Construction Forecasting Council CFC

1
Launch of Residential Forecasts

• Construction Forecasting Council (CFC)
• The Future of Construction in Australia
• 8th Forecast with launch of residential
• September 2005

2
Outline

• Objectives
• Forecasting Approach
• Forecasting Backdrop
• Construction Activity Forecasts
• Non-Residential Building
• Engineering Construction
• Residential Building

3
ObjectivesProject

• Forecasting construction to improve the
  industrys knowledge base
• CFC forecasts are published free on the web-site
• 1st CFC forecasts for non-residential
  construction were published March 2002 and have
  been updated half-yearly
• Pilot residential forecasts produced in March
  2005
• Residential forecasts launched now as part of the
  8th CFC forecast
• CFC now forecasts entire construction industry

4
Objectives Construction activity (2003/04)
5
ObjectivesFormat of Forecasts

• approvals -gt commencements -gt work done -gt
  completions
• work done measures the current level of activity
• work done drives employment
• but approvals, commencements are used as leading
  indicators, as are large engineering projects

6
ObjectivesFormat of Forecasts

• original / seasonally adjusted / trend
• all ABS data are available in original form
• but forecasts for main aggregates are also
  seasonally adjusted
• values / chain volume (real)
• all ABS data are available in value form
• but forecasts for main aggregates are also in
  chain volume form
• with normal annual economic growth around 3 and
  inflation around 2.5, normal growth in (nominal)
  construction is 5-6

7
Outline

• Objectives
• Forecasting Approach
• Forecasting Backdrop
• Construction Activity Forecasts
• Non-Residential Building
• Engineering Construction
• Residential Building

8
Forecasting Approach Blending Three Perspectives

• ABS leading indicators of work done (short-term)
• approvals (residential and non-residential
  building)
• commencements
• Industry intelligence (short-term)
• Reed Construction Data on major projects
  (engineering)
• Economic Fundamentals (long-term)
• uniquely, we model construction investment
  demands for 18 broad industries
• these demands driven by industry profitability
  and interest rates
• residential demand depends on interest rates,
  building costs, rents, household growth, consumer
  sentiment, house prices

9
Forecasting Approach Model Outputs
Non-Residential Building
Residential Building
Forecast outputs
Engineering Construction
by 9 building functions
by 7 types of construction
by 4 types
Type
by 6 capital cities, 6 rest of states 2
territories
by 6 capital cities, 6 rest of states 2
territories
by 8 states territories
Geographic Detail
Short Term (8 quarters) Long Term (9 years)
Time horizon frequency
10
Forecasting ApproachBuilding Types

• Types of Non-res Building
• Retail/wholesale trade
• Offices
• Other commercial
• Industrial
• Educational
• Health aged care
• Entertainment recreational
• Accommodation
• Miscellaneous

• Type of Residential Building
• Houses
• New other residential
• Large Alterations Additions
• Residential Building (Building Act.)
• Other
• National Accounts dwelling investment
• approved over 10,000
• difference between Nat. A/c and Bldg Act.
• includes small alterations and additions

11
Forecasting ApproachEngineering Construction
Types

• Roads
• Bridges, railways, harbours
• Electricity, pipelines
• Water and sewerage
• Telecommunications
• Heavy industry including mining
• Recreation and other

12
Forecasting ApproachWork Done
Fixed Investment demand by 18 Industries (14
market, 4 non-market)
Construction Investment demand by 18 Industries
Other economic factors
Construction Investment demand by 20 types
Engineering project starts by type Building
Approvals by type
Commencements by type
Work done by type by region
State Population
13
Forecasting Approach Occupation Categories

• Classified by the ABS according to the Australian
  Standard Classification of Occupations (ASCO).
• ASCO uses nine major occupation groups.
• For this project, the nine major groups have been
  aggregated into three broad skill groups, to suit
  the construction industry.

Tradespersons related
Low Skilled
High Skilled
Managers Admin.
Adv. clerical service
Professionals
Int. clerical, sales service
Associate Professionals
Int. prodn transport
Elem. clerical, sales service
Labourers related
14
Outline

• Objectives
• Forecasting Approach
• Forecasting Backdrop
• Construction Activity Forecasts
• Non-Residential Building
• Engineering Construction
• Residential Building

15
Forecasting BackdropTrack record - Non-res
building

• half year to 2004Q4
• Retail/wholesale trade 0
• Offices 2
• Industrial 7
• Educational 5
• Health aged care 9
• Non-res building 2.4
• /- means over-prediction / under-prediction

16
Forecasting BackdropTrack record - Eng.
construction

• half year to 2004Q4
• Roads 0
• Bridges, rail, harbours 24
• Elec., pipelines 5
• Telecommunications 6
• Heavy industry 13
• Engineering construction 8.0

17
Forecasting BackdropTrack record - Dwelling
Investment

• half year to 2005Q1
• New houses 8
• New other residential 6
• Large Alterations Additions 2
• Other (mainly small Alts Adds) 4
• Dwelling Investment 3.3

18
Forecasting BackdropData update

• Variables Historical data available to
• Work done 2005Q1
• Commencements 2005Q1
• Building approvals 2005Q2
• Industry demand 2005Q1
• Major projects 2005Q2
• The 8th CFC work done forecasts begin from
  2005Q2

19
Forecasting BackdropMacro Assumptions

• latest in 12 months Long Run
• GDP (rolling year) 2.3 (to 05Q2) 2.8 3.4
• Unemployment 5.0 (Aug 05) 5.5 5.6
• Wage inflation 3.7 (to 05Q2) 4.6 4.5
• CPI inflation 2.5 (to 05Q2) 2.2 2.3
• Cash rate 5.5 (12 Sep 05) 5.5 5.2
• 10-year bond 5.2 (12 Sep 05) 5.2 5.5
• A (US cents) 77 (12 Sep 05) 72 70
• Firm labour market is leading to slightly higher
  wages growth, but the impact on inflation is
  being offset by slower economic growth. So cash
  rate on hold.

