Construction cost escalation in Australia is expected to remain a significant challenge, with no relief anticipated until at least 2028.
According to WT’s latest Australian Construction Market Conditions Report, the forecast for cost escalation through 2027 remains stubbornly high, averaging around 5 per cent per annum nationally.
Damon Roast, WT’s construction economist, noted that the three-year base-case outlook includes an average escalation of approximately 5.5 per cent in 2024 across capital city markets for building, with projections indicating that this figure will stay above 5 per cent until 2026 and rise to 5.7 per cent in 2027.
The report highlights several factors contributing to this persistent cost escalation.
Elevated levels of construction activity have been sustained, with record or near-record levels of work currently underway.
Additionally, the contractor landscape has been affected by a high number of insolvencies and ongoing weaknesses in profits and margins, resulting in a conservative risk profile among contractors and subcontractors.
Supply chain pressures continue to linger, particularly due to increased freight costs and a global shortage of electrical components stemming from the pandemic.
Furthermore, the broader economic landscape has been characterised by sub-par performance since the early 2010s, which has negatively impacted sentiment for sector investment.
Roast emphasises that while there is hope for recovery in construction activity and the economy by 2026 — which could make necessary investments more attractive — labour remains a pivotal input driving cost escalation.
Recent enterprise bargaining agreement (EBA) negotiations in larger states are expected to underpin elevated wage growth until at least the fiscal year 2027/28.
The implications of these trends are significant, particularly concerning housing for key workers, including construction personnel, which remains difficult to secure or costly.
Additionally, the ongoing underperformance of the Chinese economy presents both risks and opportunities; China’s growing capacity as a source of lower-cost, high-quality building materials could potentially ease some cost pressures on Australia’s construction sector.
The report argues that sustained elevated construction cost escalation is “simply not sustainable”, with a potential return to long-term averages approaching 3 per cent possible from 2028. However, this outcome is contingent on necessary investments in sector capability being realised.
A key opportunity for encouraging such investment lies in the development of a rigorous, legislated medium-to-long-term project pipeline by government entities.
The outlook varies across different markets within Australia. In Sydney, cost escalation is expected to remain stubborn due to increased unionisation among trades and regulatory impacts.
Melbourne faces similar challenges with regulatory pressures and competition for skilled labour from local infrastructure projects.
Brisbane is likely to experience market tightness driven by shortages of key trades, while Adelaide’s robust project pipeline will keep escalation elevated due to the influence of enterprise bargaining agreements.
In Perth, healthy market fundamentals are challenged by difficulties in attracting labour, leading to continued high escalation rates.
Hobart’s escalation is anticipated to remain high but uneven across sectors, while Canberra’s commercial pipeline concerns weigh on costs despite stronger social infrastructure spending.
In Darwin, defence and renewable energy projects are expected to anchor activity amidst labour retention challenges.
Overall, the construction industry in Australia is navigating a complex landscape marked by rising costs and significant challenges but also potential opportunities for future growth and stabilisation if strategic investments are made effectively.
