There has been a trend toward multi-unit dwellings in Australia over the past 30 or 40 years,” Jones said. “That trend we believe will continue. However, [the trend] is not easy to pick up in a cyclical sense over the next two or three years and what we are forecasting [over the next three years] is strength across the sectors.”

“That includes detached housing, it includes other units including multi-apartments and high-rise buildings in the inner-city. And we are also anticipating a recovery in alterations and additions expenditure in building construction as well.”

Australia Dwelling Starts

Dwelling starts

Outside of housing, Master Builders says the value of work done in engineering construction will drop back from $122 billion in 2012/13 to $102 billion in 2015-16, albeit with overall output levels remaining high by historic standards and growth occurring in some non-mining states such as Victoria and New South Wales amid reasonably strong levels of infrastructure spending.

In commercial building, meanwhile, overall levels of activity are set to remain flat as low levels of investment in public sector building contrast with stronger activity in the office, retail and industrial sectors.

This is especially the case in Sydney and New South Wales, where Jones says an improving picture is being driven not just by big ticket projects such as Barangaroo but more broadly by a sense of ‘catch up’ amid a lag in activity in recent years.

Australia Building & Construction Value of Work

Building and construction value of work

Jones is not overly sanguine when it comes to the outlook for profits and profit margins despite the upturn in the residential sector.

“I think we need to put the current conditions into context,” he said. “It is still weak in many parts of our industry and we are actually not expecting any great pickup in non-residential building over the next two to three years until demand does pick up. So it remains tough for non-residential builders and we are going to see a fallback in engineering construction.”

He noted that overall industry conditions could best be described as mixed despite the growth in the housing market, which has sagged in recent years, saying that “the current economic climate – I think it is true to say – is still producing many challenging headwinds that could impede the sector moving forward.”