IMPLICATIONS FOR THE CONSTRUCTION SECTOR

Booms and busts in investment cycles – across mining, economic and social infrastructure, and housing – have had a profound impact on Queensland’s construction industry.

Since the mid-2000s, measured construction activity in Queensland has been dominated by the tremendous cycle in resources investment, primarily coal and LNG related projects. Construction activity tripled between 2002 and 2014 before collapsing 40% in subsequent years.

The volatility in work, high competition for resources, and sharp variations in costs and prices continue to challenge the sustainability of the construction industry in Queensland. While total construction activity in Queensland is likely to stabilise around current levels for the next few years, this masks wide variations by construction segment – across housing, non-residential building and engineering construction – as well as within the engineering construction segment itself. Construction costs, which had flatlined in the wake of the investment bust – are growing at the fastest pace for several years, with sustained, high levels of construction activity in New South Wales and Victoria likely to continue to provide resourcing challenges for Queensland projects.

KEY IMPLICATIONS

CONSTRUCTION ACTIVITY

Has risen a modest 6.7% over the past two years, following a 40% collapse over 2014/15 and 2015/16.

Much of the boom and bust in construction activity in Queensland was driven by the engineering construction segment (including Major Projects).

From a peak of $65.3bn in 2013/14, annual construction work done (encompassing residential building, non-residential building and engineering construction) now sits at just over $42bn.

Total engineering construction work done fell from an official peak of $47bn in 2013/14 to $18.6bn in 2015/16, but has risen marginally to $21.4bn in 2017/18 on the back of roads, electricity, telecommunications (NBN) and mining projects.

CONSTRUCTION EMPLOYMENT WAGES AND PRODUCTIVITY

Employment growth was strong during the first phase of the resources boom, but did not rise significantly again post GFC during the more LNG-intensive boom phase.

There has been a solid construction employment recovery through 2017/18, although the modest outlook for construction work from here remains a key risk.

CONSTRUCTION COSTS

The boom in construction activity in Queensland over the past decade produced large increases in construction costs.

Overall construction costs have not fallen substantially since the boom and are again rising strongly, placing pressure on industry margins.

KEY IMPLICATIONS – FURTHER ANALYSIS

CONSTRUCTION ACTIVITY

Strong government revenues from the boom and surging population growth drove a twin cycle in public investment, particularly where infrastructure gaps become apparent in transport (roads and ports particularly, but also rail), utilities and social and institutional nonresidential building (education and health). While public investment was sustained early on in the subsequent resources investment bust, sharply falling revenues eventually drove a retreat in public investment – amplifying the effect of the downturn in private investment on the Queensland economy.

Total construction activity (including residential building, non-residential building and engineering construction) peaked at $65.3bn in work done through 2013/14, almost 140% higher than 2004/05 levels.

Over 2014/15 and 2015/16, however, the value of total construction work done fell by 40% as several multi-billion dollar LNG projects reached or neared completion and investment in coal projects continued to decline sharply.

Over the past two years, total construction activity has more or less stabilised in Queensland, with work done settling at just over $40bn. However, cycles continue to play out under this steady exterior, with residential building activity falling 6.4% in 2017/18, offset by a pickup in non-residential building and engineering construction work.

Over the next two years, total construction activity in Queensland is forecast to edge lower, with weaker residential and engineering construction activity offsetting modest growth in non-residential building.

Since the end of the resources boom, Queensland’s construction market has been overtaken by both New South Wales and Victoria, with activity in those states supported by a strong turnaround in economic and population growth driving surging social and economic infrastructure construction. In turn, skills and other construction resources such as plant and equipment have moved from the former resource boom states into the new growth states. While New South Wales and Victoria are near the peak of their current construction cycle, construction activity is still expected to remain at very high levels, presenting capacity and capability challenges if Queensland is to sustainably grow its own construction market.

FIGURE 34: TOTAL CONSTRUCTION WORK DONE BY STATE $BILLION, CONSTANT 2015/16 PRICES

FIGURE 35: QUEENSLAND CONSTRUCTION WORK DONE BY SEGMENT $BILLION, CONSTANT 2015/16 PRICES

QUEENSLAND CONSTRUCTION ACTIVITY HAS RISEN A MODEST 6.7% OVER THE PAST TWO YEARS, FOLLOWING A 40% COLLAPSE OVER 2014/15 AND 2015/16

CONSTRUCTION ACTIVITY – RESIDENTIAL BUILDING

After five consecutive years of growth, residential work done in Queensland eased back in 2017/18 (-6.4%). High density residential construction focused in inner Brisbane pulled back 21% in 2017/18.

Total dwelling activity is set to fall by a further 6% over 2018/19 and 2019/20, despite the pickup in population growth, with detached house and attached dwelling segments contributing to the fall. The oversupply of apartments in the Brisbane market is projected to see high density work done drop significantly over the forecast horizon. Houses are expected to fare better, holding at a relatively strong level, as regional areas including the Gold Coast and Sunshine Coast benefit from solid population inflow. North Queensland is also set to bounce back after underperforming for several years.

