Construction in Transition: What are tomorrows growth drivers?
It was a pleasure to welcome our clients to Australia's Construction Conference, hosted in Sydney, Melbourne, and online.
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At Oxford Economics Australia’s Construction Conference, held in Melbourne on Tuesday, 25th February, and in Sydney on Thursday, 27th February, Managing Director David Walker set the stage with a thought-provoking introduction, outlining the key themes of the event.
The presentations provided delegates with insights into major sectoral topics, including Construction & Infrastructure, Real Estate, Housing, and Building. Experts explored the evolving landscape of Australia’s construction industry, examining the impact of emerging growth sectors such as data centers and renewable energy, alongside challenges posed by capacity constraints and cost pressures. Discussions also covered policy shifts and global resource demand, highlighting their influence on the sector and strategies to navigate future opportunities.
Is Australia set for growth or stagnation?
The Australian economy was listless coming into 2025, but there are good reasons to expect an improvement. Inflation has eased and looser policy settings will start to support growth,” said Sean Langcake, Head of Macro Economic Forecasting, Oxford Economics Australia. “However, the economy has become overly reliant on public demand as a primary source of momentum. While this has kept a technical recession at bay, there are signs of private sector activity being crowded out.”
Public demand has been a major driver of growth in recent years, and Oxford Economics Australia believes it will be difficult for either major party to walk away from existing social spending commitments.
“But the economy is facing capacity constraints and badly needs a turnaround in productivity growth,” said Langcake. “At this stage, the election campaign appears bereft of answers to the tougher questions.”
The labour market continues to operate beyond the level consistent with inflation returning to target – a surprising development given GDP growth has been so anaemic. Yet, forward looking indicators and data on the most vulnerable parts of the labour market are still holding up well.
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A changing of the guard for building construction growth drivers, while green shoots are emerging for housing
After a few tough years, total building is hitting a trough,” said Timothy Hibbert, Head of Building & Property Forecasting, Oxford Economics Australia. “The build forms that will power the next upturn will be different to previous cycles. The fall back in asset classes like offices will create room for data centres and public hospitals to expand. Nonetheless, industry capacity issues linger that will apply a speed limit to how fast emerging segments and regions can grow.”
With an election due by May, the opposition’s housing policy platform has begun firming. The key announcement to date by the Coalition is the substantial $5 billion Housing Infrastructure Programme which would enable the construction of key infrastructure to unlock the development of detached, greenfield housing. This could trigger a supply surge in capital city outer ring postcodes but not until late decade.
Over the coming year to FY2027, the ranking of non-residential sectors is expected to be highly dynamic. A soft outlook for traditional asset classes such as offices is expected to be offset by non-core sectors such as data centres, and public capex dependent health building.
Meanwhile, house approvals have turned the corner without the help of interest rate cuts, with domestic property investors playing a larger role in the house and land market than before.
While some signs of weakness in land sales and enquiry indicators suggest a sluggish start to 2025 for approvals, we still expect house commencements to grow seven per cent to 108,136 in FY2025,” said Maree Kilroy, Lead Economist, Construction & Property, Oxford Economics Australia.
After booming over FY2023, build-to-rent (BTR) starts are estimated to have ended FY2024 down 19% to 5,290 and little change from this level is anticipated this financial year. A pickup is expected from FY2026 as financing costs ease, while policy uncertainty, which has held back some institutional investors, has faded.
Download the presentation deck here.
How much further can engineering construction activity grow? Will costs and capacity stop the next construction upswing?
The publicly funded infrastructure boom continues to slow as activity reaches a peak of just under $40bn of work in 2025. Activity will then fall as investment priorities shift towards utilities, as work to decarbonise the electricity network and concerns around long-term water security are prioritised by governments.
“The push towards net zero has drawn significant investment into electricity infrastructure,” said Dr Nicholas Fearnley, Head of Global Construction Forecasting at Oxford Economics. “We anticipate a surge in wind farm construction work as the increased penetration of rooftop solar has reduced the economic attractiveness of large-scale solar farms.
“Australia’s size and proximity to Asia ensures we are well placed to become a hydrogen exporting superpower, once the remaining technological and economic hurdles are overcome. Our experience with the LNG boom highlights that investment and construction activity will boom very quickly once the technological and economic hurdles are addressed.”
