Summary top

Non-residential building has been rising to a solid level over the last three years, due to strength in office, industrial and health building activity. Over the short term, non-residential building is forecast to be flat then turn down from 2009/10, as the surge in office building passes. Due to an oversupply of residential building, activity slumped during 2004/05 and 2005/06. However, residential building began to recover in 2006/07 but this recovery has now paused due to tight financial market conditions. However, solid growth is forecast for 2009/10 when the true recovery in residential building starts. Engineering construction has reached a very high level, driven by the boom in mining construction investment. In the future, the main source of growth in engineering construction will switch from mining to road, electricity and water construction. Activity is forecast to remain at a high level. The construction activity outlook is consistent with the macro economic forecast of slower economic growth and rising unemployment over the medium term.

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Residential Construction highlights>>

Non-residential Construction highlights>>

Engineering Construction highlights>>

Highlights of Forecast for Residential Building top

• Residential building was weak during 2004-05 and 2005-06 but began a modest recovery in 2006-07. This recovery paused in 2007-08 as the housing market is being constrained by high interest rates and tight credit. However, residential building is forecast to experience solid growth again from 2009-10 when the true recovery starts.
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• New houses slowed during 2004-05 and 2005-06 due to weak dwelling investment. In 2006-07, house building began to recover with firm growth of 9 per cent (nominal). Over the medium term, house building is forecast to remain at a typical level, as tight financial conditions keep the housing market constrained and delays a true recovery.
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• New other residential includes townhouses, units, etc. This type of building activity has been weak since 2005-06. Unlike house building, it did not begin a recovery. This is because the new other residential building cycle is about one year behind the new house building cycle, as new units and townhouses tend to have longer construction pipelines than houses. Over the short term, unit and townhouse building is set to turn up as it begins its recovery.
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Highlights of Forecast for Non-residential Building top

• Non-residential building activity has risen solidly over the last five years. The solid growth has been driven by retail, office and industrial building. Nationally, non-residential building acitivty is forecast be flat in 2008-09 with growth of only 3 per cent (nominal). In 2009-10, non-residential building is expected to fall (-3 per cent, nominal). This slowdown is expected to be led by weakness in industrial and office building. The high Australian dollar has hit industrial building and the upswing in office building is coming to an end. The forecast slowdown in office and industrial building will be partially offset by solid growth in educational and health and aged care building. Interestingly, in 2007-08, non-residential building activity has been higher in Melbourne than in Sydney. However, this is likely to be short-lived with Sydney expected to re-take its lead in non-residential building activity from Melbourne in 2008-09.
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• Retail building rose to a high level in the four years to 2006/07. This is because investment in retail building experienced a strong recovery due to strength in consumer spending. However, growth in retail building has begun to slow and is expected to remain flat over the medium term as retail investment remains subdued.
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• Office building has doubled over the past five years, rising from $2.9 billion in 2002/03 to $7.7 billion in 2007-08. Leading indicators reached a very high level in the second half of 2007 due to some large projects. There is a lead time of about one year from office commencements to work done, indicating that growth in office building activity is expected to remain high over the short term. The current upswing in office building is forecast to end around 2009-10, but activity will remain at a high level by historical standards.
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• The level of industrial building activity more than doubled from $2 billion in 2001-02 to $4.8 billion in 2006/07, mainly due to growth in warehouse construction. Hence, industrial building is currently at a very high level. Industrial building is expected to ease to a more typical level over the medium term, as the manufacturing industry suffers due to the high Australian dollar.
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• Educational building has risen 35 per cent over the last two years to a solid $3.2 billion in 2006/07. The strong growth has been driven by a high level of educational building activity in the higher education sector. One reason for this has been the strong growth in full fee paying overseas students studying in Australia. Educational building is forecast to continue growing strongly with the Rudd Governemnt's education revolution which includes the new Education Investment Fund.
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• Health and aged care building activity has been rising to a high level during 2006-07 and 2007-08. This has been due to the commencement of some large projects such as the Queensland Health Sunshine Coast Tertiary Hospital valued at around $940 million and the new Royal Children's Hospital in Melbourne, valued at $1 billion. Over the long term, this type of building activity is expected to remain at a high level due to Australia's ageing population, which is causing strong and rising demand for medical and aged care services.
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• Accommodation building is being held back by weakness in the tourism industry. This weakness has been caused by the high Australian dollar and high oil prices. Over the short term, some large accommodation projects will give accommodation building activity a temporary boost.
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• Melbourne is usually second behind Sydney in its level of non-residential building activity. However, the post-Olympics slump in non-residential building activity in Sydney caused a reversal. Since then, non-residential building in Sydney has recovered and is now at a typical level. This led to non-residential building activity to be broadly similar in Sydney and Melbourne during 2004-05 and 2005-06. Recently, however, Melbourne has temporarily taken the lead from Sydney in 2006-07 and 2007-08. This was due to large retail, office and industrial projects in Melbourne. The traditional gap between Sydney and Melbourne is forecast from 2008-09.
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Highlights of Forecast for Engineering Construction top

