Impact on global confidence from political uncertainty and the lower Australian dollar is both stimulating growth and starting to highlight Australia's dependence on imported construction material. But what does this mean for construction costs in NSW, VIC and QLD?

Key factors for Australia in the medium term include:

• Slowing yet steady growth
• Resource projects moving from construction into production
• Large dips in the engineering construction sector partly offset by strong rises in residential construction
• Construction sector producing more than during the pre-GFC peak
• ACIF forecasting that ‘other residential’ work load will largely level off in Brisbane, Sydney and Melbourne in 2016/17

Victoria didn’t suffer the same GFC correction and NSW recovered strongly

Confidence remains strong in the residential construction sector whilst increasing contractor and subcontractor work books are having upward pressure on margins and prices. In ‘hot’ markets, we are transitioning between a competitive tender market and a non-competitive market. The question is how long the transition will take and how stakeholders can best take advantage of it.

New entrants into the market have been absorbed and capacity is starting to shrink, which is leading to increased labour costs at a time when the volume of new and proposed stock is having a dampening effect on selling prices.

Material prices have remained relatively flat over the last few years due to increased imports and economies of scale from ramped up production, and they are going to start to feel the pinch of the falling Australian dollar.

QLD figures are indicative and based on a basket of projects. Based on FECA

Key underlying factors for Queensland include:

• Considerable increases in residential construction
• Large dips in the engineering construction sector
• Strong growth in housing in high population areas
• Rebound in tourism in the medium term
• Growth in hotel rooms and student accommodation
• Oversupply of office space in key markets
• Price differentials between Brisbane and the Southern States continues to fuel demand QLD
• Government commitment to return to budget surplus, limiting stimulus

For the last year and a half, we have been living on borrowed time and enjoying a low cost-growth environment despite indicators telling us it should be otherwise. Going back a year, Mitchell Brandtman forecast three to five per cent growth across 2015 with a caveat that this could change dramatically when the Gold Coast market takes off.

At that time, the Gold Coast was operating at just 20 per cent of its peak capacity and was starting to see an upward swing in approvals. This trend has grown and with a number of $1 billion-plus projects being talked about, it looks set to continue. The long lines of utes jamming the M1 into Brisbane from 5 am each morning has been keeping the heat out of the Brisbane labour market.

However, this is about to change and the impact will be hard felt. For now, it is mainly the Gold Coast tradies who are swapping the long commute for a chance to catch a wave before work. They are happy to do so for similar pay to what they would earn in Brisbane. However, we are starting to hear reports of tradies being offered small premiums to work at the beach. If this takes hold, we will end up in a pre-GFC situation with both the Brisbane and GC markets operating at capacity and competing for labour.

Tenders are getting less competitive, and first choice builders are getting picky about the projects they compete for. This has been giving other contractors an opportunity to pick up work, but they are doing so at higher preliminaries and more sustainable margins.

Broadly, major banks are responding to APRA with tighter lending guidelines and reduced appetite for risk on new projects. However, if you know who to ask and have the right product, they are still lending. In the meantime, any slack is being picked up by smaller institutions and alternative funders – brokers are making their mark in the smaller deals.

Our cost forecast is two-tiered; at the larger end which is exposed to EBA increases and reduced competition for a smaller number of large contractors, we predict increases upwards of six per cent right through to the end of 2016. For the rest of the market, you should forecast one per cent per quarter for a total of four per cent throughout 2016.

NSW figures are indicative and based on a basket of projects. Based on FECA

According to ACIF, NSW is in the enviable position of having the growth in residential and non-residential construction exceeding the decline in engineering construction. This creates a situation where NSW will have net construction growth at a time when other states are in significant decline.

High demand in both houses and apartments continues to drive the strong growth in NSW Residential approvals. Outside of the greater Sydney area, Illawarra and Newcastle are both exceeding previous approval highs.

Civil projects including large residential sub-divisions on Sydney’s outskirts continue to move ahead at a rapid pace. Key infrastructure projects will also put price pressure on the market in the next one to two years.

Illawarra is going strong with demand for good quality commercial tenancies and hotel accommodation, alongside a number of projects due to commence at the University next year. In Wollongong CBD, various large multi-unit residential projects are underway, which has caused a squeeze on quality sub-contractors.

The demand for residential apartments in Wollongong CBD and home and land packages in Illawarra fringe suburbs remain strong and will likely grow. This will place upward pressure on labour and materials into 2017.

While there are localised signs that demand is starting to slow and clearance rates are down, pre-sales of new units and apartments are still strong and this is encouraging developers to rapidly commit to new projects.

Using a printed cost guide for a generic cost per apartment is causing many novice developers grief. The change in product over this latest phase of the cycle is causing huge differences in cost per square metre, with ranges touching on $1,600 to $5,000 per square metre. Traditionally this has been explained away as the difference between owner occupier and investor stock; in the current market it more commonly reflects developers needing to provide more high-end, upscale product on smaller tighter blocks and creating value for the higher selling prices.

Developers are finding value in putting fewer units of a higher quality on a site rather than cramming in as many as possible. However, this can’t compare to what is being delivered at more traditional rates in the Western suburbs.

Through this, a bubble is being creating for trade demand – particularly in structural and finishing trades, and putting upward pressure on overall construction costs. Depending on scale of project, our forecast is for between four to six per cent increases through to the end of 2016.

VIC figures are indicative and based on a basket of projects. Based on GFA

Key underlying factors for Victoria:

• Residential construction growth is peaking after a long upward trend
• Strong economic and population growth
• Median house prices continuing to grow
• Retail growth supporting residential construction

Residential construction remains strong, but there are signs that the long run started pre-GFC is starting to taper off with growth forecasts slowing into 2017. While there remains talk of resi-bubbles, the demand for apartment living, the growth in population, and the growth of apartments in the inner ring rather than the CBD will keep demand steady. The need to keep workbooks full will dampen potential cost rises.

Victoria’s Triple A credit rating along with long sustained residential construction and continued Government Investment to infrastructure continue to provide a consistent environment in which to operate. While EBA wage pressure is strong, the above national average growth over the last few years will keep a downward pressure on potential spikes.

While there remain strong numbers of projects under construction we are starting to see sites with approved DAs on the market. Whether this is a sign of early profit taking, nerves, or a reflection of challenges in getting finance remains to be seen.

We are forecasting construction cost escalation of three to four per cent through to the end of 2016.