Past Regional Reports
The financial year 2017-2018 saw overall construction activity increase by 11% and 7% in Australia and New Zealand respectively.
Australia construction output 2018 (AU$)
Austrlia construction activity
New Zealand construction output
The financial year 2017-2018 saw overall construction activity increase by approximately 11%, with each sector of the industry (Residential, Non-residential and Engineering) delivering above-trend growth. Heightened construction activity is forecast to continue throughout 2019, albeit at a more sustainable pace of circa 5%.
Residential construction activity peaked in 2018 and is now in decline, with housing approvals down year-on-year. This trend is set to continue in the medium term, as this sector comes under pressure from a number of different angles. The policymaker’s intervention to deflate the housing bubble in Sydney and Melbourne appears to be working, with prices down 11.1% and 7.2% respectively from their peaks in 2017. The Royal Commission into Misconduct in Banking, Superannuation and Financial Services has brought to light irresponsible lending practices by the major banks in Australia. This has resulted in a tightening of lending conditions and further downward pressure on the residential market, as access to finance is no longer as readily available as it was in previous years. Furthermore, a tranche of multiunit residential developments is flooding the market at present, and it appears that supply may have surpassed demand for these types of dwellings. In light of the above, it is unlikely that interest rates will rise in the next 12 months as the residential market has enough to contend with.
Heightened construction activity is forecast to continue throughout 2019, albeit at a more sustainable pace of circa 5%.
The Engineering sector remains buoyant, with major urban transport infrastructure projects (rail, road and airports) currently underway across the nation. This trend is forecast to continue, with construction spend expected to increase by circa 7% year-on-year through to 2021. As reported previously, the infrastructure boom is not without its challenges, as heightened activity has led to difficulties in sourcing suitably skilled labour and raw materials such as concrete, steel and asphalt. Rises in material, plant and labour costs are already evident and likely to continue on an upward trend in the short term.
Commercial office activity remained strong throughout 2018, with moderate growth of 5% forecast for 2019. Low vacancy rates, and in turn rising rents across Sydney and Melbourne, has gained the attention of developers and asset owners who are looking to capitalise on these favourable conditions in the short term.
Across the states and territories, confidence and construction activity remains elevated in New South Wales, Victoria, Australian Capital Territory and Tasmania. The resource states of Queensland, South Australia, Northern Territory and Western Australia are still recovering from the collapse in mining. However, green shoots are beginning to appear, largely down to major investment in infrastructure projects coupled with growing confidence from the private sector.
It is expected that tender prices will increase by between 5% and 6% for infrastructure projects, and 3% to 4% for all other sectors in 2019.
Contributors: John Carleton, Rémi Chalon, Albena Spasova and Chantal Zhang
It was another strong year of growth for New Zealand’s construction industry in 2018, with a 7% increase in building activity for the year to September 2018. The actual value of all building work for the third quarter of 2018 was NZ$5.8 billion (up 6% from the same quarter in 2017). These figures come from a market that is already operating at a high base (in 2017, the actual value of building work was up 10% on 2016) and reiterates the underlying strong demand for construction work across the nation.
There are fears that the construction industry may be nearing peak capacity.
As reported previously, there are fears that the construction industry may be nearing peak capacity. The market is struggling to meet demand due to the lack of available skilled workers, labor shortages, rising building costs and tighter profit margins. In relation to the latter, a worrying development in 2018 was the revelation that two of New Zealand’s most prominent construction companies had very difficult years. Fletcher Building posted a full-year loss of NZ$190 million, whilst Erbert Construction was placed into liquidation. These are warning signs that cannot be ignored, and in order to find viable solutions to the aforementioned issues, a sentiment of willingness and urgency accompanied by investment will be required from both public and private sectors.
All of this construction activity is driven by demand for residential housing, ongoing earthquake repairs, and investment in infrastructure, healthcare and education facilities. This is set to continue through 2019, with tender prices predicted to rise in the order of 5%-7% in 2019.
Contributors: John Carleton, Rémi Chalon