20
Forecasting BackdropIndustry Investment, m per
year
21
Outline

• Objectives
• Forecasting Approach
• Forecasting Backdrop
• Construction Activity Forecasts
• Non-Residential Building
• Engineering Construction
• Residential Building

22
Construction Activity Total, million per qtr,
nominal, orig
23
Construction Activity Total, million per year,
nominal, orig
24
Construction Activity Total, million per year,
real, original
25
Construction Activity Constn Employment, 000
persons
26
Outline

• Objectives
• Forecasting Approach
• Forecasting Backdrop
• Construction Activity Forecasts
• Non-Residential Building
• Engineering Construction
• Residential Building

27
Non-Residential Building Annual Nominal Growth
Rates
28
Non-Residential Building Retail/Wholesale Trade
29
Non-Residential Building Offices
30
Non-Residential Building Other Commercial
31
Non-Residential Building Industrial
32
Non-Residential Building Educational
33
Non-Residential Building Health Aged Care
34
Non-Residential Building Entertainment
Recreation
35
Non-Residential Building Accommodation
36
Non-Residential Building Miscellaneous
37
Non-Residential BuildingLarger Capital Cities,
m per year
38
Non-Residential BuildingConclusions

• Total non-residential building rose modestly in
  2004-05
• nominal rise of 11 but real rise of only 2
• strengthening in industrial offset by weakening
  in offices
• Nationally, real falls of 3 for 2005-06 and
  2006-07
• fall in offices and accommodation in 2005/06
• fall in retail in 2006/07
• industrial building consolidating at a high level
• health and aged care building rising with ageing
  population
• In Melbourne, big fall in office building after
  2004 boom
• So in 2005 Sydney to re-assert its lead in
  non-residential building activity over Melbourne

39
Outline

• Objectives
• Forecasting Approach
• Forecasting Backdrop
• Construction Activity Forecasts
• Non-Residential Building
• Engineering Construction
• Residential Building

40
Engineering Construction Recent Major
Engineering Starts

• project type start date value (bn)
• Darwin LNG plant NT mining 03Q2 1.2
• Westlink M7 NSW road 03Q3 1.1
• Telfer Gold Expansion WA mining 03Q3 0.8
• Lane Cove Tunnel NSW road 04Q2 0.8
• Aldoga aluminium QLD mining 04Q2 3.1
• Perth Metro rail WA rail 04Q2 1.1
• Alcan Refinery NT Heavy 04Q4 1.0
• EastLink Tollway VIC road 05Q1 2.5

41
Engineering Construction Forecast Major
Engineering Starts

• project type start date value (bn)
• Melb.-Sydney upgrade NSW rail 05Q4 0.5
• Wimmera/Mallee Pipeline VIC pipeline 06Q2 0.4
• Gateway upgrade QLD road 06Q3 1.0
• Tomago power station NSW electricity 07Q1 0.3

42
Engineering Construction Annual Nominal Growth
Rates
43
Engineering ConstructionRoads
44
Engineering ConstructionBridges, railways,
harbours
45
Engineering ConstructionElectricity, pipelines
46
Engineering ConstructionWater Sewerage
47
Engineering ConstructionTelecommunications
48
Engineering Construction Heavy industry incl.
mining
49
Engineering Construction Recreation and other
50
Engineering ConstructionLarger States
51
Engineering ConstructionConclusions

• Total engineering has been rising strongly to a
  very high level over the last two years.
• real rises of 8 in 2003-04 and 12 in 2004-05
• driven by major road and rail projects
• Forecast to stabilise at a high level over the
  next two years, up 4 in 2005-06 and down 4 in
  2006-07 (real).
• Mining investment boom from China-induced boost
  to commodity prices to peak in 2005-06
• Rail projects nearing completion
• Road construction boosted by EastLink tollway and
  Sydney M7
• Telecommunications upswing from 2006-07

52
Outline

• Objectives
• Forecasting Approach
• Forecasting Backdrop
• Construction Activity Forecasts
• Non-Residential Building
• Engineering Construction
• Residential Building

53
Residential Building Annual Nominal Growth
Rates
54
Residential Building New Houses
55
Residential Building New Other Residential
56
Residential Building Large Alterations and
Additions
57
Residential Building National A/c Dwelling
Investment
58
Residential Building Larger States Building
Activity
59
Residential BuildingConclusions

• National Accounts dwelling investment rose very
  strongly to 2003-04 from post-GST low of 2000-01
• In 2004-05, dwelling investment fell 2 (real).
• In 2005-06, dwelling investment to fall 3
  (real)
• New houses to fall a further 2, in response to
  oversupply
• New other residential to slump 12, in response
  to units glut
• Large alterations and additions to fall a further
  3
• Other dwelling investment to rise 1
• From 2006-07, moderate across-the-board growth in
  dwelling investment, due to benign macro
  environment of low interest rates and unemployment