Construction sector set to bounce back strong

Australia’s building sector will experience a couple of softer years before conditions start to improve, with the sector predicted to reach new heights in FY2029, according to independent analyst and industry forecaster, Oxford Economics Australia.

In its recently released flagship report, Building in Australia, Oxford Economics Australia forecasts national total building construction will hit a record $169.3 billion in FY29.

Before that, however, both residential and non-residential construction sectors will have to weather multiple challenges including heightened interest rates and labour shortage over the coming years, the organisation said.

“Despite renewed government efforts to boost housing supply, it is expected to take until the latter half of the decade before tangible benefits emerge, entrenching affordability as a chronic issue,” said Oxford Economics Australia.

The firm also predicts while residential construction activity levels will pick up in due course, total dwelling completions over the next five years to FY2029 will total 940,000 – a level 22 per cent below the 1.2 million dwelling National Housing Accord target.

Report author and Head of Property & Building Forecasting for Oxford Economics Australia, Timothy Hibbert, said while the sector will continue to experience a dwelling stock deficiency, activity will inevitably recover.

“All build forms will contribute, driving total dwelling commencements to a new record level by the end of the decade,” he said.

“And a recovery in non-residential is due from 2026, led by hospital asset renewals and a strong pipeline of data centre builds.”

“The negative pass-through of higher interest rates and strong cost escalation to dwelling construction has almost concluded at the headline level,” Oxford Economics Australia said.

It is estimated that total dwelling starts will end FY2024 down 10 per cent nationally to a trough of 155,700.

The backlog of work points to home completions holding up over 2024, but strong population growth will continue to power underlying housing demand. Oxford Economics Australia estimates a significant dwelling stock deficiency of 146,000 at June 2024, and expects this will grow further to 164,000 by June 2027.

“A bifurcation has emerged by market,” Hibbert said. “Western Australia is at the front of the pack, with leads for new house demand including land lot sales and lending for new construction well up on a year ago. Queensland is primed as the next to move.”

Improving house construction is set to drive the marginal growth forecast for national total dwelling starts in FY2025 to 158,300. While industry capacity is showing signs of improvement, labour shortages remain that will limit the early-to-mid stage of recovery.

“Announced policy shifts at both the state and federal level, combined with substantial pent-up housing demand, provide a firm platform for the next upturn,” said Oxford Economics Australia.

“Cash rate cuts are expected from early 2025 – the beginning of a normalisation towards a neutral setting by late 2026.”

Attached dwellings are forecast to join the upswing from FY2026 with support from falling interest rates, the upward rebasing of rents, coordinated social housing investment, and planning tweaks in key markets. Build-to-rent development has risen to around one-fifth of apartment starts and is expected to grow this share a little further through late-decade.

Momentum across all build forms is geared to continue over the three years to FY2029, with total commencements rising a cumulative 33 per cent to 241,900 dwellings – a level marginally above the previous record high set in 2016.

However, over the five years to FY2029, Oxford Economics Australia forecasts total dwelling completions to total 940,000 – well below the 1.2 million dwelling National Housing Accord target.

“Although some states will likely hit their goals, others will fall short by a meaningful margin,” the company said.

A downturn in national non-residential building is showing through with commencements estimated to have ended FY2024 down four per cent to $51.87 billion (constant FY2022 prices).

“The underlying approval lead continues to soften, which is being compounded by a widening gap to commencement,” Hibbert said.

“This suggests a higher dropout rate is playing through – a trend likely to persist near term.”

The slide is expected to continue into FY2025, with starts slipping a further four per cent to $49.80 billion. Private investment has slowed, with activity patchy by sector as higher borrowing costs continue to drag in combination with the upwards rebasing of construction costs.

As the impact of cash rate cuts and normalising build costs play through, a recovery is forecast to kick in from FY2026, with activity lifting to $58.15 billion in FY2029.

A surge in warehouse construction, underpinned by strong demand, is set to make it the largest sector by commencement value in FY2024.

“While a normalisation is expected through mid-decade, warehouse activity will remain at an historically elevated level – in part supported by higher construction costs with the emerging multi-storey logistics market in Sydney,” Hibbert said.

“Meanwhile, offices and retail have been hampered by a series of structural headwinds. Given growing pockets of oversupply and higher costs, large office developments are becoming increasingly risky without precommitment.”

The report shows a thin new project pipeline for office and retail builds through mid-decade with starts expected to decline a cumulative 41 per cent over the three years to FY2026.

Similarly, the slide in retail building is forecast to continue near term with higher interest rates and pressure on household budgets weighing on investment.

Elsewhere on the private capex front, strong growth in data centres has seen other commercial activity pick up steam. A series of very large campus style developments are slated to break ground in coming years, concentrated heavily in Western Sydney.

“Despite delays and uncertainty surrounding state government finances, the public pipeline remains plump, with recent state budgets delivering few surprises,” Hibbert said. “Health building is set to be the standout.”

All major states are working through a period of hospital asset renewal, undertaking very large $500 million+ developments; at the same time population growth is placing pressure on social infrastructure. Towards the end of the decade, Olympic related works will provide a boost to entertainment building in Queensland.

At a state level, the non-residential construction outlooks for New South Wales and Victoria are relatively more challenged over the latter half of the decade, with New South Wales’ share of national activity expected to rebase below pre-pandemic levels.

Population growth in the two states is anticipated to run lower relative to the 2015-2019 period, while the next round of public projects is more uncertain in these states.

On the other hand, Queensland and Western Australia should see their shares of the national pie continue to lift over the medium to long term as they experience nation-leading population gains. Early indications suggest projects focusing on improving sovereign capacity will be clustered in these areas.