The boom in construction activity throughout Australia is expected to continue as massive levels of investment in transport and energy projects offset subdued conditions in residential building, new forecasts show.

The Australian Construction Industry Forum (ACIF) has released the November edition of its Australian Construction Market Outlook report, which provides detailed forecasts across 20 industry subsectors throughout each state and territory.

Overall, ACIF expects the dollar value of construction work done throughout Australia to increase from already elevated levels of $264.4 billion in 2022/23 (in constant 2020/21 prices) to $281.0 billion by 2025/26.

Not surprisingly, the report highlights diverging fortunes as rising interest rates impact new home building at the same time as the nation is undergoing a boom in civil infrastructure work.

In residential building, ACIF says that the industry is caught between opposing forces of higher interest rates and the longer-term need to address affording housing shortfalls.

Over the next two years, it expects subdued activity levels as the industry battles higher interest rates and higher construction costs.

Beyond that, it expects a recovery as population pressures mount and governments respond to need for affordable housing.

Within residential building, ACIF says the focus is shifting away from detached housing and toward multi-residential developments.

A recovery in multi-residential building activity is being supported by the return of migration/ overseas students and tight rental market conditions.

This sector is also likely to be a focus of housing policy effort as urban infill is seen as imperative in delivering more affordable homes in suitable locations.

Concerningly, the ACIF forecasts point to severe challenges in meeting the national housing target of delivering 1.2 million new homes in well located areas over the five years beginning 1 July 2024.

To meet this target, the nation would need to complete an annual average of 240,000 new dwellings each year over the five years beginning in 2024/25.

In its forecasts, ACIF says it expects annual housing completions of only 169,000 in 2024/25 rising to 184,000 completions by 2027/28.

Turing to civil/engineering construction, ACIF expects the dollar value of work done to increase from already elevated levels of $107 billion in 2022/23 to $118 billion in 2025/26 (constant 2020/21 prices).

Not surprisingly, activity is being driven by an unprecedented volume of public transport projects and a rapidly expanding volume of energy work.

In transport, ACIF expects output to remain at steady at record levels until at least the middle of the decade. This is being driven by the huge volume of public sector road and rail projects which are in planning or underway.

The scale of this boom should not be underestimated. In railways, bridges and harbours, for example, the value of work done in 2023/24 is expected to be around two and a half times that which was recorded in 2015/16.

Looking further out, the volume of work is expected drop back over the longer term as concerns mount over project delays, cost blowouts and public fiscal capacity.

Last week, the federal government announced that Commonwealth funding would not be provided for 50 projects that were in the infrastructure pipeline.

This comes on top of the earlier cancellation of the Commonwealth Games in Victoria and the  Beeches Link in NSW.

Beyond transport, opportunities are exploding in electricity and pipelines as Australia ramps up its energy transition.

Since the passing of the Climate Change Bill last year, there has been a surge in commencements solar, wind and battery storage projects.

The bill legislated emissions reduction targets of 43 percent by 2030 relative to 2005 levels and net zero by 2050. It also allocated $40 billion to climate initiatives including the $20 billion Rewiring the Nation Initiative.

Its passing has gone a long way toward resolving uncertainty surrounding Australia’s energy transition.

Combined with a continued reduction in the cost of wind and solar generation – now around $1 billion per gigawatt of capacity – this has led to a surge in private project commencements as investment committees pulled the trigger on projects that were previously under consideration.

In addition to new projects entering construction, momentum is gathering for the longer term as more projects are entering the pipeline.

Over the six months to October, 74 electricity and pipeline projects were entered into a database maintained by real estate and construction services firm CoreLogic. In total, these projects have a combined value of $49.572 billion. They are mostly wind farm developments (both onshore and offshore) along with a number of battery storage projects and solar farms.

This comes on top of 38 new projects being entered into the CoreLogic database over the previous six months to April.

Some projects in the current pipeline are huge. They include the $100 billion Western Green Energy Hub and the $30 billion Evergreen Hydrogen Hub on the Eyre Peninsula.

