This episode was recorded on the land of the Wurundjeri people of the Kulin Nation. We pay our respects to their elders, past, present and future.
Richard: Hello and welcome to another episode of Precisely Property. I’m your host, Richard Temlett. I’m excited to have you with us today. If you’re here for the first time, thank you for joining us. I encourage you to listen to our previous episodes where we discuss all things property with a focus on dynamic discussions with industry leaders.
In this episode, we’ll be talking with Trent Wiltshire of RLB. So, sit back, relax, and let’s get started. Trent is the chief economist at Rider Levett Bucknall, a global construction cost consultancy. He has a background in housing and property markets, economic research and public policy. He was previously a deputy program director at the Grattan Institute. Before that, worked at the Victorian Department of Treasury and Finance, Domain group, and at the Reserve Bank of Australia.
Welcome Trent.
Trent: Good to be here Rich, thanks for having me.
Richard: Trent, in today’s episode, we’re going to talk about all things construction costs. We’re going to also go wider than that and talk about the impact of the federal budgets as well as some of the issues that we are seeing on the ground that are playing out on the ground based on what’s happening in the Middle East. A lot of this is tied into the report that you’ve prepared and I was very privileged to have a read or pre read before it actually was published, but I’m keen to talk through the findings today with you about that report. We have a just the audience and our listeners up to speed, we do have a pre-existing relationship and I love catching up with you sharing ideas. I’m incredibly grateful. You’ve obviously taken this, new role at RLB and I think that you’ll be an absolutely fantastic addition to RLB. But I’m very grateful that you’ve come on the show today to just talk about what’s happening on the ground. I think it’s a very topical issue. And there’ll be a lot of people that are very interested in what you have to say.
Before we get into the show, though, I do have an icebreaker question. What’s something you could happily spend hours talking about, that has absolutely nothing to do with economics or property?
Trent: Well, this is a very easy one for me. It’s a North Melbourne football club and the AFL more broadly. So, I’m a big, big kangaroos fan.
Richard: I didn’t know that. All right.
Trent: Yeah. So, you know, it’s been a tough few years for people that follow AFL. Obviously, it’s been a tough few years or decade for us, but things are looking a little bit better this year. Not out of the woods yet, but looking, looking lots better. So, yeah, I’ve got a three-year-old girl and a six-year-old son that are both big fans too. Love going to the footy altogether. A lot of kangaroos talk in our house. So they handle the losses pretty well, but enjoy the wins as well. So it’s been good fun.
Richard: That’s absolutely fantastic. I was going to ask, they have a choice as to who they support or is it just predetermined?
Trent: Minimal choice. Yeah. They do if they really wanted to, but I’ve been strongly pushing, but yeah, my oldest son now, you know, he pushes my daughter along as well. So she’s a big fan. She’s three and she’s really good. She can last pretty much a whole game at the footy. Yeah, she’s pretty good.
Richard: Wow. I’ve got a few friends that have just started taking their kids to the AFL and they typically to maybe half-time, three-quarter time. And if they haven’t had their chips or their popcorn or something, it’s just, it’s going home.
Trent: My six year old checks the fixture in advance and knows where they’re playing and what, if we can go and if it fits on the weekend schedule. Yeah, she’s all over it.
Richard: Well, that’s brilliant to hear. No doubt there’ll be a bunch of listeners that certainly I know they obviously follow the AFL. Probably a bunch of them that maybe share some of your views or some of them obviously who support other sides that might think of it differently. Anyway, that was something I certainly didn’t know. And it was great to get to know. All right. In terms of today’s session, it’s really, it’s the construction costs updates and outlook for Australia. You prepare, RLB prepares a quarterly report. Obviously, you’ve come on board, chatting to you offline, you’ve basically said you’ve been in the role now for six months. And I know your background, I think it’s you’re very well qualified to do this role and do it really well and really bring some very good economic insights to the sector. I had the privilege of reading your report. It’s the June quarter construction market update report. What we’re going to do is we’re going to talk about the contents of the report, the methodology, some of your findings. I’m keen to apply it to how the different states are performing because certainly when I do work across the country, I can see that there are different risks and opportunities in this space across the different markets.
