Melbourne construction industry: Navigating slowdowns amid rising costs & uncertainty

September 21, 2023

Planned Resources recruit across the niche markets of planning, engineering, architecture and design, property, and government support. We operate across private and public sectors in Melbourne, Victoria, and Australia. Here, Leigh Monro from our design team, takes a look at some of the current challenges being felt within Melbourne’s construction industry.

Melbourne’s construction industry – last year a thriving hub of development and growth – has been facing challenging times over the past 6-9 months. A significant slowdown has cast a shadow over various projects, ranging from family home extensions to large-scale developer-driven endeavours. This stagnation can be attributed to a combination of factors, primarily the impact of rising interest rates, escalating construction costs, and decreases in government funding for projects.

Rising interest rates: A costly challenge

One of the key culprits behind the recent slowdown in Melbourne’s construction sector has been the surge in interest rates, with the Reserve Bank of Australia raising interest rates 12 times over 14 months. As the cost of borrowing money has increased, the financial burden on developers and potential homebuyers has grown significantly. This not only made funding for construction projects more expensive but also dampened demand for housing stock in developments. Prospective buyers found themselves grappling with higher mortgage payments, making it increasingly challenging for them to commit to property purchases.

Escalating construction costs: A double-edged sword

Another major contributor to the industry’s woes has been the dramatic increase in construction costs. The general consensus among industry experts is that construction expenses have surged by anywhere between 20% to 40% in the past 12-18 months. This sharp rise in costs has put developers in a precarious position. Developers are traditionally fiscally quite conservative, and as such they are more hesitant to embark on new projects amid economic uncertainty. With both funding costs and construction expenses on the rise, the margin for profit in any given project has become highly uncertain, leading many developers to either put their plans on hold, or review those projects to try and increase profitability – either way, the project slows down.

Public projects: Government austerity measures

The slowdown isn’t limited to privately funded projects alone. Even publicly funded projects backed by state and federal governments have felt the pinch. During the COVID-19 lockdown years, the government played a crucial role in stimulating the economy by supporting numerous public projects. However, as governments grapple with increasing debts, they are now faced with the challenging task of reducing spending. This has inevitably led to a slowdown in the pipeline of publicly funded construction projects, and over coming years we may see a similar approach by government to the one taken during the GFC – significantly cut funding for most projects, except for the occasional major project that has significant political mileage.

The path forward: Uncertainty lingers

Design practices, typically working on low margins, don’t have the capacity to carry large numbers of staff who aren’t fully utilised on projects. This has seen redundancies initially in the developer driven multi-residential sector, and then expanding into retail, hospitality, and over the past few months, publicly funded projects. While not all practices are planning redundancies, we are seeing a more cautious approach to staffing, with increased scrutiny on salaries after the runaway increases a mere 12 months ago.

From a structural perspective, there is still a significant need for the many stalled projects to restart in the short to medium term. Melbourne’s growing population demands infrastructure and housing, and these projects remain essential for the city’s long-term growth. However, the current uncertainty surrounding construction costs and funding availability has put the industry in a holding pattern.

Unfortunately, it seems unlikely that the market will see a significant revival in what remains of 2023. A more optimistic outlook suggests that the earliest signs of recovery may emerge in early 2024, contingent upon increased cost predictability and a more stable economic environment.

Finally…

Melbourne’s construction industry finds itself at a crossroads, navigating a challenging period of slowdown driven by rising interest rates and construction costs, coupled with government austerity measures. While the need for construction projects remains, the industry must weather this storm of uncertainty before it can once again thrive and contribute to the city’s growth and development.

Leigh Monro, Associate Director

Leigh is our Design Recruitment Consultant and Associate Director. He is a specialist in Architecture, Interiors, Urban Design and Landscape Architecture. He is a true expert in the field and has been recruiting in this space since 1997.