Ideas that Australia’s construction costs should fall in real terms or that the nation’s housing sector is being crowded out by civil infrastructure investment are wide of the mark, a leading economist says.

(image: AI generated via freepix.com)

During the recent Economic Outlook and Building and Construction Conference hosted by Oxford Economics Australia, Adrian Hart, Head of Construction and Infrastructure Consulting at Oxford Economics Australia, gave an overview of the outlook for activity and costs across Australia’s construction sector.

Hart also explored two misconceptions about the nation’s building industry (see below).

Overall, Hart says that the dollar value of work done on building and civil construction projects throughout Australia will remain relatively flat at existing elevated levels over the next twelve to eighteen months. This will occur as new growth arising out of energy and water projects is offset by continued weakness in residential building (albeit with building approvals now trending upward).

Beyond that, the next expansion will take hold from 2026/27 as a strong recovery in residential building kicks in.

From a geographic viewpoint, Queensland and Western Australia are expected to fare well as these states benefit from interstate population growth along with mining and renewable energy projects (not to mention the effect of the 2032 Brisbane Olympics during the latter part of this decade).

By contrast, more subdued conditions are expected in Victoria.

Over the longer term, Hart says that construction demand over the next decade will be driven by the need for energy, water, housing, defence, healthcare and many other areas.

Turning to costs, Hart expects pressures to remain notwithstanding that the rate of cost escalation has eased since its peak in 2022.

Pointing to the Public Infrastructure Workforce Supply Dashboard maintained by Infrastructure Australia, Hart points out that a shortage of public infrastructure workers is expected to remain until at least 2028.

This could extend for longer if more projects emerge which are not yet on the public radar, he adds.

Two myths

Further, Hart says that misconceptions exist in two areas.

Myth 1: Construction cost must fall in real terms over the long run.
First, there is a common notion that construction costs should fall in real (inflation adjusted) terms over the long run.

This, Hart says, is not the case.

Looking at civil construction in particular, Oxford has performed calculations based on Producer Price Index data from the Australian Bureau of Statistics (ABS). These show that over the long run, the rate of construction cost growth has historically exceeded inflation by an average of around 0.8 percent per annum (see chart below).

This means that in absence of productivity improvements, real construction costs have increased over time.
Primarily, this has been driven by above-inflation increases in construction salaries and wages.

Granted, real construction wages have fallen over the past two years as inflation has spiked and most workers remained on existing enterprise agreements.

Going forward, however, further increases in real construction wages are expected as new or renegotiated workplace agreements come into effect. Many of these will deliver wage rises of four percent or greater.

Myth 2: Housing has been crowded out by public infrastructure
The second misconception is that Australia’s housing sector is being crowded out by a record program of public infrastructure work.

According to this idea, staff shortages on housing projects are being driven by major road and rail developments, which offer greater job security, higher profile work and higher pay packets.

Again, Hart says that this is not the case.

Looking back through recent history, he says that strong periods of infrastructure work have not materially affected housing sector output.

Indeed, ABS data shows that dwelling completion timeframes remained steady throughout both the post-GFC mining boom and the increase in public infrastructure work during the second half of last decade.

In fact, housing completion timeframes started rising only in 2020 (initially, COVID disruptions were a factor in this).

Further, Hart says that there are two reasons why civil construction work has only a modest effect on home building.
First, civil construction accounts for only a modest share of overall construction industry employment.

Of the 1.387 million people who were employed across Australia’s construction sector in 2025 (ABS data), only 9 percent or 118,800 were directly employed in civil and engineering construction.

Whilst the civil space also employs a portion of the 872,600 workers who are classified as working in ‘Construction Servies’ (mostly trades such as electricians, carpenters, concreters and others), most workers in this category are employed in the building sector.

Beyond this, Hart says that the transfer of skills between housing and civil construction may not occur as freely as commonly believed.

Many skills which are needed on large civil/engineering projects do not necessarily come from the residential workforce, he says. Even where skills are transferable (in areas such as construction management, electrical, plumbing etc.) additional certifications are often required for civil projects.

Rather than competition from the civil sector, Hart says that challenges in home building have stemmed from cost increases and associated insolvencies which have occurred since COVID.
Longer term, however, Hart notes that the industry faces an underlying structural challenge to replace workers who are at or near retirement age.

This is happening as the number of new construction workers who are coming through the vocational, educational and training (VET) sector is in decline (see chart) amid perceptions about university degrees being preferable to trade-based qualifications.

More productivity needed

Overall, Hart said Australia has little chance of achieving its target of delivering 1.2 million new homes over the five years to 2028/29 as envisioned under the National Housing Accord.

Nevertheless, he says the industry needs to increase productivity – something which he acknowledges will take time.

“We’ve got to become so much better at what we are doing and building things so much more smartly, procuring them smartly and designing them smartly so that we can just replicate it and do it,” Hart said.

“It doesn’t come easily. It doesn’t come quickly.”

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