I’m also really keen to talk to you about the impact of the Middle East and the crisis overseas. Also interest rates and then the federal budget. here’s so much going on right now. Almost every day, I’m having discussions and at least once a week, presentations probably similar to yourself, where people want to know, there’s a thirst for knowledge, they want to know what’s going on. I read your report, I particularly love reports that take a forward looking view of the market and basically look, look and have forecasts and go where is the market going? I think that’s the most was it’s very difficult to do, it’s the most valuable. So let’s and by the time this is actually released, your report will have already been released. So thank you very much for doing this session in advance.
Let’s kick off with the basics of the report. What does it cover? How frequent is it? What’s the methodology?
Trent: Yeah, so it’s a quarterly report, obviously focusing on construction costs, which is RLB’s expertise. But of course, you know, driving construction costs is construction activity as well. So, we think about, you know, what’s happening in activity, how does that affect costs? So we have a long running price series called the tender price index, which tracks construction costs over time. So we have that for actual and forecast. We forecast out to 2029. And how do get those forecasts sort of a mixture of on the ground field from across the country. So, we have state officers, so multiple officers in states across the country and my sort of economic background as well to try and sort of guide those forecasts too. So, a mixture there to try and see what’s happening. I think it’s been a good part of the job is it’s a nice mix of having the sort of, bring the, I guess, high level stats and economics perspective. And then we have really great experts across the country that know what’s happening on different projects in different areas in different sectors. So, it’s been a really good learning experience for me learning that part from directors and quantity surveyors across the country. So that’s sort of how it’s done. Yeah, quarterly report and then the big part of it is our forecast where we think prices are going.
Richard: Gotcha. For those listeners that are not as close to what you do as obviously you are, let’s talk a little bit more. You say a tender price index. So, what is a tender price index? What is a tender? even starting some of our government listeners and other people that are not construction costs related. When we’re talking about the tender price index later on in this session, what are we actually referring to?
Trent: Yeah, so in very simple terms, tender, a developer wants to build a new project, whether that’s an apartment building, a big new facility, university, all different types of projects. They’re looking for a builder, they go up to tender and builders come back to them with their best price or what they think it will cost. And the final price, whichever builder the developer chooses, that’s the tender price and that’s sort of what this index tracks.
Richard: Great. Okay. And then as you said, it’s across all asset classes and all geographies in Australia.
Trent: Yeah, sorry, excluding sort of the engineering sector. So residential, non-residential.
Richard: Okay, great. Well, certainly we’ll touch on that a little bit because whilst my main love and work is obviously in residential, certainly those other sectors are really relevant to and if you have insights and data, even if we don’t get into the detail today, certainly encourage our listeners to reach out to you guys because that right now is where a significant amount of risk is sitting and just understanding what’s happening with tender pricing across the different states is so important. Okay, so we’ve got what it covers how frequent it is in terms of the methodology, just so I understand a little bit more, you work then with your quantity surveyors, your other colleagues, they are basically privy to a lot of these tenders so they can see what’s happening with the pricing and it’s up to date as recently as the most recent tenders. Is that always a lag in some of the data?
Trent: Well, no, it’s based on the tenders we’ve seen, but then the forecasts are where we think things are heading. So, we sort of do an annual forecast, 2026, 2027, et cetera. So, the forecasting part’s obviously been pretty challenging over the past few months with everything happening, but happy to provide the insights into what’s underpinning those forecasts.
Richard: Great. Okay. Well, look, let’s jump into the findings. I read the report or I reread the report last night, just preparing for this session. And it’s amazing to see that the different states that have different issues in the sector, you know, the bigger states perhaps have larger subcontractors versus the smaller states. There’s issues with certain states that have more activity with infrastructure being delivered. I’m kind of in your hands as to where we start. Let’s jump through the different states and just give a bit of insight into what some of your findings were. I’ll let you start.
Trent: I was actually going to suggest, how about I just, I think one of the key findings actually from the report is how much the Middle East conflict, how it’s evolved over the past few months. I think if I was producing this report, say in early May, it would be quite different to what it is now. For me, you know, obviously the conflict starting at the end of February, then we saw some really big cost increases hit pretty quickly. Obviously, the fuel prices, the diesel price spiked a lot, then those oil linked products like the plastic pipes and fittings, bitumen, asphalt, those ones really jumped in price. And that looked like it was going to have a really big impact on building costs, we saw some, you know. I guess scary headlines about whether things could head.
Richard: Yep.
