It will be no surprise to any interested observer that elevated construction cost conditions are persisting. What continues to baffle many, however, is exactly how this situation came to be. For the most part, the distortions of 2020 to 2022 are now out of the system, yet we remain in a world that is still far unlike our pre-pandemic reality.
In WT’s forthcoming biannual update to our Australian Construction Market Conditions Report, our view is that the answer to this conundrum lies in a greater understanding of the construction sector itself, especially investment in its own capability and capacity. Put simply, sector investment has been sub-par over the last 10-15 years, more so in some geographies and some parts of the sector than others.
This explains why the end of pandemic-era disruptions did not result in a swift return to 3% escalation and why a quick fix to persistent elevated escalation is unlikely.
Our three-year outlook to 2026 includes an escalation forecast of around 5% per annum on average across capital city markets for Building. For Infrastructure, we expect escalation around the 5% mark for 2024 before rising closer to 6% per annum on average in capital city markets in 2025 and 2026, driven by the next phase of major projects.
This is not, of course, uniform across the capitals. Brisbane, not surprisingly, continues to expect the strongest Building escalation outlook. This will attract resources from other markets, notably Sydney and Melbourne, which will put upward pressure on their still-elevated outlooks.
Elsewhere, Perth’s escalation outlook is now expected to strengthen, with a more positive outlook for construction activity likely to see increasing pressure on costs (most notably wage costs). Elevated escalation in Hobart largely reflects the size of the new AFL stadium project vs the remainder of the market but does point to a robust market elsewhere to 2026.
For Infrastructure, while it is not immune to issues emanating from sub-par investment, an ongoing issue is the elevated strength and complexity of the pipeline, especially in major transport but increasingly so in utilities. While the pipeline of major road projects is starting to slow, major rail will see new large, complex projects continue to come to market. This will see escalation strengthen in 2025 and remain elevated in 2026 across most markets.
While the upcoming Australian Construction Market Conditions Report looks at all drivers of escalation, our analysis will include a deeper dive into the expected impact from drivers of wage costs and how the underrated project pipeline from state governments may be affected by increasing debt concerns.
On wage cost drivers, our report will examine the extent to which underinvestment in the pipeline of key trades – i.e. the number of people choosing construction-related vocational training or apprenticeships – has contributed to recent wage cost escalation.
We noted with interest the announcement in the recent Federal Budget pledging almost $90m towards the creation of up to 20,000 fee-free places in TAFE, VET and apprenticeships, starting from next year. While this investment is welcome, it won’t make much difference for several years and much more is required to make significant headway into continued tightness in construction labour markets. This is especially so if the federal government is serious about its lofty residential construction targets.
Our report will also examine how underinvestment in the pipeline driving wage escalation has differed by key trade. Lastly, we examine the emerging divide between wage escalation for those on enterprise bargaining agreements (EBAs) and those not on an EBA and how this will affect the overall escalation outlook.
Lastly, we will look at how the collective construction spending pipeline of state governments has become increasingly important (vs. their federal counterparts) over the last two decades. However, this has become more reliant on borrowings in recent years and with interest rates back towards long-term averages, state government debt levels become an increasing concern.
We saw some previously planned spend either postponed or indefinitely on hold in the recent Victorian budget. This is likely also to be seen in the looming budgets of New South Wales and Queensland, but we don’t expect significant changes to the state government construction pipeline. However, should interest rates remain higher for longer or cost pressures continue to push project costs up, this increases the risk of greater cuts to state projects.
The upcoming Australian Construction Market Conditions Report will look into these drivers and more to inform and help our clients understand the impact of market conditions.
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About the author
Damon Roast is WT Australia’s Construction Economist. He brings a wealth of experience from economic analysis and output communication across the in-house and consulting worlds for more than 20 years. His career began as a classical economist before the changing landscape increased the demand for his services in the construction universe, initially in infrastructure and mining before broadening across the sector, most notably for a Tier 1 contractor, before joining WT in 2022.
