A new report has revealed there’s no end in sight for construction cost woes as prices continue to escalate heading into the end of the decade.
Commissioned by cost management group WT, the Market Conditions report predicts cost escalation to stay stubbornly elevated above five per cent per annum until at least 2028, thanks to lingering issues tightening the noose around the sector’s neck.
Construction economist Damon Roast fingered issues like contractor insolvencies, record-industry activity and material price hikes in particular for plaguing Aussie construction businesses in recent years, warning that their effects would be felt well into 2025 and beyond.
“Our three-year base-case outlook includes a forecast of an average around 5.5 per cent in 2024 across capital city markets for building, remaining above five per cent through 2026 despite a broader moderation in construction activity, before jumping to 5.7 per cent in 2027,” he said.
“From a weighted national average of 4.8 per cent this year, we forecast escalation in infrastructure to move back around the 5.5 per cent mark to 2026, remaining above five per cent in 2027.”
The major pressure point impacting prices, however, was the sector’s severe labour shortages, with Roast claiming the outcome of recent EBA negotiations in larger states would “underpin elevated wages growth” until at least the 2027/2028 financial year.
In March, BuildSkills Australia said 90,000 new tradies were needed between then and the end of 2024. But according to the Australian Bureau of Statistics, the industry is falling well short, hiring just over half that number.
Roast’s analysis did predict some improvement for 2026 thanks to a recovery in construction activity and an improving broader economy, but didn’t expect the benefits to “pay dividends” until at least 2028.
The swinging Chinese economy would also present equal opportunity and risk for the sector in the coming years, as the country’s viability as a source of lower-cost, high-quality building materials and equipment could be strengthened depending on its performance.
“China’s recent track record of fast progress as a sophisticated producer of electric vehicles, batteries and renewable energy equipment suggests it could provide escalation relief via this avenue to Australia’s construction sector,” explained Damon.
But, according to Damon, the main takeaway from the report though is that the persistent elevated construction cost escalation is “simply not sustainable” for the industry to thrive moving forward.
“A return to the long-term escalation average heading back towards 3 per cent is possible from 2028,” he says, “but this is contingent on the necessary investment in the sector’s capability coming through.”
“A key opportunity to encourage investment in sector capacity would be for governments to develop a rigorous, legislated medium-to-long-term project pipeline.”
The construction cost outlook for your city
While Roast’s findings might hold true for the nation’s construction industry as a whole, here’s what WT expects to happen to construction costs in each major Aussie city.
Sydney: Rising costs amid tight labour pool
Escalation in Sydney remains stubbornly high, propelled by increased unionisation in trades, regulatory pressures, and growth in sectors such as healthcare and transport. Additionally, a concerning trend of skilled workers migrating to Brisbane and South East Queensland is further tightening the labour pool.
Melbourne: Regulations and economic factors weigh down market
Melbourne faces similar challenges, with regulatory impacts and a drain of talent to infrastructure opportunities in Queensland adding strain.
The city’s conditions are compounded by the state’s debt profile, statutory constraints, and broader economic sentiment. While the fundamentals are expected to improve, significant recovery may only occur post the next state election.
Brisbane: A strong pipeline but persistent tightness
Brisbane’s market tightness continues to drive up costs, fueled by a robust pipeline of projects and shortages in critical trades. However, the outlook may improve as the relationship between the construction sector and government policy strengthens under the new state administration.
Adelaide: Major projects keep costs elevated
Adelaide’s construction market remains buoyant due to a pipeline of major projects requiring Tier 1 contractor involvement. This reliance on enterprise bargaining agreements (EBAs) is driving escalation even higher, ensuring costs stay elevated for the foreseeable future.
Perth: Labour challenges add to cost pressures
Perth is grappling with healthy demand but persistent labour shortages, exacerbated by new EBA terms. These pressures are expected to maintain escalation rates at or above 5% in the near term, reflecting the city’s difficulty in retaining a stable workforce.
Hobart: Uneven escalation across projects
In Hobart, high escalation rates are forecast, although they may vary by project size. Larger developments with EBA-covered trades are likely to experience steeper cost increases, while smaller projects could see more contractors competing for work, tempering escalation somewhat.
Canberra: Infrastructure spending provides stability
Concerns about the federal-driven commercial project pipeline are creating uncertainty in Canberra. However, the stronger social infrastructure pipeline and elevated public spending on infrastructure are acting as stabilising factors, keeping cost pressures in check.
Darwin: Defence and resources drive activity
Defence projects, along with resources and renewables, continue to underpin construction activity in Darwin. Yet, the persistent struggle to attract and retain skilled workers is driving annual escalation rates to around five per cent through to 2027.
Cairns: Recovery and local spending push costs higher
In Cairns, a resurgence in tourism, reconstruction efforts after Cyclone Jasper, and significant local government spending have led to strong market conditions.
Alongside the active Townsville market, these factors are contributing to a shortage of key trades and heightened escalation. A new state government is expected to add further pressure in the coming years.