Trent: That was a worry in terms of where things were heading, but we’ve actually seen in the last probably month or so, things are really settled down. Obviously, the diesel price has fallen quite a bit, partly due to good government efforts to secure supply. The conflicts may be eased or touched, touched more to where things are heading. And so that sort of meant the price pressures haven’t been as severe as what we thought maybe six weeks ago. Negotiations for new builds to sort of continue, like sort of things paused for a few weeks, I would say in April, maybe early May, people were very cautious, but that’s settled down a bit. So, actually looking at our forecast that we haven’t really pushed up our price forecast much for 2026. So, we did this in Q1. So, we settled our forecast just before the conflict basically. And then so updating about three months later. In some cities we’ve increased the tender price index forecast to 26 a little bit. But for most in annual terms, it hasn’t really changed. So, we’re expecting that prices will jump a little bit over sort of Q2, Q3 level off in sort of Q4. So, the annual figure pretty much unchanged. At this stage, it’s sort of a temporary jump in prices without being permanent. So a little bit different to say that post COVID period, there was big supply chain problems and that really, that meant price pressures lingered for a long time. We’ve seen some supply chain problems, reports of that, but not really widespread supply chain problems, which means if the conflict does resolve as we sort of, that’s our assumption, things sort of resolve in Q3 and prices return to somewhat normal levels by 2027, that the prices won’t have actually jumped too much.
Richard: Well, look, that was going to be one of the questions I asked and thank you for redirecting the conversation because I am certainly in your hands. I read your report and you did say that six weeks ago you had or looked like there were different views and certainly when I speak with people on the ground, everyone was really freaking out. And I must admit, I was pleasantly surprised to see in your report, we’ve actually said that things are starting to more stabilise or normalise. I think throughout the session is going to be a question that I keep asking units, why? Why have they stabilized as much as you? And we’ve obviously started to answer this. But I remember when I was also doing some of our own forecasting, and I commend you for the forecasting, because it’s extremely difficult to do right now. A lot of the people in the industry, the participants in the industry were going, well, this is going straight back to the times in COVID. How do we mitigate the risk? Do we store and hoard materials? Are we going to get another 10, 15, 20% cost increase over the next 12 months. Certainly there’ve been people in the industry that have said that and I can understand where they’re coming from. And so, it’s interesting to hear from your data and your research to hear that it seems anyway, and I take your point that you’ve qualified it with what Trump does next and how long they.
Trent: You gotta have some sort of scenario planning.
Richard: But I suppose that is a really positive key finding is what you’re basically saying is that some of these costs are starting to ease up now. I suppose one of the biggest ones obviously was fuel. Is that because of, excuse my ignorance here, but because of the governments and reducing some of the excises or what’s driving that component?
Trent: That’s helped as well. It’s just, I guess the diesel, mean the crude oil futures prices that have come off, sort of 90 US a barrel, so well down from where it was. I think people expecting the conflict to somewhat resolve. Clearly the price is going to be higher for a while, but how much higher? It’s a shock, but it won’t be a huge shock. But I think there’s no, or minimal supply shortages, which is certainly a big fear in April. We did see broad based price pressure. Inputs like, the sort of energy intensity inputs did jump in price. So things like steel, concrete, aluminium windows, things like those, like certainly products, but that was sort of five to ten fifteen percent price jump and that’s come off. So I think a good example is concrete. So surcharges were added in April of about $8 per cubic metre, $8 to $9 per cubic metre. That then jumped to about $18 per cubic metre in probably late April, early May. And that’s sort of a eight to 10% price rise on a typical sort of price of concrete, that’s now back down to about five to eight dollars a meter. So that surcharge has come back. And that means, you know, it’s a price hit, but it’s not huge anymore.
Richard: See, this is what frustrates me about the media, to be perfectly honest with you. We all heard the headlines where the prices were increasing. I remember, you know, Reece plumbing was in the paper, whatever it is, or I’m not singling out Reece, but there were a number of these headlines going, look, from the 1st of April or 1st of May, whatever the dates were, these significant changes are coming. If what I’m hearing from you now is, they’ve come, but they’ve been reduced. I’ve certainly heard very little about it. Now, I’d like to believe my ears reasonably close to the ground, certainly not as close as yours. But that is a really important finding in a good news story, because if some of the prices have reduced, because the normal readers like myself would have just assumed that those prices are still where they were a month ago, which means obviously that the cost of delivery of all forms of real estate will be higher.