As a result of all this, ACIF expects the value of construction work done on energy related projects to increase by 12 percent over 2023/24 from already elevated levels following a 32 percent increase in activity over the previous two years.

Longer term, it says there will be substantial opportunities amid a massive volume of projects which are in planning and design and have prospective start dates from 2025 onwards.

This is the case notwithstanding uncertainty over which and how many of these developments will end up moving into construction.

Many projects in the current pipeline are private developments that will need to compete for the same pool of funding. Only a portion of the prospective projects will clear finance, regulatory and other hurdles, ACIF says.

Outside of transport and energy, healthy levels of activity in water and sewerage construction are expected to persist over the next three years (before dropping back thereon after) on account of significant dam projects such as the Hells Gate Dam Irrigation Scheme north-west of Townsville.

(If it proceeds, the proposed Western Green Energy Hub in Western Australia will be one of the biggest green energy hubs in the world.)

Finally, turning to commercial and non-residential building, ACIF expects overall levels of activity to remain relatively flat as healthy output levels in some sectors are expected to be offset by more subdued conditions in others.

In particular, subdued levels of activity are expected in the office, retail and accommodation sectors.

Offsetting this, however, are opportunities in other areas.

Specifically:

• Activity in construction of health and aged care facilities is set for considerable growth over coming years amid rising approvals in this space and a spate of new hospital project announcements particularly in Queensland as governments commit funds to meet the cost of a growing and aging population.
• Work on industrial buildings is expected to remain at elevated levels as a ramp up in new warehousing projects over recent years has led to a build-up of stock in the pipeline.
• Healthy levels of activity are expected in education as students return and underlying demand from private schools led to a growing need for buildings and facilities.
• Activity in ‘other commercial’ will remain at robust levels as the boom in transport construction is driving strong activity in building new train stations and airport terminals. In addition, there is considerable momentum in data centres as companies such as Microsoft aggressively roll out active data centre construction programs across the nation.

Of course, ACIF acknowledges that there are risks to its forecasts.

Over the most immediate term, there is uncertainty surrounding oil prices on account of the unfolding Midde East crisis and the Ukraine War. Any unexpected movements in oil prices could have flow through implications for the economy and the cost of delivering projects.

Meanwhile, the outlook for housing construction will depend upon future interest rate movements whilst the longer-term outlook for transport construction will be impacted by fiscal pressures and rising government debt servicing costs.

Peter Downes, Director of Outlook Economics and Lead forecaster for the ACIF forecasts, said that clean energy presents a huge opportunity for Australia’s construction sector.

“To combat climate change there is huge amount of work in prospect in wind and solar in addition to the public work on transmission and storage,” Downes said.

“Australia may yet become a clean energy super-power and the big question is whether the big projects, like the gargantuan $100 billion Western Green Energy Hub, will stack up and receive final approvals.”

Andrew Scott, Deputy Chair of ACIF’s Construction Forecasting Council, says that broader momentum in infrastructure construction continues.

“Work done in the Engineering construction sector has surged in recent years led by infrastructure construction,” Scott said.

“Looking forward, leading indicators continue to point to a robust pipeline in the short-medium term albeit (as) cost pressures are seeing some projects come into question.”

Finally, Dr James Cameron, Executive Director of ACIF, said there is a tension between current interest rate rises and the need to deliver sufficient volumes of new housing construction.

“For dwelling investment there is a tension in the outlook between the National Cabinet’s aspirational goal of building 1.2 million homes over the next five years, and the requirements of monetary policy to slow the economy to bring inflation under control,” Cameron said.

The main way the RBA does that is by raising the cash rate which increases mortgage rates, and hence reduces mortgage borrowing and new housing investment. In the short term the RBA is winning, but in the medium-term we expect co-ordinated government action in terms of land releases, rezoning, development approvals and concessional finance to lift multi-story apartment construction and increase the density of our capital cities.”