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ProfessionalsAustralia

CONSTRUCTION INFORMER

WHAT’S INSIDE:

• The big issues• The long-term outlook• The opportunities

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Summary

The Australian economy remains in a transition phase as the mining boom continues to slow. As the reliance on mining declines, it will be up to other industries to drive growth. One of the bright spots in the economy is the recent performance of the construction sector, particularly residential construction.

The construction sector is of major importance to the Australian economy. During 2014–15, the construction sector is expected to employ 1,060,000 people, which represents 9 per cent of total employment across Australia. Over the same period, total income earned by the construction sector is forecast to total $341.2 billion. According to the latest ABS figures, the value added by the construction sector accounts for 8 per cent of GDP.

The construction informer

Indicators Latest figures % change since previous period

% change since previous year

Building construction

Approvals (total) 19,333 (March 2015) 18 18.2

Private sector houses 9,489 (March 2015) 0.2 -

Excluding houses 9,605 (March 2015) 3.6 44.4

Work done (total value) $22,328m (Q4 2014) -0.2 4.1

Residential $13,752 (Q4 2014) 7.2 12.4

Non-residential $8,584 m (Q4 2014) -1.4 -2.5

Engineering construction

Work done $27,854 (Q4 2014) -0.6 -12.4

The economy

The global financial crisis changed the way Australians managed their finances. Many households sought to minimise debt levels and nearly doubled their savings rate. The high savings ratio has persisted since 2008, remaining around 10 per cent. While household savings are strong, the Reserve Bank now faces the task of encouraging spending in an effort to boost growth. Efforts to boost spending are likely to aid the construction sector.

Table 1: recent performance measures

Table 2: current economic indicators

Note: All figures are ABS ‘trend’ figures

Note: figures current as last published

Indicator Latest figures (%) Date released 12 months ago (%)

Economic growth 2.5 Dec-14 2.8

Unemployment 6.1 Apr-15 5.9

Participation rate 64.8 Apr-15 64.8

Inflation (CPI) 1.3 Mar-15 2.9

Wage price index 2.3 Mar-15 2.6

Household savings ratio 9.1 Dec-14 9.9

RBA cash rate 2.00 May-15 2.5

Informer - Construction

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The big issues

These are the big issues facing the Australian economy:

1. Global growth. Global growth of 3.5 per cent is expected in 2015, while 3.17 per cent growth is forecast for 2016. A rebounding US economy has been aided by low world oil prices. While some lingering instability remains in Europe, the region has also displayed some positive signs. Asia continues to outperform, despite slowing slightly. A shift in Chinese growth to more reasonable rates has occurred, as they transition to a consumer-driven economy.

2. The transition. Over the past year, the RBA reports that commodity prices have fallen by 20.5 per cent, restraining the performance of the mining sector. Conversely, the AUD has depreciated against the USD, by approximately 15 per cent over the past 12 months, supporting trade-exposed industries. The dropping of the cash rate to 2 per cent in May has helped support this devaluation, while also promoting residential housing and construction.

The outlook

The Australian Construction Industry Forum (ACIF) is predicting that total spending on construction will remain relatively stable for 2014-15, dropping by only $5 billion to $228 billion. However, where money is spent in the sector is likely to change. Demand from foreign investors and a strong domestic market is forecast to drive growth in residential construction’s share of the sector to $90 billion in 2017-18, from the current $75 billion.

Engineering construction is forecast to decline from a peak of $128 billion to $92.5 billion in 2017-18, reflecting the slowing investment in mining and allied sectors. However, the rest of the economy remains strong.

The long-term outlook

The Australian construction sector will face ongoing challenges over the coming years. Those operators that invest in new and emerging technologies and keep a keen eye on demographic trends will be best positioned to prosper.

Residential

• Falling affordability. Housing scarcity issues and ongoing property speculation are making houses less affordable in major cities. As the National Housing Supply Council reports, ‘While detached houses will dominate the stock of housing for many years to come, smaller and higher density dwellings are likely to form the majority of additions to housing supply in major cities and towns’. This trend is particularly pronounced in the apartment markets in our two largest cities of Sydney and Melbourne. While interest rate cuts have reduced the cost of debt, they have also exacerbated housing price growth. With State governments reliant on the private sector to boost supply, the challenge for industry will increasingly be to change consumer behaviour an increase the uptake of affordable small-medium size dwellings.• The Baby Boomers are retiring. With the first Baby Boomers reaching 65 in 2011, older households will become ‘a potent force’ in the Australian housing market. Decisions about house size, design and location will affect demand, supply and affordability over the coming years.

• Investment and speculation. Residential property is taking on more characteristics of an investment vehicle. Negative gearing, foreign investment and the popularity of SMSFs are supporting price growth and promoting greater activity in the construction sector.

Non-residential

• Infrastructure and capability. Australia’s infrastructure investment is currently shifting away from mining and into productivity driving roads and rail. NSW and Queensland both have large projects in the pipeline, shifting the focus of engineering outputs. However, depleted engineering stocks - through under investment – will challenge their ability to manage this investment. While Victoria has a comprehensive engineering capability policy, NSW does not.

• Environmental efficiency. Energy-efficient offices, factories and other workspaces are becoming increasingly sought-after. New buildings are required to meet energy efficiency standards, while many existing buildings are also being upgraded. High energy costs are driving much of this change, as businesses seek to minimise running costs. Advances in renewable energy and energy storage technology will encourage many commercial establishments to invest in renewables where possible.

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The opportunities

• Low interest rates. The Reserve Bank cut interest rates to a record low of 2 per cent in May. While the move seeks to stimulate spending across the economy, the most immediate consequence for many households is the lower cost of debt. Low lending costs are likely to encourage many households to borrow to fund the building of new homes or improvements to existing buildings. Interest rates are expected to remain low over the next few years, providing opportunities for residential builders.

• Housing affordability and shortages. Residential construction will continue to provide strong opportunities for growth. Strong competition will encourage builders to push seek cost savings in order to capture larger margins or decrease their prices. Governments have pointed to shortages as a driver of high prices. As a result, strong residential construction activity is expected over the coming years to address these shortages.

• Energy efficiency. The increasing shift towards energy efficiency will require builders to incorporate new elements into building design. Significant opportunities are present for operators that can incorporate these requirements into their designs and cater for the climate conscious consumer.

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Construction informer

Level 1, 163 Eastern Road SOUTH MELBOURNE VIC 3205 rpeng@professionalsaustralia.org.au 1300 273 762 +61 3 9695 8902

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