Significant cost pressures are likely to reemerge in Australia’s construction sector during the second half of this decade, a leading construction economist has warned.
During a recent interview with Sourceable, Adrian Hart, Associate Director – Construction and Infrastructure at Oxford Economics Australia, warned that cost pressures are likely to reemerge during the second half of the decade notwithstanding that cost growth is likely to remain at more ‘normalised’ levels in 2024.
Hart’s comments come as latest Producer Price Index (PPI) data published by the Australian Bureau of Statistics indicates that growth in construction costs and output prices has eased from levels seen during the height of the COVID disruption in 2021 and 2022.
According to the data, output prices in building construction increased by 1.9 percent during the December quarter (up from 1.3 percent in the September quarter) and by 5.4 percent across calendar 2023.
This represents a higher rate of output price escalation compared with pre-COVID levels (see chart).
However, it is well down compared with annual increases of 7.8 percent in 2021 and 11.4 percent in 2022.
Meanwhile, in civil and heavy engineering construction, the rate of quarterly price growth eased from 0.9 percent in the September quarter to 0.6 percent in the December quarter.
On an annualised basis, output price growth in civil and heavy engineering construction eased from 5.6 percent in 2021 and 9.6 percent in 2022 to a more modest rate of 2.9 percent in 2023.
However, the comments also come as very strong levels of housing and civil construction activity are expected in the latter half of this decade.
This comes at a time when the industry’s labour force is already stretched.
Already, construction industry employment stands at record highs. Meanwhile, job vacancies across the architecture, engineering and construction sector remain at historically elevated levels.
In infrastructure, the Public Infrastructure Workforce Supply Dashboard indicates that the nation currently has a shortfall of 232,100 workers who are required to deliver upon the nation’s public infrastructure program.
Speaking about the easing in cost pressures in 2023, Hart says this has arisen out of several factors on the international stage.
These include an easing in supply chain and shipping cost pressures, prices for oil having come off early 2022 peaks and an easing in the price of commodities such as coking coal and iron ore – the principal ingredients for steel making.
These factors have only partly been offset by a decline in the value of the Australian Dollar from a peak of 78.2 US cents in February 2021 to 65.3 US cents (as of Monday Feb 5).
Despite this, Hart says that upward pricing pressures are still evident as a result of high levels of activity and a strong construction pipeline.
This is leading to upward pressure on wages. Indeed, Hart says that construction wage growth is likely to be sustained and could become entrenched for a period of time through enterprise bargaining agreements.
This will continue to underpin growth in construction prices.
But he warned that whilst costs growth is likely to remain moderate in 2024 on account of more subdued construction activity, substantial cost pressures are likely to reemerge during the second half of the decade.
“We do anticipate that cost growth is still on an easing trend,” Hart said.
“Some of those (more modest) quarterly figures (see above) – you might expect those to continue a bit into the near term.
“It’s when you begin to look further out that things could get more difficult again.
“This year might be a period of the same or slightly weaker growth in prices. But further out, we have a lot of potential stories about construction that could come through.
“A strong housing rebound is likely once interest rates do come off given the amount of population and high demand for housing. So in the second half of this decade, we anticipate a very strong rebound in housing activity.
“We have also got the energy transition. We have got the Olympics. We have got still a very large pipeline of transport infrastructure. There’s a lot of health and education building. And we’ve still got some really big utility projects outside of electricity in big water projects going off around the country.
“So overall, the construction story really strengthens in the second half of this decade. That means that unless we do things a lot smarter or we streamline things a bit, we could be looking at a re-acceleration of construction cost inflation over the second half of this decade.
“That will show up in your PPI readings.”
To help minimise cost pressures, Hart says that action is needed in three areas.
First, there are measures which can be undertaken to smooth out demand and reduce pressures which may occur on account of major demand peaks.
One example is the Commonwealth Government’s review of the Commonwealth funded infrastructure pipeline. This saw the pipeline of Commonwealth funded work pared back in order to restrict Commonwealth investment in the pipeline to $120 billion over ten years.
Next, Hart says it is important to improve supply and labour force capacity by rebooting efforts to train the next generation in engineering, building and construction workers.
On this note, he expresses disappointment about funding cuts to the TAFE system which occurred during the past decade.
These have ‘gutted’ the system at a time when Australia needs more TAFE graduates.
Finally, Hart says more must be done to improve productivity and to maximise output from existing resources.
On this point, he says actions are needed in two areas.
First, more needs to be done to improve construction quality and reduce the need for expensive remedial work such as that which has needed to occur on a large number of apartment complexes.
This will involve improving regulation, accountability and certification so as to ensure that design and construction is performed in a compliant manner.
Doing this will help to avoid not only financial and emotional impacts upon owners but also the tying up of resources that would otherwise be available for delivering new projects.
Beyond that, change is needed to improve contracting practices and to address issues early in project planning and design.
In terms of contracting, Hart says that risk on complex projects should be shared in an equitable manner. This helps not only to foster trust and collaboration but also to improve financial sustainability across the construction industry.
Finally, more work needs to be done in design and planning before construction commences.
This involves engaging contractors early in design through early contractor involvement. Such engagement will help to ensure that constructability considerations are embedded into major design decisions.
Beyond this, more needs to be done in terms of planning and geotechnical investigations to enable significant risks to be identified during early planning and design.
Hart says the importance of productivity should not be underestimated.
“That’s really got to be the solution,” he said.
“Yes, we can smooth demand. And yes, we can improve the supply of skills.
“But both will be challenging and – with the supply of skills – may take time.
“We’ve got to start now (to smooth demand and beef up training). But in the meantime, we can also try to do things a lot smarter.”