According to WT’s latest Australian Construction Market Conditions Report, cost escalation forecast to 2027 remains stubbornly elevated, around 5 per cent per annum on average nationally.
“Our three-year base-case outlook includes a forecast of an average around 5.5 per cent in 2024 across capital city markets for building, remaining above 5 per cent through 2026 despite a broader moderation in construction activity, before jumping to 5.7 per cent in 2027,” says Damon Roast, WT’s construction economist.
“From a weighted national average of 4.8 per cent this year, we forecast escalation in infrastructure to move back around the 5.5 per cent mark to 2026, remaining above 5 per cent in 2027.”
WT expects to see elevated escalation through the remainder of 2024 and well into 2025 due to:
- construction activity: elevated levels of project starts have largely persisted but, of more relevance, there are record or near-record levels of work under construction
- contractor landscape: record or near-record levels of contractor insolvencies and ongoing weakness in profits and margins have seen the risk profile for contractors and subcontractors remain conservative
- lingering supply chain pressures: freight costs have jumped in 2024, albeit off a low base, while there has been an ongoing global shortage of electrical components since the pandemic
- broader economic landscape: sub-par economic performance has weighed on sentiment for sector investment since the early 2010s.
“Our base-case outlook is for recovery in construction activity and the broader economy to become quite apparent by 2026. This would make the necessary and overdue increase in sector investment more attractive, likely paying dividends in the form of downward pressure on escalation from 2028,” explains Damon.
“However, labour remains the most pivotal input to cost escalation, with the outcome of recent EBA negotiations in the larger states to underpin elevated wages growth until at least FY2027/28.”
According to Damon, the most likely implications and risks to the outlook include that housing for key workers (which include construction workers) remains difficult to secure, costly or both.
The potential for ongoing Chinese economic underperformance is both a risk and an opportunity. China’s increasing viability as a source of lower cost, high-quality building materials and some plant and equipment could be strengthened by its economic underperformance.
“China’s recent track record of fast progress as a sophisticated producer of electric vehicles, batteries and renewable energy equipment suggests it could provide escalation relief via this avenue to Australia’s construction sector,” says Damon.
The overall view in our report, Damon argues, is based on the premise that persistent elevated construction cost escalation is “simply not sustainable”.
“A return to the long-term escalation average heading back towards 3 per cent is possible from 2028,” he says, “but this is contingent on the necessary investment in the sector’s capability coming through.”
“A key opportunity to encourage investment in sector capacity would be for governments to develop a rigorous, legislated medium-to-long-term project pipeline,” concludes Damon.
Key points to escalation outlook by market
- Sydney: Escalation is set to remain stubborn, with increased unionisation of trades, the ongoing impact of regulation, strength in sectors such as health and transport, and the risk of skills flowing to Brisbane and South East Queensland.
- Melbourne: Similar to Sydney, the Melbourne market is seeing the impact of regulation and the attraction of skills to local infrastructure projects and to opportunities north of the border. State government debt profile, statutory headwinds and broader economic sentiment are also weighing on conditions. Fundamentals should reassert themselves but perhaps not until after the next state election.
- Brisbane: We expect to see continued market tightness, a strong pipeline, and shortages of key trades driving the outlook for Brisbane. However, the relationship between the sector and government policy should improve with the change of government.
- Adelaide: A robust pipeline of major projects will keep escalation elevated. Several of these projects require Tier 1 involvement, likely increasing the influence of enterprise bargaining agreements (EBA) and driving escalation higher.
- Perth: Healthy market fundamentals are exacerbating difficulties in attracting and keeping labour, with the impact of the new EBA keeping escalation at or above 5 per cent for some time to come.
- Hobart: Escalation is expected to remain high, though uneven across sectors. In major projects, escalation is likely to rise further, particularly where trades are on EBAs. For smaller projects, escalation may be lower, with more contractors seeking work.
- Canberra: Continuing concerns about the (federal-led) commercial pipeline are weighing on escalation, although the social pipeline is stronger. Elevated infrastructure spending is likely to put a floor under market cost pressures.
- Darwin: We expect defence and, less so, resources and renewables to anchor activity amidst the ongoing battle to attract and keep labour. Escalation is set to average around 5 per cent per annum to 2027.
- Newcastle: Newcastle is well-placed to benefit from activity across many building and infrastructure sectors. Major concerns around skills shortages have been limited so far, but this may be tested in coming years.
- Geelong: Geelong has a healthy project pipeline. The soft Melbourne market is boosting the supply of trades, but this may change when the Melbourne market recovers.
- Gold Coast: There is an increasingly robust activity pipeline for the Gold Coast, which is stretching availability of resources to deliver projects across all sectors. This is continuing to put upward pressure on escalation.
- Cairns: A healthy recovery in tourism, rebuild from the impact of Cyclone Jasper, elevated spending from local government, and strong market conditions in Townsville have contributed to a shortage of key trades and an elevated escalation outlook in Cairns. The change of government at the state level should see further pressures in the years ahead.