
The building sector is currently confronting a low point in the business cycle.
A combination of tight cost pressures, high interest rates and labour shortages have undermined the sector over the past 12 to 24 months. According to the NCI database, the number of incoming claims for ‘building and hardware’ has more than doubled from the low point in 2021 and is now tracking at levels above the pre-pandemic period.
Many of these pressures remain in place which means the building sector is likely to remain subdued until the start of 2025. Ongoing sluggishness in the economy more generally is also likely to restrain the sector in the near term.
That said, there are some tentative signs of better times ahead that are pointing towards a recovery in building and construction through the course of 2025 and into 2026.
In particular, some cost pressures have moderated and the recent boom in immigration has at least partly addressed labour shortages in the sector.
Money markets continue to price in a series of interest rate cuts over the next 18 months, which will not only provide a boost to the economy more generally when they are delivered, but will help property developers to start projects that have been delayed because of the recent problems.
In broad terms, there remains a severe shortage of dwellings which needs to be addressed through higher supply – more building in other words. The Federal government has reiterated its plan for there to be 1.2 million new dwellings over the next five years as it works to address the housing shortage. While this is an ambitious target, even if the actual outcome falls short and is close to the target, the number of dwellings set to be built over the next few years will be materially higher than in recent years – well over 200,000 per annum compared to the recent levels under 165,000 per annum.
To that end, the number of residential building approvals has been trending higher since the low point in February 2024.
While it is still some way from being a strong pick-up, according to ABS data residential building approvals have risen in trend terms for six straight months to be 9.4 per cent up from the low.
One of the most important near term issues for the building sector and the economy more widely will be the timing and magnitude of the interest rate cutting cycle.
With the rest of the world already well on the path to easing monetary policy pressures, it is just a matter of time before the RBA joins the trend. Lower interest rate cuts will spark demand for new properties and will also make it materially easier for construction companies to undertake new projects.
Current market pricing has 125 basis points of interest rate cuts built in between now and the end of 2025. The fall in inflation and soft economic conditions, including in the building sector, are key factors in this outlook.
This monetary easing, when it occurs, is likely to be the trigger for a stronger pick up in building activity, even though the near term outlook remains problematic.