Will the Australian construction sector bounce back in 2023?

After an abrupt slowdown in the residential construction sector throughout 2022, there are positive signs the industry is headed for a recovery this year, particularly in light of the positive data on dwelling approvals released by the Australian Bureau of Statistics in February. 

Over nine interest rate rises in a row, plus mushrooming material costs, supply chain disruptions, and labour shortages stalled new home construction last year, setting back an urgent need for new dwellings across Australia.

According to HIA Chief Economist, Tim Reardon, “The 2022 cash rate increases were sufficient to bring [the] building boom to an end and further increases in 2023 will accelerate this downturn,” he added. 

“There was a large volume of work in the pipeline when rates started to rise in May 2022, and there remains a record number of homes under construction, but this will shrink quickly as market confidence continues to fade.

Lending for the purchase or construction of a new home had already fallen to its lowest level since 2012 by the end of 2022, and the full impact of last year’s rate increases is still to flow through to households. 

This will see the number of detached housing starts fall below 100,000 starts per year for the first time in a decade to just 96,300 in 2024. This is a very rapid slowdown from the 149,000 starts in 2021.”

Master Builders Australia CEO Denita Wawn, said, “The current environment is a difficult one for the industry marked by rising interest rates, robust cost pressures and labour shortages. Despite this, the total volume of construction activity grew modestly (+1.5 per cent) to $215.1 billion during 2021–22.

Whilst detached housing and renovations are stable or steadily growing off the back of the COVID stimulus boom, medium to high density remains hardest hit. This segment is more sensitive to interest rate fluctuations and is still recovering from the absence of inward migration over the past three years. Even before the pandemic, higher density dwellings were in decline.

The challenge will be to make sure that we put downward pressure on building and construction costs to increase output.”

She continued, “At present these challenges relate to supply of housing, workforce shortages – particularly key trades, bottlenecks in the market for key building materials and products, and increased costs from regulatory changes.”

ABS provides better news

Meanwhile, the total number of dwellings approved rose 18.5% in December, in seasonally adjusted terms, according to the latest data released by the Australian Bureau of Statistics (ABS)i.

Daniel Rossi, ABS Head of Construction Statistics, said, “this rise followed an 8.8% decrease in November 2022. The increase in the total number of dwellings approved in December was led by a sharp rise in approvals for private sector dwellings excluding houses (+56.6 per cent). The result was driven by a number of large apartment developments approved in New South Wales and Victoria."

He continued, "Approvals for private sector houses continued to track downwards, falling by 2.3%."

Across Australia, total dwelling approvals rose in New South Wales (+48.4%), Victoria (+20.7%), Queensland (+8.3%), and Western Australia (+6.4%), while Tasmania (-49.7%), South Australia (-24.6%), recorded decreases.

Approvals for private sector houses were mixed, with increases in Western Australia (+8.2%), Victoria (+0.3%) and Queensland (+0.2%), while South Australia (-7.4%) and New South Wales (-4.2%) fell.

The value of total building approvals rose 3.0% in December, following a 0.6% decrease in November. The value of total residential building approvals rose 6.6%, comprised of a 7.25% increase in new residential building and a 2.7% increase in alterations and additions.

Government doing its bit too

In the 2022-23 Budget, the Australian Government is delivering on $9.6 billion of election commitments for vital infrastructure projects across Australia that will help underpin the non-residential construction sectorii. 

Commitments funded in the Budget include:

• $300 million for Western Sydney Roads Package and $500 million for the High Speed Rail Authority.
• $2.2 billion for the Suburban Rail Link in Victoria.
• $586.4 million of additional funding for a major upgrade of the Bruce Highway to widen a 13-kilometre stretch through Brisbane's outer northern suburbs.
• $1.5 billion for upgrading important freight highways, sealing the Tanami, and upgrading Central Arnhem Road, as well as the Dukes, Stuart and Augusta highways in SA.
• $540 million to upgrade Tasmania’s important road corridors, including the Bass Highway, the Tasman Highway and the East and West Tamar Highways.
• $125 million funding to help build an electric bus network for Perth.

A further $250 million has been committed for the Local Roads and Community Infrastructure program, enabling every local council across Australia to deliver priority projects to quickly stimulate local economies.

The Australian and South Australian governments have committed a total of $685 million to fund the Main South Road and Victor Harbor Road duplication (Fleurieu Connections) projects, with the Australian Government committing $221.6 millioniii.

The Victor Harbor Road duplication involves duplicating approximately four kilometres between Main South Road, Old Noarlunga and Main Road, McLaren Vale.

The duplication will improve road safety, improve traffic flow and increase capacity.

The adoption of technology

Technology is also playing a key role in the development of the construction sector, bridging the gap between manual and digital processes creating new ground for the industry. Many companies are now adopting solutions such as 3D printing and artificial intelligence, reducing the time and cost for production, whilst creating efficient and cost-effective solutions for the public.

Overall, the growing demand for construction services and with advances in technology is providing a unique opportunity for construction companies to succeed as the sector continues to grow. With the sector starting to show early signs of a return to form, the construction sector in Australia is expected to grow significantly over the coming years, providing a sustainable and reliable market for all industry participants. 

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i.     https://www.abs.gov.au/media-centre/media-releases/apartment-approvals-drive-december-increase

ii.    https://minister.infrastructure.gov.au/c-king/media-release/96-billion-infrastructure-boost-australia

iii.   https://minister.infrastructure.gov.au/c-king/media-release/major-milestone-duplication-victor-harbor-road

Disclaimer

The information provided in this article does not constitute advice. The information is of a general nature only and does not take into account your individual financial situation. It should not be used, relied upon, or treated as a substitute for specific professional advice. We recommend that you contact Brentnalls SA before making any decision to discuss your particular requirements or circumstances.