While stronger growth in residential building is expected late in the forecast period as excess stock of housing is absorbed, it is unlikely to surpass the previous peak in work in 2016/17.

LOGAN ENHANCEMENT PROJECT

NEW OPPORTUNITIES MAY EMERGE WITH THE COMMONWEALTH GOVERNMENT’S INFRASTRUCTURE INVESTMENT PROGRAM (IIP)

CONSTRUCTION ACTIVITY – NON-RESIDENTIAL BUILDING

In 2016/17, non-residential building work done eased back by 5% as work on a number of major projects came to an end. Health building declined sharply with the completion of the $950m Sunshine Coast University Hospital while office building also fell as projects like the $265m 480 Queen Street and $320m 1 William Street were completed. However, with improving economic conditions and stronger population growth, nonresidential building work done rose 8.5% in 2017/18 and is expected to move to a higher plane over the next five years. Large defence projects helped drive the rise in work in 2017/18, along with rising commercial and industrial activity.

Looking ahead, a number of hospitality developments, including the $1+ billion New Brisbane Casino, along with education, accommodation and health projects – including the second stage of the Sunshine Coast University Hospital – is driving a strong surge in social and institutional building. Combined with further increases in defence work, total non-residential building work done is forecast to move above $9bn per annum, compared to the average of $7.4bn over the five years to 2017/18. Here, Queensland is joining the strong upswing in non-residential building activity nationally, although this is principally being driven by commercial and industrial development in New South Wales and Victoria.

CONSTRUCTION ACTIVITY – ENGINEERING CONSTRUCTION

A boom in mining and heavy industry construction, combined with elevated levels of transport-related construction, drove roaring engineering construction activity over the first half of this decade. Activity in 2012/13 was more than double the levels seen only a few years earlier, although this figure was heavily driven by work on three simultaneous LNG projects which saw oil and gas work done rise from just $232m in 2008/09 to a peak of $23.3bn by 2013/14. While engineering construction activity has fallen dramatically from the 2013/14 peak, it has settled at a level higher than the pre-resource boom years, supported by public investment in roads and telecommunications (the NBN) and private investment in renewable electricity generation and resources.

As reflected in the outlook for work in the Major Projects Pipeline in this Report, total engineering construction activity in Queensland is expected to track lower in coming years as key drivers supporting current strength begin to reverse. In particular, engineering construction activity is expected to ease as major roads projects move to completion, as uncertainty in renewable energy and climate change policy impacts on electricity investment, and as the rollout of the NBN begins to wind down. This will be partially offset by rising activity in rail, water and recreation.

A mild recovery in engineering construction activity is expected in Queensland in the early 2020s, led predominantly by large rail projects as well as further resources investment. Overall, total engineering construction activity is expected to average $20.7bn per annum through the next five years to 2022/23

CONSTRUCTION EMPLOYMENT, WAGES AND PRODUCTIVITY

EMPLOYMENT

Queensland construction industry employment has surged 14.7% over the past two years, following a long period of decline since 2009/10. While there was a substantial surge in measured construction activity during the second phase of the resources boom in Queensland (between 2010 and 2014), construction employment remained relatively steady at around 228,000 persons during this period. This was due to the bulk of the increased activity being focused in LNG facilities, where much of the recognised value of construction work was actually fabricated offshore and only assembled locally.

Construction employment rose 14.7% to 239,000 persons over the two years to 2017/18, rebounding from declines experienced over 2014/15 and 2015/16.

Higher levels of residential building activity – a major employer of construction labour – was a key driver of the employment rebound, along with an uptick in engineering construction work from lower levels. However, more recent quarters show that the upswing in construction employment is now reversing – in line with the near-term outlook of falling total construction work done. Looking ahead, construction employment is likely to ease further as residential building and engineering construction fall back, followed by a mild recovery in the early 2020s.

ENGINEERING CONSTRUCTION ACTIVITY IS EXPECTED TO EASE AS MAJOR ROADS PROJECTS MOVE TO COMPLETION

WAGES

Queensland construction wages (measured by construction industry Wage Price Index data) grew significantly through the 2000s construction boom – rising over 40% between 2003 and 2012 at an annual average pace of 4.5% per annum. However, the slowdown in growth in domestic construction work (excluding fabricated LNG imports) post boom saw construction wage growth slow significantly. Annual average construction wage growth slumped to 1.8% in 2014/15, before falling further to 1.2% through 2015/16 and 2016/17. Over the 2018 calendar year, wages growth in the construction industry has accelerated to 1.8% and is expected to accelerate further in 2019.

