2023 Summary: Australia’s booming and struggling construction sectors revealed

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Australian Construction Industry Forum (ACIF) Forecasts reveal that transport infrastructure and clean energy sectors are experiencing a boom whilst other construction sectors are struggling.

The Australian Construction Industry Forum (ACIF) Forecasts released reveal that the state of the construction industry in 2023 is a study in contrasts.

Buffeted by both sharply rising interest rates and a 30 per cent rise in construction input costs, as well as the after-effects of Covid disruption and associated structural changes such as the move towards work from home, some sectors, such as retail, accommodation and home building are struggling.

Meanwhile, others such as transport infrastructure and investment in clean energy are experiencing boom or near boom conditions, with the main problems arising from skill shortages or difficulty obtaining key inputs or equipment.

Residential developers often caught in fixed price contracts faced with sharply rising material costs and project delays are in many cases making losses and struggling with rising debt servicing payments. Bankruptcies in the construction industry are now running at an annualised rate of around 3,000 a year, roughly twice the pre-Covid level. At the same time profitability in the industry as a whole is at relatively high levels.

These contrasting fortunes are reflected to some extent in the aggregate activity figures. Total Residential Construction activity has declined over the last year and will remain subdued for the next two years under the weight of higher mortgage rates (see graph below), and a decline in alterations and additions as the surge related to the HomeBuilder subsidy and work-from-home subsides. Approvals for new builds are declining, but there is still a substantial pipeline of work that will sustain activity in the short-term, with downside risks for 2024-25 if cash rates need to continue to rise.

The policy response to the housing shortage is expected to boost multi-story unit and apartment investment in the out years. At the same time as residential activity has declined, Infrastructure Construction has surged with a raft of public transport infrastructure projects, and a surge in approvals and commencements in the renewable energy space. The ramp up in work yet to be done had been very large over the last year and there is some short-term upside risk to the forecast 6.6 per cent growth for 2022-23.

Non-Residential Building activity has been relatively stable, but averages out large movements in the sub components, with strength in Health and Aged Care, Education and Other Commercial (mainly transport and logistics) offsetting weakness in Retail/Wholesale and Accommodation. It is forecast to be broadly flat in 2022-23 rising by a modest 0.6per cent.

In Heavy Industry including Mining, weakness in investment in bulk commodities such as coal is being offset by a surge in interest in much less investment intensive critical metals. Investment in clean energy to reduce the industries carbon footprint is boosting activity, and investment levels are expected to rise by 5.6 per cent in 2023-24 from a low base.

“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. 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,” says Outlook Economics and Lead for ACIF Forecasts, Peter Downes.

“Work done in the Engineering construction sector has surged in recent years led by infrastructure construction. Looking forward, leading indicators continue to point to a robust pipeline in the short-medium term albeit cost pressures are seeing some projects come into question,” says ACIF’s Construction Forecasting Council Deputy Chair Andrew Scott.

“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. 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,” says ACIF Executive Director Dr James Cameron.

“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,” says ACIF Executive Director Dr James Cameron.

Source: Australian Construction Industry Forum Limited 2023

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