Highlights from ACIF Forecasts May 2017

The latest industry forecasts released today by Australian Construction Industry Forum (ACIF), the peak consultative body for building and construction, show this important industry for employment is moving quickly through two peaks in activity with a less fevered period of activity coming.

The ACIF Forecasts for May 2017, released at DesignBUILD on 4 May show that Engineering Construction is midway through a sharp downslide. Demand in the sector, that includes mining-related construction, plus roads, rail and other large infrastructure is coming off a record-breaking peak driven by the mining development boom to take second position behind Residential Building. Residential Building is in the middle of its own boom. This has pushed growth beyond the housing fundamentals and a downturn is on its way.

The Australian construction market is rolling through multiple business cycles of boom and bust, and some of the highlights of the ACIF Forecasts May 2017 are outlined here.

Economic developments are at the heart of the business cycles

  • The end of the mining investment boom continues to be a drag on economic growth, which is tracking below the longer-term average.
  • The much awaited strengthening in non-mining business investment remains elusive.
  • Dwelling investment has provided one of the few sources of growth in activity and employment over recent years.
  • Growth in employment, despite relatively low levels of growth in GDP, has been sufficient to wind back the rate of unemployment to under 6%. This gradual decline in unemployment may have faltered recently and high rates of part time employment points to significant underemployment and spare capacity in the labour market.
  • Reflecting low inflation, sluggish growth and evidence of spare capacity the cash rate of interest has been set to 1.5%, an historic low point. This has supported modest growth in non-mining business investment and household consumption. Traces of accommodative monetary policy are most apparent in surging dwelling investment and somewhat alarming increases in house prices, especially in Sydney and Melbourne. There is also concern about increased household debt and risks to the banking system and future growth.
  • Increases in official interest rates should not be on the table until there is evidence of a significant improvement in employment growth, higher income growth and a clear prospect of higher inflation.
  • Firmer prudential supervision is targeting the emerging risks in mortgage lending, sharply restricting credit growth and raising interest rates for investors and developers. There are indications that these measures have already taken some of the pressure out of rising house prices and they are adding to expectations of a downturn in investment in new housing, especially development of apartments in inner city areas.

Engineering Construction has been downgraded

  • The ongoing decline in Engineering Construction has been extended and deepened in the May 2017 ACIF forecasts. Work done is projected to fall by 14.5% in 2016-17 to $81 billion. Overall, a fall of 45% is expected from the peak in Engineering Construction activity in 2012-13 to the expected trough in 2017-18.
  • Earlier ACIF Forecasts had pointed to plans to increase infrastructure spending and these are now flowing through into actual construction work (especially in Roads and Telecommunications).
  • The ACIF forecasting team is still assessing recent announcements in the Australian Government’s Budget 2017 that foreshadows a $75 billion investment in infrastructure across Australia and in most key categories of infrastructure over the next 10 years. Many of the larger commitments relate to projects that are already in the ACIF Major Projects database. The May 2017 ACIF Forecasts reflect the view that additional commitment to infrastructure investment in the medium term will play a useful role in putting a halt to the current downslide in Engineering Construction and stabilising activity at around $80 billion into the medium to longer term.

Non-Residential Building disappoints

  • This category of building fell by 0.8% last year, shedding $276 million in work done.
  • Non-Residential Building is a mixed bag with increases in subsectors being less common than dips. The May 2017 revisions have downgraded the outlook for Education, Health and Aged Care and Industrial. This largely dominates upgrades in activities such as Accommodation, and Retail/Wholesale Trade and results in a net decline in Non-Residential Building activity in the next two years.

The cycle of boom-and-bust deepens in Residential Building

  • A boom in Residential Building resulted in growth of 10.5% in 2015-16 lifting the value of work done to $95 billion.
  • Leading indicators show that growth has peaked, particularly in New Other Residential (that is, flats, apartments and townhouses).
  • A raft of policy measures have been implemented to reduce demand for housing, including closer supervision of foreign buyers and more stringent prudential supervision on mortgage lending which has already raised interest rates for investors and reduced house prices in key markets.
  • Growth in Residential Building at large is projected to fall to 4% this year (2016-17) and then activity will contract by a total of 16% over the 3 years to 2018-19.
  • The Australian Government’s 2017 Budget provided many measures designed to tackle problems with housing affordability. These will take some time to flow through to actual Residential Building activity and it is likely that they will provide a lift in supply and assist in funding demand for more affordable housing from 2017-18, just when the Residential Building activity would otherwise be entering its expected downturn in earnest. It is too early to say in this set of ACIF Forecasts how much this will change the projections.

The states are riding the cycles hardest

  • Queensland and Western Australia, traditionally viewed as the mining states, experienced extraordinary growth in construction activity in the years up to 2013-14 and they surged ahead to overtake every other state. Construction activity in these 2 states accounted for over half of the total at the time. Huge mining and supporting export infrastructure projects have been completed and construction activity in these states is now in a steep decline.
  • Meanwhile, construction activity in New South Wales and Victoria faltered in 2013-14 and then began to see more rapid growth as Residential Building built up steam. These states are predicted to enjoy continued increases in construction activity this year and next as the housing boom finally reaches its own peak. They too will experience the downside of a boom when the predicted decline in Residential Building works through the construction pipeline.

Total construction and cycles

  • The outlook for the Australian construction market as a whole seems to be underlining the well worn cliché that “what goes up – must come down”.
  • The value of aggregate construction work done peaked at $248 billion in 2013-14 reflecting the influence of the investment phase in the mining boom.
  • The synchronised double dip due to the bust in mining and housing booms will push the value of work done in aggregate construction down to $194 billion by 2019-20.
  • Construction employment will inevitably have to ride the cycles
  • Employment in building and construction rose to a little above 1 million persons in 2013-14 as mining related construction activity peaked.
  • It has been a source of surprise in some quarters that employment did not fall away following the end of the investment phase in the mining boom. It seems that the Residential Building boom has been sufficient to sustain and actually increase employment in construction activity, which has continued to grow to around 1.1 million jobs last year (2015-16).
  • The end of the Residential Building boom is forecast to occur as the Engineering Construction activity troughs. It is this “double dip” in construction activity that will drive employment numbers down to 956,000 by 2020-21.

About Australian Construction Industry Forum (ACIF)

Australian Construction Industry Forum (ACIF) is the cohesive, trusted voice of the Australian construction industry. ACIF facilitates and supports an active dialogue between the key players in residential and non-residential building, and engineering construction, other industry groups, and government agencies. ACIF’s focus is on innovation, collaboration, equity and sustainability for the industry.

ACIF Members are among the most significant associations in the industry, spanning the entire asset creation process from feasibility through design, cost planning, construction, building and management. ACIF harnesses the resources of its Members to research and develop initiatives that benefit businesses of all sizes, from the largest of construction companies to small consultancies. More information on ACIF is available from www.acif.com.au.

About ACIF Forecasts

ACIF Forecasts are rolling ten year forecasts of demand across residential, non-residential and engineering construction in Australia. The Forecasts are prepared by respected economic modellers, using high quality data sources, and are overseen by ACIF’s Construction Forecasting Council, an industry panel of expert analysts and researchers.

ACIF Forecasts are used by thousands of professionals each year, from across the full range of stakeholders, from major organisations to small consultancies. ACIF Forecasts are available as the Australian Construction Market Report, and detailed numbers are available by subscribing to the Customised Forecasts Dashboard. More information about ACIF is available from www.acif.com.au/forecasts.