FIGURE 36: QUEENSLAND CONSTRUCTION INDUSTRY INDICATORS

PRODUCTIVITY

Queensland construction labour productivity growth has historically been near zero between the mid-1980s and mid-2000s, reflecting international trends.10 However, data from the ABS on Construction Gross Value Added (i.e. the output of the domestic construction industry in Queensland, as opposed to “work done”) versus employment revealed growth in labour productivity during the second, post-GFC, phase of the resources boom (2009/10 and 2013/14).

However, this productivity surge is likely to have been overstated given the likely understatement of employment growth in the industry between 2009 and 2013 (as Queensland construction workers may have been misclassified as mining employees in the official statistics) coupled with unusually large increases in construction industry GVA as heavily offshore fabricated LNG projects were rolled out.

While construction labour productivity declined sharply again between 2014/15 and 2016/17, it has settled at a level some 10% above the decade average preceding the boom, indicating some structural improvements to labour productivity in the industry have taken place but this growth lags significantly compared to other industries such as manufacturing.

QUEENSLAND CONSTRUCTION COSTS

Along with much higher volumes of Queensland construction activity during the 2000s, there was also a marked acceleration in the costs of delivering construction projects. High and rising construction costs are an important issue for the major projects industry as well as the broader economy as:

  • It limits the quantum of publicly funded projects that can be delivered against given State and Commonwealth budgets. Where unplanned increases in construction costs occur, it can effectively reduce the funding available for further work.
  • It worsens the competitiveness of developing private sector industrial projects (e.g. in mining or manufacturing) in Australia relative to the rest of the world, in turn potentially impacting on decisions to invest in Australian projects.

Rapid increases in construction activity can go hand in hand with accelerating construction costs is not surprising. High (and rising) levels of demand (i.e. construction activity) places pressure on the existing supply of inputs, boosting local input prices. Where capacity constraints exist, rising construction activity can lead to strong increases in local input prices as investment in new capacity is itself costly and takes time to come on stream.

But construction costs may also vary due to changes in input prices determined in global markets (for example, steel and oil products such as bitumen and diesel fuel). These price changes may occur independently from domestic construction activity.

COST TRENDS

The ABS publishes two broad price series which are pertinent to and provide an insight into the cost trends experienced in Queensland’s engineering construction sector (see box below).

Given the use of similar construction materials, equipment and skilled labour, the trend for costs in engineering construction can be extended to broader cost trends in the building and construction industry.

The history of both of these construction cost measures since 2010/11 is shown in Figure 37. Construction costs fell in 2008/09 following the onset of the GFC, but this proved to be temporary, as the large Chinese stimulus program and the fall in the Australian dollar cushioned the domestic economy and improved the prospects for the major resources projects. Costs resumed their upward trend from 2009/10, as the LNG sector joined the construction boom. The sheer size of the LNG boom had the potential to overwhelm the local construction industry, however, the heavy use of imported pre-fabricated modular structures helped take pressure off local supplies.

Implicit price deflator (IPD) for engineering construction work done

Is derived by dividing current price (nominal) engineering construction data from the Australian Bureau of Statistics by its corresponding constant price (real) data series. This effectively isolates changes in the price of construction, as opposed to changes in activity.

The Road and Bridge Index (RBI)

As part of the Producer Price Index at the state level, the RBI is an output price index measuring changes in the prices (revenues) received by businesses undertaking road and bridge construction less any direct tax paid. Being an output index, the RBI takes account of contractor margins, and is available at the national level as well as for the five largest jurisdictions in Australia: New South Wales, Victoria, Queensland, South Australia and Western Australia.

FIGURE 37: GROWTH IN ENGINEERING CONSTRUCTION PRICES, QUEENSLAND

With construction activity falling sharply in Queensland (and also declining at the national level) from 2014/15, growth in engineering construction prices slowed sharply, as captured by both the RBI and the engineering construction IPD. Construction prices actually declined between 2014/5 and 2015/16 according to the RBI and fell close to zero for the engineering construction IPD during 2016/17. While falling construction activity certainly played a part in slowing down the growth in construction costs – particularly through its impact on slowing growth in construction wages and the pricing of local equipment and materials – it was also likely influenced by international factors.

In particular, slowing global demand for commodities coupled with rapid increases in supply courtesy of the resources investment boom in Australia and elsewhere resulted in a commodities glut and substantial falls in prices for those commodities used in the construction process (particularly for oil and related products – such as bitumen and fuel – as well as steel).

By contrast, over the past year, construction costs have re-accelerated sharply, with readings for both the RBI and engineering construction IPD surging back to resourceboom highs close to 4% in moving annual average growth terms.

While this has been largely due to sharply higher oil prices (feeding through to diesel fuel for construction plant and vehicles, as well as bitumen prices), other industry costs are also starting to reaccelerate, albeit from a weak base. Given the number of construction projects already in flight at contracted prices, the prospect of persistent, higher growth in construction costs is likely to presents risks and challenges to industry sustainability and the financial health of contractors and projects.

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