CONSTRUCTION costs in Australia are set to accelerate markedly, with the declines in costs which followed the financial crisis now at an end, according to a new report from industry research company Macromonitor.

The report, Australia Construction Cost Trends 2010, notes that a rebound in cost growth is already apparent and forecasts a steady rise in the rate of cost inflation over the next three years. The report’s author, Macromonitor director Nigel Hatcher, says, “The resurgence of cost inflation is being driven by the solid recovery in the Australian economy, a strong rebound in commodity prices and the increasingly good performance of the construction sector.”

Macromonitor reports that overall construction costs declined by more than 2 per cent during 2009, following five years of strong inflation. Costs in some areas fell by much more than this however, including falls of more than 6 per cent in non-residential building and medium and high density dwelling building, and a fall of 8 per cent in civil engineering construction costs.

The Macromonitor report is forecasting construction cost growth to rise to 4.5 per cent in 2010, to above 5 per cent in 2011 and to around 6 per cent in 2012. Hatcher notes, “Government stimulus programs have successfully buoyed building and construction activity, and a recovery in private sector investment has already begun in some areas – most notably in housing. Cost growth has consequently stabilised or started to accelerate once again during 2009/10, and we are forecasting further rises in inflation over the next three years.”

The report notes that the next few years will see a return to the kind of cost inflation experienced during the boom years prior to 2009. During the five year period from 2003 to 2008, overall construction costs increased by an average of 6 per cent per year – around double the rate of CPI inflation. This surge came to an end with the impact of the global financial crisis and the cost declines of 2009.

The Macromonitor report expects the data for the December quarter of 2009, once available, to show some further small declines in costs in some sectors and a gradual acceleration in others. But during 2010, the report is forecasting rising cost inflation in all parts of the construction sector.

Hatcher comments, “As the Australian and world economies continue to recover, and as currently weak areas of the construction sector strengthen once again, upward pressure will come to bear on prices for a range of construction inputs, including labour, metals and other materials, fuel and plant hire costs.”

Macromonitor is forecasting another downturn in construction work around the middle of this decade. “At this time we expect another slow-down in the rate of cost growth, with the next low point for cost inflation expected around 2014/15,” says Hatcher.

The report notes that the largest declines in construction costs during 2009 occurred in Queensland, WA and Victoria. Over the next few years, Macromonitor expects Queensland to experience the strongest rate of cost increases, but Western Australia, New South Wales and Victoria are also expected to experience stronger growth in costs than the other states and territories.

Below are some selected summary notes from the new Macromonitor report, Australia Construction Cost Trends 2010, covering the outlook for costs in each sector of construction.

House Building
“Unlike other sectors of construction, the rate of increase in house building costs slowed over the four years from 2005/06 to 2008/09, correlating with a weak period for house building activity. We expect a rise in house building cost inflation in 2009/10, back to growth of 5.3 per cent. Over the following two years, 2010/11 and 2011/12, rising house building activity should combine with generally strengthening wage and price pressures throughout a solidly growing economy.”

Non-residential Building
“Starting in the second half of 2008, non-residential building cost growth turned from strongly positive to sharply negative. Over the 12 months to September 2009 (the latest available data period), non-residential building costs declined by 6.5 per cent. Overall non-residential building costs are expected to move back into positive territory in 2010/11, with growth of 2.5 per ecnt forecast. We then expect significantly stronger growth, of 5 per cent to 6 per cent, during 2011/12 and 2012/13.”

Engineering Construction
“Engineering construction costs declined over four consecutive quarters from December 2008 to September 2009. The total decline in engineering construction costs in 2008/09 was –6.8 per cent. We expect another small negative growth quarter in December 2009, followed by a return to positive cost inflation. We are forecasting cost escalation of 4.9 per cent in 2010/11, followed by 6 per cent in 2011/12.”