Download the presentation deck here.
The outlook for total construction activity and its implications
Despite some easing in cost pressures over the past year, 2025 will still be a bumpy ride for the construction industry,” said Adrian Hart, Head of Construction and Infrastructure Consulting at Oxford Economics Australia. “The past six months has seen a distinct shift in where growth is coming from in the construction industry, by state and territory, by segment and funding source. Over 2025 these shifts will accelerate with businesses and project owners also having to consider a number of new risk factors both domestically and internationally.
Overall, construction activity in Australia is still rising and is projected to continue rising over the second half of this decade. Overall, construction activity in Australia is still rising and is projected to continue rising over the second half of this decade. Overall, construction work done grew 5.1% in real terms over the year to September 2024. Although real growth is forecast to slow to 1.5% across FY2025, successive years of growth from here will see activity nearly 8% higher again by FY2030 than it is now.
This growth means that the industry in Australia is not likely to avoid future skills and capacity risks without serious improvements in productivity, with states such as Queensland and Western Australia facing the greatest challenge.
“Market capacity is not easy to measure, however, and is likely to be experienced differently by region, and across smaller and larger contractors,” said Hart. “Given that much of the recent increase in construction work has been publicly funded, the immediate approach has been to look at demand management – literally this means cutting or delaying projects to minimise the pull on resources.
“On this, Infrastructure Australia and the Federal Government are claiming some success from the recent Strategic Infrastructure Review which saw 52 projects axed at a value of $17.1 billion. But unless we are cutting unproductive projects, this is not the best long term answer to market capacity. Rather, we need to do the hard yards on skills and productivity that may take years to get right but will result in massive economic and social benefits.
“The fact is, we have allowed education, training and skills development to wither over the past decade and are now paying the price for this shortsightedness.”
VET completions in construction-related fields are down nearly 55 per cent since 2012, engineering-related VET completions are down by almost 60 per cent. Ord Economics Australia believes Australia needs to fundamentally rethink the way it funds and develops skills – and whose responsibility it is.
“And we need to do things smarter if we are going to achieve Australia’s policy objectives for housing, energy, transport, resources, manufacturing and the environment this decade,” said Hart.
Construction cost growth has eased somewhat over the past year, but it is still running above general inflation, despite easing prices for steel and other commodities that spiked during 2022 and 2023.
This means that costs for building in Australia are still rising in real terms and this trend is likely to persist given robust growth in construction wages. As the residential cycle heats up later on, the risk is that cost growth re-accelerates.
On the outlook for costs, Hart believes that there are fundamental misconceptions about what the long run or ‘new normal’ cost growth looks like.
“I am constantly surprised about how ingrained the idea is that because we had large increases in costs recently, that we should in turn see construction costs fall – rather than slow in growth – in real terms from here and over the long term,” said Hart. “Long run data doesn’t show that. There is no Reserve Bank ‘target range’ for construction costs as there is with the CPI, and there is no reason for it to match growth in CPI either given its composition. The best we can really hope for is for productivity growth to improve. This will offset average growth in the price of inputs, particularly wages, so growth in real costs can be minimised.”
Download the presentation deck here.
Summary
Oxford Economics Australia’s conference provided invaluable insights into Australia’s construction outlook for 2025 and beyond. With a focus on major sectoral topics including Construction & Infrastructure, Real Estate, Housing, and Building attendees gained a deeper understanding of the challenges and opportunities shaping Australia’s construction landscape with invaluable insights.
For more information about Oxford Economics Australia and our research capabilities, visit our website.
The Author
David Walker
Managing Director, Oxford Economics Australia
+61 (0) 2 8458 4234
David Walker
Managing Director, Oxford Economics Australia
Australia
David is the Managing Director at Oxford Economics Australia and heads the office for Australia and New Zealand. In August 2013 he moved to Sydney to establish the firm and is continuing to grow the business in this region as well as leading key projects within Australia.
Before moving to Australia David worked as part of Oxford Economics’ business development team in London. Prior to joining Oxford Economics he worked for KPMG as a management consultant, specialising in financial risk management including stress testing and scenario analysis. During this time he was also seconded to the main Financial Services regulatory body, the Financial Services Authority (FSA). He completed his degree in Economics at Nottingham University and also studied the chartered institute for securities investment diploma.