October 2024 Construction Market Insights

Rawlinsons October 2024 Australian Construction Market Update offers insights into the current state of the industry, highlighting cost trends, ongoing challenges, and activity levels within the sector.

A complete, downloadable copy, can be found here, subscribers of the current edition receive the update inclusive of an Annexure with details, update rates.

MARKET OBSERVATIONS

The major topic of discussion in the construction industry over the past quarter has been the revelations from ABC’s investigation into the infiltration of outlaw motorcycle gangs within the CFMEU's construction branch. This has led the government to immediately place all branches of the CFMEU's construction arm into administration.

While this news hasn't surprised many, it has added to the disruption in the construction sector. However, some view it as a significant opportunity to clean up the industry. The full impact of these developments on the market is still unclear.

Market activity remains steady, with the ABS reporting an increase in dwelling approval rates across all states except Queensland. Approvals for private sector housing were mixed, rising in New South Wales, South Australia, and Western Australia, while the other states saw a decline.

Challenges such as historically high interest rates, contractor insolvencies, industrial relations issues, a shortage of skilled labour, and ongoing geopolitical concerns are contributing to low market sentiment.

STATE BY STATE

The following are the forecasted percentage changes across each state over 2024:

ADELAIDE

The outlook for the remainder of 2024 is mixed due to the complexities of post-COVID economic recovery. While material supply constraints have stabilized, labour issues persist, necessitating an increase in skilled workers for long-term sustainability. In response, the South Australian government is establishing Technical Colleges to enhance training and generate interest in trade opportunities.

The residential sector, particularly medium-density housing, remains robust but faces challenges from delays in approvals and funding, compounded by issues like the Affordable Housing Initiative and Building Indemnity Insurance Certificates. Although the non-residential sector is softening, industrial growth remains strong. Tendering opportunities are declining, indicating more competitive pricing. Despite the overall slowdown, sectors such as housing, defence, energy, and e-commerce are expected to sustain growth into 2025. To address workforce shortages and productivity issues, a coordinated effort between the Federal Government and the industry is essential to improve sustainability through reforms in industrial relations, skilled migration, and regulatory requirements.

BRISBANE

Labor cost increases, particularly for in-demand trades like ceilings, partitions, and building services, are driving cost escalation this quarter and are expected to persist into the fourth quarter of 2024 and beyond. Building approvals for dwellings have risen, aligning with recent yields, although it's unclear if this change stems from increased market confidence or low rental vacancies. Overall activity levels reflect long-term averages, suggesting the domestic sector can meet current demand.

Tender activity in the commercial sector is also strong across public and private sectors, though contractor insolvency remains a risk in market sentiment. While some sectors, like industrial, remain competitive, pricing for large-scale projects is expected to rise significantly due to escalating demand for key trades. The upcoming State election may temporarily pause public tendering, but demand for public services is high, and commitments from both parties suggest activity will resume post-election. Preparations for Olympic Games venues are expected to begin in 2025.

CANBERRA

The slowdown in residential building construction in the ACT is expected to persist into early 2025 due to high inflation and interest rates. While the ACT Government's planned spending on social and affordable housing has not yet impacted builders' workloads, delays in funding could hinder their ability to deliver affordable homes quickly. Fluctuations in dwelling construction can adversely affect trade competition.

Smaller commercial projects in Canberra are largely on hold or progressing slowly, with a significant decline in bank valuation work indicating a lack of private and smaller commercial projects, with no substantial recovery anticipated until early 2025. However, the ACT and Federal Governments, along with educational institutions, are pursuing large commercial, defence, and education projects that will compete for resources in the upper market. Despite ongoing demand for experienced project delivery professionals, there are signs that the severe labour shortage is easing.

Meanwhile, the civil sector and social infrastructure projects in health and education remain strong, with large initiatives planned for the next 12 to 15 months.

