Where is the construction industry heading? Peter Barda outlines the major findings of November’s ACIF Forecasts.
The ACIF Forecasts reflect a series of turning points in the construction industry across Australia, within different parts of the construction industry and within the different states. The turning points reflect key macro-economic changes and industry developments.
Falling commodity prices have narrowed the pipeline of new major development projects and have deferred other major projects, while the engineering construction boom is projected to taper off. Meanwhile, historic lows in interest rates and improved housing affordability are expected to encourage uplift in housing starts and an increase in residential construction spending.
A recent recovery in investor sentiment along with lower interest rates is expected to encourage an improvement in commerce that will be reflected in an upturn in non-residential construction spending.
ACIF considers that a fall in construction activity in some sectors of the industry will be offset by increases in others. Total construction activity is projected to amount to around $229 billion next year, roughly the same as it was in 2012–13. The total amount of construction and building work to be done in 2013–14 is projected to be around 75% larger than it was a decade ago. This is in real terms – that is, taking out the impact of inflation.
More than ever, this sanguine big picture hides considerable variation, swings and troughs in construction spending in specific construction sub-sectors and in different states and cities. Those interested in gaining a full understanding of patterns and the outlook for construction should review the macro projections and construction aggregates as well as the detailed picture provided in the ACIF Forecasts.
Readers should also note that ACIF Forecasts are reported in real value terms instead of nominal values (current prices). The base year for the November 2013 forecasts is 2010–11.
Highlights for residential building
Lower interest rates and greater affordability will boost the recovery in residential building that began last year in NSW. The pattern of change is going to be different across the Australian states. Key points include the following:
- The state that had the best conditions for some time, Victoria, is set to see a fall in residential activity in 2014. The key swing factor is the risk of a supply overhang in apartments in Melbourne following double-digit growth in this category in recent years. The relatively low interest rates and increased demand pressures from continued population growth will see a recovery in Victoria within the next two years.
- Queensland can expect growth in 2013–14 after weakness in recent years.
- While there has been weakness in residential building activity in Western Australia in recent years a lift is factored into the forecasts reflecting low mortgage rates and expectations of income growth as mining development projects come on-stream.
- For South Australia, an upturn is expected in the forecasts although the level of demand and spending on new housing and additions is not set to return to pre-GFC levels over the next three years.
- For those in the nation’s capital, prospects for the Australian Capital Territory are for an extended period of weakness.
- Tasmanian builders will have to hang on for their relief, as conditions remain muted across the state in 2013–14 ahead of a moderate recovery as relatively low mortgage interest rates eventually restores demand growth for new homes and alterations.
Highlights for non-residential building
An uplift in non-residential building is projected in the year ahead, reflecting an improvement in investor confidence and relatively low interest rates. Growth in this category of building in the medium term is expected to be variable, reflecting the interplay between underlying economic conditions and the phased reduction of policy-related spending in areas such as education and health.
In the big picture, the percentage of gross domestic product (GDP) spent on non-residential construction has been in long-term decline. The overall outlook in the forecasts involves a stabilisation of the share of GDP devoted to non-residential construction. The outlook for the sector differs widely by subcategory of construction within the overall non-residential category and by different states. It is more important than ever to look at the details in the forecasts as well as the big picture.
New South Wales Retail, health and office investment are all expected to contribute to growth in the short term.
Victoria A recovery in 2014 after several years of contractions. The upturn is not as large as previously foreshadowed. It will take some years for complete work to claw its way back to levels achieved before the GFC. Forecasted declines in spending in areas such as offices and retail reflect the completion of current projects, and increases in areas such as Industrial reflect a distribution of the expected national increase in investment in these areas given Victoria’s traditional share of underlying economic activities.
Queensland A bounce raising activity in 2013–14, then contractions in later years, essentially holding a flat to negative outlook. The few bright spots include accommodation, entertainment and recreation, which are always volatile and variable. They are countered by contractions in areas such as health, where the current major projects will be completed and not replaced; and office construction, which is projected to shrink in the medium term (two to three years).
South Australia In contrast to general gloom about the retention of the automotive industry in South Australia, ACIF Forecasts project a swing into growth in industrial construction in SA in the next few years. This reflects a continuation of work in the pipeline and then an increase in commercial activity reflecting relatively low interest rates. The projected increases should be viewed in context – they serve to bring construction work done up to the level regularly attained in the last decade rather than set new records.
Australian Capital Territory Some growth in office and retail is forecast – this is essentially completing existing projects – but in real terms the ACIF Forecasts predict a contraction across the sector at best.
Western Australia Investors seem to want to ‘wait and see’ about lower commodity prices and further mining construction. A reduction in non-residential building activity is forecast in the next few years.
Tasmania Non-residential building activity has an uplift in 2013–14. This reflects some growth in general commerce in response to low interest rates and a moderation in the strength of the Australian dollar that increases tourism arrivals and retail turnover. This growth still leaves forecast activity well below levels achieved several years ago and there is a more than usual amount of forecast uncertainty around this recovery.
Northern Territory Non-residential activity has been supporting the surge in engineering construction and major energy investments in the Territory. Non-residential construction activity is forecast to fall away from the recent peak.
Highlights for engineering construction
The ACIF Forecasts indicate that engineering construction spending peaked in real terms in 2012–13 with around $124 billion of work done. This is higher than previously expected and represents an historic achievement that will be difficult to exceed in the next few years.
Peter Barda is CEO of the Australian Construction Industry Forum (ACIF). The ACA is a member of ACIF. More information can be found at www.acif.com.au.
This item was first published in ACA Communique December 2013.