Trent: Yeah. That probably a good point to sort of jump to the second point. So that’s the cost side of it. So there’s definitely been cost pressures. They haven’t broadened as much as expected. They’ve come off a touch as I’ve talked about as well. But of course the risk is still there that they will see price pressures rebound. There’s reports that the real pressure in the oil market is coming the next few weeks as the European summer demand for fuel sort of rises. Inventories run down there might be another fuel spike price coming. We can’t rule it out, but it is a bit better at the moment. So on our numbers at the moment the conflicts added around one and a half to three and a half percent to construction costs. Depends on the project things that are more in diesel more intensive intensively have more sort of groundworks. So things with a big asphalt, big car parks, of engineering, that sort of preliminary type work, that’s probably bigger price rises. But that sort of general magnitude. But the demands are met as well. So are these costs being passed on to the final prices being paid by developers and then eventually by consumers? And that sort of differs across the country a bit. This sort of gets to, know, the difference of what’s happening around Australia. I guess the simple story there that these costs pressures aren’t being passed on much in Melbourne and Sydney. Is that really the case? And more, but much more pressure in the sort of hotter markets. So Queensland, Adelaide, Perth. But again, that’s sort of the general story. There’s subtleties there. So I think one of that being particularly in Melbourne, we’re seeing a big spread of tender prices. So, things go out and depending on how busy a builder is, they might offer a really competitive sort of price or others might be willing to sort of pass on some of these higher costs. In Sydney, it seems like there’s a bit of a flat spot at the moment before we anticipate a pickup in activity from late 26, mainly in the residential sector. So, at the moment costs aren’t being passed on, but maybe later this year, if the conflict persists, maybe that will happen. And then we are seeing more costs being passed on in WA, in Queensland. But as I was mentioned at the start, we’re seeing that probably going to be a temporary jump and then things that level off. That’s the forecast and obviously things may change, but that’s sort of the rough story around the country.
Richard: Look, I certainly will never hold, doing my own forecast, I never hold anyone to the forecast. And by that I mean, certainly we stand behind, and I know you’re the same, you stand behind the assumptions and the forecasts you’ve made, but the nature of forecasts means they can and do change subject to the different variables out there. What I found and I’ve had direct feedback from the industries, they really respect the fact that people like yourself or Charter put out forecasts because it helps them with their investment in the development decision. So, thank you very much for doing that. I will obviously remind our listeners that things right now are so uncertain and so volatile that certainly there’s a bunch of metrics that could shift very quickly and obviously that does impact forecast. But I’m certainly not hearing a lot of this or seeing a lot of this in the media headlines. And it’s really great to obviously have you in looking at some of the data looking at the evidence to actually cut through some of this noise is how I describe it, especially to hear that certain costs and certain projects or jurisdictions are actually not getting passed on. Whereas, I suppose the general thinking and certainly, I think that that’s what people would think is that all of it would just be passed on. And if that’s not the case, that’s we’ll get into, you know, and no doubt when we get to different states, we’ll learn a little bit more about why that is. But that is certainly a very important finding for today. Before we jump into the states, then are you, how the performance of the different states, are you keen to then also talk about the federal budgets? Or do you want to jump into the different states in terms of how you’ve laid out the logic for your forecast?
Trent: Yeah, I think maybe by state. And I’ve sort of covered the general vibe, but I think some of the, I think the looking in the sort of immediate term. Southeast Queensland is actually a little bit softer than we thought probably at the start of the year. So I would have expected these cost pressures to be passed on a bit faster in Southeast Queensland. It hasn’t happened at the moment. Of course, we know there’s a big pipeline of work to come. Particularly the Olympics related work. So that’s going to be a really big story over the next few years, but that’s not hitting just at the moment. In Sydney, as I mentioned, it’s a little bit of a soft spot at the moment before we see the residential pipeline to really, I guess, pick up or take off from late this year. So that’s where cost pressures might start to pick up and that’s what we’re forecasting. Melbourne’s market, subdued, apart from say data centres, which we might get into a bit later. Adelaide’s been strong for a while and we’re seeing cost pressures there. Across the state’s actually a theme is that there’s limited tier one competition. So that the big builders that work in the big projects, there’s these sort of mega projects, sort of sucking up some of the big contractors and that sort of putting some price pressure there, but less price pressure for some of the smaller projects. Darwin’s another one. So, Darwin we’ve seen relatively rapid growth in the tender price index that’s expected to pick up as well. We’re seeing some costs being passed on. Maybe it’s a bit of a smaller market. So that’s why. And then Western Australia, like Perth’s been at capacity for a little while. It’s got skilled labour shortages. There’s some wage pressures. The tier one competition is an issue there as well. Some costs being passed on and some reports of supply chain pressures as well, maybe reflecting that sort of a bit more remote. And those pressures being more amplified in the regional areas of WA.