DARWIN

The Northern Territory construction market is operating near capacity, with low unemployment levels, though skilled labour shortages and rising wage costs are driving price escalations in the greater Darwin area and regional locations.

Continued investments in defence and government infrastructure projects, including remote housing, are boosting activity across the territory. While there was some stabilisation in material prices in Q3 2024, labour shortages, high demand, and challenging economic conditions contribute to market volatility, with significant pricing variations across trades and inflated costs due to a lack of competition among tier one contractors.

Key projects include the first multi-storey apartment building in the Darwin CBD, the Larrakia Cultural Centre, a new office for the Northern Land Council, the Darwin Ship Lift, the State Square Art Gallery, and an ongoing remote homes program for regional communities, all of which reflect sustained high demand for labour driven by government and defence investments.

HOBART

There is cautious optimism among those who have faced unfavourable pricing in recent years, as signs of potential competitive pricing emerge. After experiencing stalled projects and rising costs since early in the COVID period, positive tender results are now appearing for those seeking commercially sensible construction costs. Previously low participation in tendering due to material and labour shortages led to inflated pricing, but an increase in builders and subcontractors seeking work has slowed cost escalations.

The State Government's recent budget commitments to support ongoing funding for built environment and infrastructure projects aim to sustain Tasmania's upward momentum. However, the government's precarious position in a hung parliament, combined with scrutiny over the proposed AFL Stadium project, raises concerns about potential instability. The construction industry hopes that the stadium and related projects can navigate the approval processes successfully.

MELBOURNE

The final quarter of 2024 is expected to maintain the positive activity levels seen in previous quarters across various construction sectors, with signs of stabilization in general material prices, aside from some major construction materials. However, the industry continues to face challenges, including skilled and unskilled labour shortages, company insolvencies, and rising costs due to recent EBA wage adjustments and increased fees.

The appointment of an administrator for the CFMEU's construction arm may have yet-to-be-determined ramifications for the industry. High construction activity in the infrastructure sector remains a driving force, while the general housing sector faces ongoing challenges related to affordability and sustainability, as well as meeting government housing targets.

Construction in the apartment sector is expected to be steady but subdued, whereas the "Build to Rent" sub-sector shows strong growth. Activity in the industrial, health, and aged care sectors remains robust, while the retail and hotel sectors are flat but may show potential for upward movement in the medium to long term.

PERTH

There are emerging signs of increased competitiveness in tender bids for lower-value projects up to $10 million, with contractors and subcontractors more receptive to opportunities compared to the past few years. However, in the Tier 1 sector, a limited pool of capable main contractors and subcontractors is leading to extremely high bids, particularly for formwork trades. While material prices are generally stable, with some reductions in structural steel and re-bar, rising labour costs are offsetting any savings.

Contractor insolvencies remain a concern, prompting contractors to maintain high margins and pursue early contractor involvement (ECI) and design-and-construct contracts for complex projects.

Private residential projects continue to struggle, except for high-end boutique apartments, as developers await higher unit and house prices to justify new investments.

Additionally, industrial relations issues related to the CFMEU and the government's decision to place it into administration add uncertainty to the industry.

SYDNEY

Sydney’s property market remains strong, with home prices steadily rising, albeit at a slower rate than in previous years. The median house price is approximately $1.47 million, while units are around $0.86 million, fuelled by strong buyer demand driven by low vacancy rates and high rental prices. Despite an increase in new listings, the market is absorbing them effectively, maintaining high auction clearance rates.

Economic indicators, including a low unemployment rate and potential interest rate cuts, are boosting confidence among buyers and sellers. However, a persistent housing supply shortage is contributing to rising prices and rents.

Key growth sectors include infrastructure, energy, data centres, and industrial projects, although a decline in construction output is expected in 2024 due to high interest rates, construction costs, and labour shortages. The construction industry faces challenges such as rising costs, skilled labour shortages, and planning approval bottlenecks, yet the outlook remains positive with significant investments in infrastructure anticipated to drive growth.

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