Growth Expected, but Where and in What Form?

Monday, March 23rd, 2015
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Much is being made at the moment about growth in the Australian population and economy.

Politicians are worrying about the inter-generational costs of our present spending and planners are telling us we are going to need massive spending on new homes, schools, hospitals, road and rail infrastructure over the next 20 years. To the construction industry, growth spells work. The only two questions are: where, and how much?

The resilient and resourceful people who work in the industry (all one million of them) will deliver whatever assets are needed, regardless of type or size of required structure.

So how good are our numbers in providing our people a guide to where the work is, and how much of it there is likely to be?

There are competing forecasters, most of whom all do a decent job in pointing to short term trends and likely work volumes. Most get the next nine quarters about right, although with volatility in the residential market due to factors such as pent up demand, buckets of overseas money, and historically low interest rates, it can be tricky to pick the turning points when demand shifts up or down significantly. And of course, no one picked the sustained investment in mining, even during the GFC.

The harder piece is identifying where the long-term growth is likely to be. The Australian Construction Industry Forum (ACIF) is having a crack at finding out and making the information available to the industry. It has released its second lot of Demand Driven Forecasts (DDF) that point to growth prospects in 21 major urban and regional centres for seven different asset types. They use Cordell Information data and the Property Council’s Our Nation app as starting points.

These are the types, and the units of measurement used in the DDF:

  • Hospital beds (number of beds);
  • Classrooms (number of rooms);
  • Houses (number of dwellings);
  • Attached dwellings (number of dwellings);
  • Retail space (square metres);
  • Office space (square metres); and
  • Industrial space (square metres).

Let’s be clear – this is not easy. Identifying growth has to take in to account existing stock, likely growth in population, shifts in economic activity, and expected demand, and that’s just for starters. You need to employ some pretty fancy econometric modelling, have access to the best data going, and be close to a maths genius. Even then, there are risks in releasing the outcomes.

Here’s how ACIF’s forecasters are doing the job (and don’t skip this nerdy bit – it explains the examples that follow.) Two mechanisms are provided in the DDF to communicate the balance of supply and demand in a region including the following:

  • Demand and supply chart: this shows the projected demand and supply of the infrastructure in their respective units (i.e. hospital bed numbers, classroom numbers, number of dwellings and so on). This chart is useful for understanding the general trend of the demand-side and supply-side of infrastructure needs of a region. This provides the reader some sense of the absolute amount of infrastructure construction needs in each region in comparable physical units.
  • Traffic light chart: this shows where the construction opportunities are likely to be. Through a simplified visual representation of a region’s infrastructure market using green lights for ‘go’ (i.e. excess demand, opportunities exist) and red lights for ‘stop’ (excess supply, limited opportunity), the chart can be used to quickly identify the overall market environment for each infrastructure type in each of the 21 DDF regions. The traffic light charts are ‘normalised’ using average values for large capital cities as one subset, and for the remaining cities as another subset. This means that the number of lights for a region may be broadly compared against another region within the same subset. Comparisons between regions not in the same subset are not valid (because the scale of construction activity is so vastly different each coloured “light” stands for very different amounts).

As with any type of economic forecasting, the reliability of the forecasts largely depends on the quality of the data inputs and assumptions used for the projections. The following are some of the limitations of the ACIF Demand Driven Forecasts:

  • Supply-side estimations need to be treated with caution due to the project database we have (the best in the country) only representing a sample of construction activity across Australia, and not the entire industry. Supply estimations are therefore likely to be underestimated.
  • The accuracy of supply-side data diminishes further into the forecast years. This is a natural product of business planning where investment and expenditure planning for governments and businesses tend to be firmer in the short term but uncertain in the medium to long term. Readers will notice that most supply-side curves have a peak in the short to medium term, then diminish rapidly. This does not mean that construction activity will reduce rapidly in the later years of the projection period. It is more likely the case that the database does not contain a lot of project data entries further out in the future, since these investments are yet to be announced or progress into more concrete feasibility and planning stages of a project life cycle.
  • The traffic light chart represents estimated excess demand or excess supply of an infrastructure based on new demand and new supply each year. It does not provide information on the level of existing excess demand/supply at the beginning of the projection period, and does not provide insight into whether the existing excess demand will be ‘filled’ by the projected supply. The ‘normalisation’ of values for the traffic light chart uses average values for each subset of regions and is therefore highly generalised. The traffic light charts should only be used to identify which regions may have construction opportunities, on balance, and information contained in this report should not be used as a basis for making commercial decisions.
Demand Driven Forecasts for industrial space in Rockhampton, Queensland

Demand Driven Forecasts for industrial space in Rockhampton, Queensland

Demand Driven Forecasts for Houses in Newcastle, New South Wales.

Demand Driven Forecasts for Houses in Newcastle, New South Wales.

Demand Drive Forecasts for Retail Space in Melbourne, Victoria.

Demand Drive Forecasts for Retail Space in Melbourne, Victoria.

So have a look at the DDFs and start planning for how to get a piece of what’s coming up across those 21 locales.

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