A look back over the decade for construction

Friday, 11 December 2009

Construction is greatly influenced by business cycles. During the past decade the global economy has experienced cyclical peaks and troughs. With increased global trade these have become increasingly synchronised, such that by the end of the decade all economies have been affected by the Global Financial Crisis GFC.

 

Now with a new decade approaching it is appropriate to take a look back at the key features of the previous ten years and how this has affected the construction and property sectors.

 

It started with the new Millennium

In December 1999 we anticipated the end of the millennium with anticipation and trepidation. Would planes fall from the sky?  Would we be plunged into darkness by computer systems that could not tell 2000 from 1900? Would we be trapped in the lift? Fortunately the worst consequences of the Y2K bug were avoided.

 

Olympics

This allowed us to get on with what Australia does best "" host a major sporting event. The Sydney Olympics in 2000 generated $3.3bn of construction and created 150,000 jobs. $3.3 billion does not seem much by today's standards, when monster Liquefied Natural Gas construction projects costing $43 billion are starting up.

 

GST

In July 2000 the goods and services tax (GST) was introduced in Australia, bringing to an end a period of frantic construction, as home buyers rushed to build new homes and renovate before the GST. Immediately private construction fell nearly 30% by value and did not recover for 12 months. 

 

Dot-Com Boom Bust

Meanwhile the first major boom-bubble-bust cycle of the new millennium was occurring. During 2000 and 2001 stock markets powered ahead by the rise of internet sites and communications start-ups. Hundreds of dot-com companies were being founded weekly, many of which quickly burned up their seed capital. Speculation of overvalued shares created a feeding frenzy. Soon we would be buying everything from online sites. Shopping centres would be no more. The whole thing collapsed when most dot-com sites failed to show a profit, and people realised that the hype did not live up its promises.

 

The dot-com crash in March 2001 plunged many of the developed economies into recession.

 

9/11

The global economy was still experiencing a significant slowdown when the 9/11 terrorist attacks occurred in 2001. The destruction of billions of dollars worth of office space and collapse in confidence caused serious damage to the economy. The Dow Jones fell 14.3% in one week. Airlines went close to bankruptcy and 248,000 US jobs were lost.

 

These were dark times indeed, but change was coming. From 2003 things got better.

 

Resources Boom and BRICS Economies

2003 was the start of the "resources boom", driven by the rise of the BRICS economies "" Brazil Russia India and China. Rapid industrialisation in China created unprecedented demand for resources, at the same time driving up commodity prices.  Mining corporations' profits and investment soared; share prices rose and the federal and state governments of the mining states were enjoying the benefits from the rapidly rising revenues.

 

In parallel to the resources boom was a construction boom. With the resources sector evaluating many new projects engineers, lawyers and managers needed office space in the resources states.  Since the "recession we had to have" in 1993 commercial construction had been in the doldrums. Now the economy was growing, vacancies falling, construction costs were still reasonable and it was a good time for non-residential construction.

 

Two Speed Economy

Hence we saw a two speed economy emerging with Queensland and Western Australia racing ahead with construction and resources projects. Meanwhile New South Wales was in near recession and South Australia and Victoria somewhere in between.

 

Construction Costs and Wages

Construction costs jumped dramatically in 2003-2004 and kept increasing right up to late 2008. The resource states were most affected with costs doubling over the decade. At the other end of the scale Sydney coming off a high base in 2000 has only seen approximately 25% increase. In late 1999 typical Brisbane apartments cost $1100m2 to build compared with $2180 today. Average weekly wages were $760 per week compared with $1200 today.  

 

Competitive tendering gave way to alliances and construction profits became healthy. Meanwhile shortages of cranes, and mining equipment were becoming a major problem.  

 

Skills shortages and Migration

Shortages of skilled workers also became a problem despite population growth of 16% during this decade, from 19 million to 22 million. Of this, 1.3 million growth has come from natural increase (births over deaths) and 1.7 million from overseas migration.

 

Compared with the nineties the unemployment rate has stayed low during this decade. In October 2001 unemployment peaked at 7.1% briefly, a rate which would have been considered desirable in the nineties when unemployment reached as high as 10.8%. In early 2008 unemployment briefly bottomed at 3.9%. A key change has been the rise of two incomes families in full time jobs. This together with the high influx of skilled migrants has been a driver of the demand for housing and helps explain Australia's high house prices.

 

Imported Deflation

Despite a doubling of house prices and construction costs this decade consumer prices have only increased 38%. Much of this is due to lower prices of imported manufactured goods from China. In real terms many manufactured imports actually cost less than they did in 1999. This includes electronics, whitegoods, carpet, sanitary ware, plastic pipe, and glass.

 

 ...and finally the Global Financial Downturn.

Increasing housing prices, overpriced stock-markets, credit binges, and sub-prime mortgages were the ingredients for the Global Financial Crisis which rounds out the decade. The motives leading to the greed, speculation and credit binge of the GFC were no different from the dot-com motives a few years earlier.  The doomsayers who predicted Armageddon from the Y2K bug are also still there. However this time they are worrying about global warming, sovereign collapse of Dubai, and bubbles in China.

 

Construction is now in a downturn. Costs have fallen by up to 10% in 2010, and it's easier to find a tradesman. But it looks like being relatively short lived. Infrastructure projects are helping to keep construction going, and ahead we have schools and hospitals, a housing revival, and construction of some very big LNG projects.    

 

...and so we start a new decade

 

By Gary Emmett

Colleen Kaefer

 

 

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