Analysis: Why construction in Australia is declining despite a strong demand for housing

Sydney construction

A Sydney construction site affected by lockdown. Source: AAP/Dan Himbrechts.

Hundreds of partly built homes across Australia remain unfinished after established construction company Privium Group went into voluntary administration last week. The homebuilder reportedly lost more than $28 million last year. Total losses are currently unknown.

Privium is the latest in a string of collapses since the construction sector began its severe decline in 2015. These include CMF ProjectsRimfire ConstructionsQueensland One HomesLeaf BuildingPlanbuild and many others.

This is happening when tens of thousands of Australians are desperate to buy houses, social housing builds are at an all-time low, migration is about to resume and the federal government has been subsidising first home buyers and spruiking a resurgent economy.

Data from the Australian Bureau of Statistics (ABS) reveals that the centuries-long upwards slope of construction volumes in Australia dramatically reversed in 2015. Year-on-year falls in spending on total construction have been infrequent since the ABS began publishing data in 1974. Almost certainly they have been quite rare since colonial construction began in 1788.

There was a decline in 1991 and 1992 during the global recession of the early 1990s, and again in 2001 when the early 2000s recession hit the developed world. But growth has been steady at all other times — until 2015, as the chart below demonstrates:

The data in this chart includes both housing and engineering construction in the private and public sectors. It shows chain volume measures which have eliminated the effects of price and hence only reflect volumes.

Total spending fell in 2015 to $235.9 billion, down 7.3% from the peak of $254.5 billion in 2013. Spending declined in 2016 and again in 2017 when it was recorded at just $217.2 billion. That was 14.7% below the peak. The recovery in 2018 was short-lived as this has been followed by falls every year since. The spending in the financial year ended last June was just $211.1 billion, which was 17.1% below 2012-13.

Public versus private

Most of the recent decline in construction has been in the private sector. Public sector spending in 2015 was $38.9 billion, down 19.9% from the 2013 level of $48.5 billion. Spending in 2017 was $45.2 billion, down 6.8% from 2013. But by 2021, spending had risen to $51.9 billion, a rise of 7.1% over 2013. That is still a decline relative to population, but it is at least slightly ahead.

In contrast, private construction spending in 2015 was $197.3 billion, down 4.2% from the 2013 level of $206.0 billion. The 2017 spend was $171.9 billion, down 16.5% from 2013. Spending in 2021 was $159.2 billion, down a thumping 22.7% from the 2013 level.

Causes of the collapse

With the bust beginning in 2015 and accelerating in 2017, this is clearly not caused by the pandemic. In fact, the billions in funds allocated by the Morrison government in first homeowner grants should have seen a similar surge in 2020 and 2021 to that in 2009 and 2010, which was during a much more severe and sustained global recession.

One analysis of Privium Group’s bankruptcy claims it is due to rising costs and labour shortages. This is not supported by the evidence. Inflation between June 2014 and June 2021 was extremely benign at below 2.3%. Unemployed Australians currently number 707,300, with another 1,157,000 recorded in August working zero hours. Wages since 2014 have grown at the lowest rate since records have been kept.

This article was first published by Crikey.

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