Australia and New Zealand market intelligence: optimism despite cooling construction
Simon Kearney
Director - Real estate
Australia and New Zealand
Our latest report indicates that Australia and New Zealand’s construction markets are cooling as increased construction costs and persistent market challenges slow new activity across the region. However, amidst challenges, the outlook for the public sector remains optimistic, with an extensive pipeline of projects.
Australia’s public sector set to maintain market activity despite softening of private sector
Construction markets across Australia continue to face challenges and are currently experiencing a short-term cooling, attributed to increased construction costs, labour shortages, increased risk and a rise in construction insolvencies.
This softening is being observed primarily across both residential and non-residential sectors. In contrast, state and federal governments are actively investing in construction projects across health, education, transport, energy and utilities, indicating a strong outlook for these sectors. However, even though the public sector maintains robust pipelines across most markets, this is unlikely to be sufficient to offset the decline in the private sector.
While we have begun to observe a decline in material prices, construction costs remain elevated due to high preliminary expenses and labour costs. We expect a gradual easing of construction cost escalation as activity slows in the private sector and the possibility of a reduced infrastructure pipeline.
New Zealand economy enters technical recession
New Zealand’s economy suffered its second quarterly contraction, pushing it into a technical recession. Inflation remains high at 6.0 percent, driven primarily by food prices, followed by housing and utility costs. However, the expectation is for inflation to return to the Reserve Bank of New Zealand’s target range of 1-3 percent by 2025.
Despite a decline in prices for certain building materials, construction costs remain elevated due to continued demand from public sector projects, which are also being affected by shortages of resources and labour. The tight labour market continues to be a challenge, with record high labour force participation and historically low unemployment and underemployment rates. High rates of overseas migration are expected to continue to improve the tightness in the labour market.
Even with increased migration, the precise impact on net demand remains unclear. However, the influx of international migration presents a challenge to housing supply and affordability. This is impacted by the decline in private sector investments due to high inflation, increased interest rates and high construction costs.