Richard: Gotcha. Let’s start with some of your forecasts then. Suppose, where are your forecasts highest? Which states or locations?
Trent: Yeah, it’s Southeast Queensland, we’re forecasting the biggest price pressure. So tender pricing that’s growth around 7% from next year onwards. And that’s really mainly an Olympic story, but also the government’s hospital package, infrastructure package as well. Some of those projects have been sort of delayed or downscaled, but still that’s going to add some pressure. Residential as well, particularly in the Gold Coast. That’s sort of underpinning that kind of rapid or forecast rapid price growth. Adelaide to grow to tender price index to grow by sort of five and a half to six percent over the next few years. So that’s been a pretty strong market for a little while. Melbourne, we’ve got the the TPI growing at about 4% over the next few years. So that’s subdued compared to the rest of the country, but still growing at a bit more of a rapid rate than pre-COVID. So, there’s still underlying cost pressures across the country. sorry.
Richard: What is the longer term average just so that myself and the listeners have a point of reference.
Trent: I’d say sort of around that three, three and a half percent mark.
Richard: Ok yep.
Trent: So anything north of five percent is rapid cost growth. The other side of it is sort of productivity growth as well, whether that’s offsetting some of these price pressures, but at the moment we’re not really seeing that, so it’s really mainly cost pressures. And then Perth, the tender price index to grow sort of five to six percent over the next few years. So that’s been growing at a rapid clip. And typically, we’ve seen sort of the Perth cost index be a bit more volatile than other parts of the country, sort of reflecting the mining boom and bust out west. And that’s in an upswing at the moment because of activity and that’s flown through to cost as well.
Richard: Just to close that out, and I apologize for interrupting you because I just had to get my question out. What about Sydney? How’s the forecast in Sydney?
Trent: Yeah, so softest this year. So TPI (Tender Price Index) 4% in 2026 is the forecast, but then picking up to four then half then five percent over the next couple of years. So as I said, I’m expecting activity to start to pick up in Sydney from later this year.
Richard: Gotcha. Do you have any line of sight as to what’s happening with subcontractors? In terms of the demand for their services and skills and things like that is that picked up in the tender process that you’re analysing?
Trent: We get that sort of more in the qualitative commentary. So you’ll see in the report there’s we sort of have the economic commentary and then state by state commentary from on the ground what’s happening. And some states do report limited subcontracted competition. So Southeast Queensland, that’s a big story. Somewhat in Perth as well, a little bit of that story as well. So that is a factor. It’s more in the contractor space, but the subcontractor is a factor as well. But a general theme across the country is just skilled labour shortages or even broader labour shortages. That’s been a theme for a while now. That’s our sort of qualitative feedback we get from clients and what we see on the ground, but it’s backed up by data as well. So, if you look at the job ads data released by Jobs and Skills Australia, you break that down to sort of all the construction related trades. So, tradies plus labourers plus professionals related to the working construction as well. Job ads have started to rise again. So not at the 2023 levels, which reflect a hotter labour market, but they’ve started to pick up again over the past six months or so. So there’s been a bit of a pickup in underlying cost pressures and in part driven by these labour shortages, which has been a problem for the sector a while. It’s a constraint on activity and a factor behind higher prices.
Richard: Gotcha. Do we actually have enough skilled labour in this country to build up all the residential dwellings, all the infrastructure and also the Olympic infrastructure? I suppose that’s, I know we’ve discussed offline, so it is quite a loaded question. Yeah what. are your views on that?
