Australia and New Zealand market intelligence: market challenges slow new investment

Australian construction markets continue to cool 

Australia’s economic growth is likely to remain subdued through the first half of 2024, largely attributed to ongoing cost of living pressures and escalating interest rates. Notably, the economy grew by a modest 0.2 percent in the third quarter of 2023, down from 0.4 percent the previous quarter.

Existing market challenges, higher interest rates and cap rates, and increased construction costs are slowing new investments and are resulting in the cooling of Australia’s construction markets. However, pockets of activity are continuing across the public sector and high-growth sectors such as data centres. 

The softening of construction investment is most notably observed in the decline of private sector projects across residential and non-residential sectors.

Similar to last quarter, a key driver of growth in Q3 is attributed to robust public sector investments, particularly in health and transport infrastructure projects across the country.

While the pipeline of these major public projects remains substantial, it has been scaled back across various markets in response to the federal government’s Infrastructure Pipeline Review. The recent uptick in inflation may also result in further reduction or postponement of major projects in the immediate term to limit the stimulatory effects on the economy.

New Zealand construction activity expected to slow 

In Q3, New Zealand’s economy surpassed expectations after suffering its second quarterly contraction in Q2, pulling it out of a technical recession. High inflation remains a challenge to the New Zealand economy. Pressures on goods prices are steadily decreasing however, high labour costs are exerting upward pressure on services inflation.  

Higher construction costs and interest rates and persistent market challenges have dampened private investment while existing government initiatives are expected to offset a steeper contraction in activity, with a vast pipeline of public sector projects set to maintain over the medium-term outlook.

Additionally, the change in government has improved confidence in the market with private investment now starting to grow.       

Softer demand and international migration are expected to loosen the labour market and constrain further strong wage growth in 2024. Increased migration has somewhat helped to ease labour costs, however, stronger demand for skilled workers still outweighs the softening labour costs from migration.

Acute labour shortages and higher labour costs are among the greatest challenges across the New Zealand construction market.