As a new government prepares to take the reins, the outlook for the construction sector in Victoria is reasonably positive amid expectations of continued strong activity in new housing construction and modest growth in commercial building.

Despite some broader economic headwinds, such as an unemployment rate which is above national averages and a struggling manufacturing sector, participants in a recent Master Builders Association of Victoria survey were more confident about the outlook for their businesses that at any other time in the past four years and had more work on their books than at almost any other time during that period.

An accommodative monetary policy is no doubt helping, as are strong levels of foreign investment in the Australian market and a general improvement in project finance availability. Furthermore, while the presumed abandonment of the East West Link following the election result will be a disappointment for some, the new government does have a modestly ambitious infrastructure program of its own.

Below is an outline of current market conditions and the near-term outlook for the state in terms of residential construction, commercial building, engineering construction and construction industry employment.

Housing

Several years ago, the expectation was that the market for new residential construction in Victoria was set for a modestly lean period as the market digested significant volumes of new stock brought about by abnormally high levels of building activity in 2010 and 2011.

That hasn’t happened. Despite a generally subdued economy and an unemployment rate which sits above the national average, the state continues to break ground on 50,000 plus new houses and multi-units each year. A persistently accommodative stance from the RBA on monetary policy is no doubt helping, as is a general easing in the availability of finance and strong levels of net migration (in the year to March 2014, for example, ABS figures indicate a net of more than 70,000 new interstate and overseas migrants made their way into the state).

Meanwhile, the level of investment in housing renovations surged from $6.513 billion in 2010/11 to $7.646 billion in 2013/14.

Going forward, the Housing Industry Association (HIA) expects the good times to continue in the near term, tipping that the state will break ground on 51,020 new dwelling units in 2014/15. Having averaged just over 4,500 per month on a seasonally adjusted basis over the past six months (implying an annual build rate of just over 54,000 assuming all units approved actually go into construction), building approval data remains encouraging.

Beyond that, the HIA expects overall activity to ease but remain at historically respectable levels as a fall in multi-residential starts offsets continued growth in detached housing. A possible tightening cycle in monetary policy toward the end of next year may not help, nor will the impact on employment and household confidence from the current fallback in manufacturing employment.

Meanwhile, on the renovations side, the HIA expects the dollar value of investment to drop back from its current peak of around $7.6 billion but remain at respectable levels of above $7 billion until at least 2017/18. Higher levels of financial capacity on the part of households bought about by generally easing finance availability and higher levels of household resulting from rising house prices should help.

Commercial Building

Following a trough experienced throughout 2012/13, conditions within the market for non-residential building improved slightly in the last financial year as financing conditions eased and foreign investors poured significant amounts of money into the local market – albeit with a modest economic performance and the malaise in the manufacturing sector not helping.

Going forward, Australian Construction Industry Forum (ACIF) expects growth of just over four per cent this year, followed by further growth of almost three per cent in 2015/16 as projects such the $990 million redevelopment of an area encompassing the former Toolern Business Park near Melton and a new post entry quarantine centre at Mickleham in Melbourne’s north drive stronger activity in industrial. Despite weakness in the state’s manufacturing sector, a decent range of projects in areas such as Collins Street and the Docklands drives steady activity in office building and work on projects such as the new cancer centre and the redevelopment of hospitals in Box Hill and Bendigo keeps work on healthcare projects at respectable levels.

Engineering

Following several years of strong growth toward the latter part of the last decade, the dollar value of work done in the civil construction market in Victoria has dropped back from its peak of almost $12 billion in 2011/12 and has now levelled off at just over $10 billion.

Going forward, ACIF expects activity to remain at around current levels for another two years before modest growth picks up toward the end of the decade as work continues to ramp up on the National Broadband Network and mining and resource work picks up off a modest base.

While the presumed withdrawal of the East West Link will obviously impact the value of work done in the transport sector in the near term, a fair pipeline of work remains in this sector throughout the longer term, given the new government’s promises to generate around 10,000 jobs by building the Metropolitan Rail Link, removing around 50 dangerous level crossings, creating a direct link to the Port of Melbourne and upgrading outer metropolitan and regional roads.

A Property Council report released earlier this year argued that the state needed $50 billion in new infrastructure investment over the next decade.

Employment

At the moment, current conditions within the construction labour market in Victoria are reasonably subdued, with current ABS estimates for the number of people employed being relatively low compared with recent historical data – albeit with that recent history being in a time when the state was recording abnormally high levels of housing starts.

Going forward, the expectations regarding slightly higher levels of commercial growth and still high levels of residential construction bode reasonably well for the sector’s workforce, as do reasonably buoyant expectations regarding near-term employment intentions showing up in Property Council and Master Builders Association surveys. Those in trades which are heavily exposed to the detached housing market (such as bricklayers and landscapers) should do reasonably well given bullish expectations for this segment of the housing market. Telecommunications workers, as well, should benefit from increased activity associated with the NBN.