Higher labour costs are fuelling construction cost growth across the region. New construction wage increases secured by unions are expected to significantly impact project costs in the coming years.

The outlook for construction activity across Australia remains mixed and largely unchanged since our last report. Market capacity constraints have improved in some areas, while others remain tight. The markets in New South Wales and Victoria are cooling, while Queensland continues to heat up - supported by a significant pipeline of health projects and preparations for the Brisbane 2032 Olympic and Paralympic Games.

Public sector infrastructure investment will continue to drive most of the activity in the near term. The 2024-2025 Federal Budget sees the Albanese Government maintain its commitment to deliver the AU$120bn pipeline over ten years, with an additional AU$16.5bn allocated to various projects over the decade. State governments are also investing in transportation, clean energy, social infrastructure and housing, which will underpin activity over the medium term.

The private sector remains subdued across the residential and non-residential sectors, due to higher interest rates and construction costs. However, there is a gradual return of private sector investment in large-scale multi-dwelling projects, driven by various state government incentives to meet the needs of Australia’s growing population. This is being supported by the government's aim to build 1.2m homes by 2029. While this is unlikely to translate into higher residential construction activity this year, we anticipate a strong increase from 2025 onwards.

Despite cooling activity from the private sector, cost pressures persist for Australia’s construction markets. Construction unions across the various states have successfully negotiated substantial wage increases for workers in New South Wales, Queensland, Western Australia and Victoria, with agreements for annual raises averaging around 5.0 percent over the next four to five years. Recent legislation changes for labour hire also mean that non-union workers are now entitled to the same level of pay as union labour EBA’s, which is expected to drive up costs for all construction labour.

The impact of these union wage increases is likely to be significant for these markets and we could see the remaining markets follow suit in the coming months. We anticipate these changes will have a substantial impact on project costs, prompting an adjustment to our cost escalation forecasts.

Material costs, while mostly stable, remain at elevated levels and are at risk of further increases due to geopolitical tensions. A resurgence in higher freight rates is a new source of concern in the global supply chain, which could see stronger material price growth in the months ahead.