Construction in Australia 2023 – mid term report

Wow… the first 6 months of 2023 has been rather tumultuous in the construction industry, especially the residential sector with inflation, supply chain issues, rapid interest rate rises and housing affordability coming home to roost and making for a difficult and tricky period for the industry to navigate. .

However, in spite of all this, the fundamentals that have underpinned the industry for the last 20 years are all still in place and whilst the short and mid-term prospects aren’t so bright, the longer term is still looking quite promising.

First, let’s unpack the bad news: the inflationary pressures brought about by global supply issues in the last two years combined with slow land release, lack of skilled trades and fixed price contracts has brought some of Australia’s larger players and a raft of smaller construction companies undone, with the Porter Davis housing company being the largest.

Others such as civil design and building firm Lloyd Group, luxury apartment builder, EQ Constructions, residential Victorian home builder Hallibury Homes, developer Longriver and award-winning house builder Mahercorp are among the casualties.

This has left hundreds of new home buyers in the lurch with unfinished homes and lost deposits and the situation is particularly ugly in Victoria, where many of the Porter  Davis and other builds were not covered by insurance. The Victorian government has had to set up a $15m bail-out scheme to help out some of these customers.

It will be many months before the situation becomes any clearer. In the meantime many sub-contractors, construction workers and suppliers are out of pocket and projects are sitting idle and unfinished.

construction australia 2023

Nationally the interest rate rises are having a very negative effect on borrowing capacity and affordability and the fixed interest rate loans that are reverting to variable loans have resulted in negative home equity for some that were already stretched or had purchased at the peak.

New home buyers are also finding that if they can get a loan, the increased construction costs have then limited what style and size of house they can afford and combined with slow land release and red tape for developers there is some pain to come in the foreseeable months leading well into 2024.

On the upside for the construction industry the federal government’s immigration policy is in place for over 300,000 net overseas migration per annum for the next 2 years. This will require more homes and infrastructure than the whole of Canberra combined and governments, developers and industry will be taxed to provide the basic shelter and amenities for this influx of population.

The indications are that this will result in a proliferation of apartment building again and the governments are under pressure to provide affordable housing, public housing and financial assistance to home buyers, which in turn will assist the building industry with extra work.

Last month’s Tiny Home Expo in Western Sydney attracted thousands of potential buyers and with rental availability at an all-time record low, these types of constructions are likely to explode in the next couple of years.

With shelter being a basic requirement, the building trades will be kept busy in any event to construct and provide what governments are being forced to look at as an essential service.

Another problem for the construction industry in the last few years has been the lack of skilled trades. This is due to the robust building activity combined with the absence of skilled migrants coming in from overseas, which we have traditionally relied on. With the opening up of the country again to immigration, building contractors will see this shortage likely to ease in the next few months and labour costs should level out.

Another area of construction that is continuing to grow is the infrastructure related to the renewables industries. Building of solar farms, wind farms and other renewable energy supplies utilise a wide range of trades especially on the civil and earthworks sectors of the industry and these will continue to be strong growth areas in the future.

On a global level the commodity and construction materials demand has subdued somewhat, and the signs are that the inflationary pressure will abate, and prices will remain steady and in some instances retreat back to a more normalised level.

With these labour and input costs stabilising, construction costs should reduce or at the least remain relatively constant without the volatility and sharp increases that marked the 2021-22 years, which will be a welcome return to normal for both the builders and their customers.

For builders and construction companies that have good fundamentals, rise and fall contracts and access to a  growing skilled labour pool, the future is bright and later into spring the pipeline of work should be better for the most part and continue to improve into 2024.