• Engineering construction work done has more than doubled over the last four years from $27 billion in 2003-04 to a very high $60 billion in 2007-08 (nominal). The strong growth in engineering construction has been primarily driven by the mining investment boom from the China-induced boost to commodity prices. Solid growth in engineering construction is forecast to continue in 2008-09, with 15 per cent (nominal) growth. Thereafter, growth in engineering construction activity is expected to return to a solid level, still well above historical levels. Over the medium term, the main source of growth in engineering construction activity will switch from mining to road, electricity and water construction projects.
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• Road construction activity has risen to a high level over the last few years. The strength in road construction has been supported by the commencement of large projects such as the North-South Tunnel and Gateway Upgrade in Queensland in 2006/07. Over the medium term, road construction is forecast to continue rising strongly as work on major projects continues and new projects commence, particularly in Queensland. Some major upcoming road projects include the Airport Link and Northern Busway project ($3.5 billion) in Queensland due to commence in late 2008.
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• Bridge, railway and harbour construction is primarily driven by railway construction. This type of construction doubled between 2003-04 and 2006-07. The recent strength in this type of construction has been due to the commencement of large coincident projects in Queensland and Western Australia in response to the mining boom. Looking further out, the commencement of the North West Metro rail project in Sydney from 2009-10 (valued at $10 billion) will keep this type of construction at a high level.
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• Electricity and pipeline construction activity has been rising to a high level over the last two years. This is because shortages in generating capacity have begun to be addressed. Electricity and pipeline construction is forecast to remain strong as uncertainty about greenhouse policy disolves. For example, development of the emissions trading system will mean new power stations are more likely to be based on gas or renewable than coal. Hence, construction will remain solid over the long term.
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• Water and sewerage construction activity is surging, with an estimated 104 per cent (nominal) increase in 2007-08 (compared to 2006-07). This surge in activity is due to several new, large projects that are commencing to address the inadaquacies in water infrastructure that have been exposed by the drought. Recently, the Western Corridor Recycled Water project commenced in Queensland (valued at over $1 billion) and the Desalination Plant commenced at Kurnell in New South Wales (valued at around $1.8 billion). The Desalination Plant in Wonthaggi, Victoria (valued at $3.1 billion) is due to commence in 2009, keeping this type of construction at a high level.
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• Telecommunications construction activity has been rising to a solid level over the last three years. This has been due to the roll-out of the Next G network. With the passing of this, telecommunciations construction activity is forecast to return to long term trend levels.
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• Mining construction has surged over the last few years. In 2007-08, mining construction activity is nearly four times higher than it was in 2003-04. The mining investment boom has been caused by the China-induced boost to commodity prices. Major projects such as Pluto LNG, North Rankin Gas Compression and Gorgon LNG will keep mining construction at a high level. Mining construction is forecast to near its peak around 2008/09, with markets expecting the terms of trade to fall from 2009-10 onwards. Thereafter, mining construction is forecast to remain at a high level by historical standards.
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