Construction costs will rise throughout Australia in coming years as a resurgent building sector and a massive volume of engineering work drives competition for resources, a leading economist has warned.

Speaking on the last day of his company’s four-day online conference, BIS Oxford Economics Associate Director Adrian Hart said upward pressure on construction costs would re-emerge from 2022/23 as the dollar of work done rises to levels which have never been seen before if capital intensive oil and gas projects are excluded.

In the past, Hart says strong price growth accompanied both the mining boom leading up to 2012/13 and record levels of housing and transport construction activity in the middle of last decade (see chart).

Going forward, he said that if the capital-intensive oil and gas sector is stripped out, the dollar value of construction work done is likely to reach levels not seen previously (see chart).

This would underpin renewed pressure on costs notwithstanding that these have barely moved over the past year amid weaker levels of activity.

“Going forward, we are starting to see a recovery (in construction activity),” Hart said.

“When you use past peaks as a guide and when you strip out oil and gas construction …  we start reaching in my mind a bit of concern about capacity and capability from about FY23 onwards. That’s when you are starting to see a simultaneous recovery in residential and non-residential building joining an already pretty strong engineering construction market. That means we are pushing total construction activity to levels that we have never seen before when you strip out oil and gas.

“That is going to be interesting in how we cope with that level of construction work.

“It hasn’t hit us yet, but as we go forward over the next few years, I anticipate that we might start to see a pickup in some of these prices.”

If the capital intensive oil and gas sector is excluded, construction activity in Australia will reach levels never seen before.

On key cost components, Hart says:

• Significant pricing pressures are likely to arise for quarry products such as cement, concrete and sand due to the volumes of these products which are needed in road and tunnel projects.
• Whilst overall wage pressures remain subdued and growth in remuneration is likely to accelerate at a modest pace only, supply shortages are emerging for some specialist skills. In coming years, companies may need to offer remuneration increases to retain workers in these areas.
• Oil prices haver recovered from less than $US30 per barrel to above $60 per barrel. Going forward, BIS expects only modest additional price growth but talks of upward risks to prices depending on supply side considerations such as OPEC behaviour.
• Steel prices are likely to remain relatively stable. Whilst BIS anticipates a decline in iron ore prices, Hart says steel prices did not surge when iron ore prices shot up and are unlikely to drop sharply in response to the anticipated decline in ore prices – especially as stimulus spending delivers support to steel demand.
• The Australian dollar is likely to firm at around $US0.80 following recent gains notwithstanding the anticipated drop in iron ore prices as economic recovery supports demand for our currency. Nevertheless, any negative sentiment could see the dollar undershoot on these expectations and add to cost pressures.

The latest comments follow an earlier forecast from quantity surveying firm Turner & Townsend, which indicated that construction tender prices would remain stable in the short term but would return to growth of between 1 percent and 3 percent per annum across major capital city markets over 2022/23 and 2023/24.

Construction costs rose during the mining boom leading up to 2012 and the housing boom in the middle of last decade. With record construction activity expected, BIS says costs will rise again from 2022/23 onward.

In his presentation, Hart said construction margins had lifted over recent years after having previously dropped back in years following the end of the mining boom.

He cautions, however, that the latest spike in margins most likely represents statistical distortion created by JobKeeper.

Finally, Hart said construction faces challenges in boosting productivity growth.

Compared with other economic sectors, construction has underperformed in this area over recent decades (see chart).

Productivity gains in construction have broadly lagged those in other sectors of the economy.

This is important, Hart says, not only for industry but also for broader policy.

As taxpayers pump large amounts of money into stimulus and public assets, it is critical to ensure that they derive maximum value for their investment.

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