Trent: It would appear that we’ll, we’ll be short, short of labour on some product. And that’s sort of a big factor underlying why we think the tender price index will rise pretty rapidly in Southeast Queensland. Builders there will be trying to get tradies to move to Southeast Queensland to build on the infrastructure basically. And they’ll have to have to pay to get people to move from Sydney, Melbourne, regional areas to build these projects. So it’s a big factor potentially holding back the pipeline. As an economist, I do believe in the market. Markets send signals. So rising wages and strong demand for jobs is a signal to people to move into the sector. So that’s whether that’s young people, whether it’s people looking for a career change. That will be a factor that helps us meet our labour needs. Migration as well. So, when I worked at the Grattan Institute, I did a lot of work on skilled migration. There’s some changes that the government can make there to make it easier for skilled migrants to work in construction. Although it’s not all sitting with the government, like at the moment, you know, it’s demand-based program. So, if a company needs a worker and they’re on the skills list, they can sponsor them to come here and work as a skilled worker. It’s just, it’s costly, it’s hard, it’s a hard process. There’s things to do to speed that process up. I would note that, you in the budget there was some changes made to improves recognition of skills of skilled migrants, which should help at the margin.
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Richard: Let’s talk about the budget. So you are an economist by background as well. I’m interested in your views on the federal budget. Were you surprised at some of the changes and obviously, it’s tied back to really construction costs in the sector. So I’m kind of in your hands.
Trent: Yeah, I was surprised, you know, the government had said they weren’t going to make these changes and then they had made the changes that were take 2018 election, 2019 election.
Richard: 2019 election. Yep. That’s right.
Trent: Not exactly, but pretty similar. And look, I think for me, it’s probably a short-term headwind to activity. I think we know that, Treasury’s forecasting around 35,000 fewer homes will be built because of the tax changes. It’s small, but it’s not nothing. It’s about one and a half percent fewer over the decade. You know, the treasury modelling assumes that those dwellings aren’t built because prices fall. And when prices fall, fewer homes get built. The big question is how much prices or how far prices fall due to these changes. The modelling is that it’s a pretty small fall, about two percent.
Richard: That’s right, yep.
Trent: The confidence impact though could be much bigger. Given we’ve got this, we’ve got the Middle East conflict, interest rates are rising. Potentially in the short term, the impact on supply could be much bigger. But it might pick up a little bit in the out year. So maybe the short-term impact is bigger than what treasury is going to expect. But I think the big unknown is, what does the carve out for new dwellings mean? So, I think the government obviously hoping that investors say, well, oh I’ll invest in new dwelling then that’ll help offset that decline in new dwelling construction. That’s a big unknown. I think it’s basically company model. We don’t know what investors are going to choose when they’ve got different options. So that’s a big, I think Westpac had a note on this recently and they’re actually quite optimistic about what these changes will mean for new dwelling supply that actually investors will start to move into new dwellings. So that’s sort of the short-term thing. I would add that the budget did have some good measures for supply, like in the longer terms they had the local infrastructure fund. So the money for last mile infrastructure. A critical part of that is that that was linked to state and local governments changing their planning rules. So, it wasn’t free money. It was only if you up-zone or streamline planning processes, you get the money. I think that’s a really good policy.
Richard: That’s a very important distinction. So thank you for highlighting that.
Trent: Faster environmental approvals, so using AI there. And then I mentioned before about changes to migrant skills recognition. Something on the supply side, which are good, but the net effect I think will be fewer dwellings built in the near term and then potentially a small net positive in the future. That’s looking at those sort of narrow budget measures, noting that the government and state governments have done a lot of things on housing over the last few years. It’s the half state government planning change, which I think are quite significant. And I think we’re starting to see the benefits of that, particularly in New South Wales. So, the net effect is hard to tell. Obviously, the last few months, the big headwinds, higher interest rates in the Middle East conflict are sort of weighing more is more significant than those changes that take a while to flow through.
Richard: As you’re talking, I wanted to let you finish because I love picking your brain I after you’ve, you’ve talked things through you, you jog my memory that you have been in government and you’ve actually done some of the forecasting if I’m correct. Do you one of the one of the things when I’ve looked at lot of the forecasts and I’m just wondering, do you think that the government has made their forecasts, their assumptions on a balanced market rather than a market that we’re in right now? Because, and why I say that or why I’ll explain that is when I chat with a lot of people in the industry, they go, Richard, some of those changes are well-intentioned, but they could not have been made at a worse time. And we go, well, let’s talk about that. What do you mean? And you’ve touched on it. You’ve gone, well, look at the uncertainty of interest rates. Look at the uncertainty. You know, with certain states having elections, look at the uncertainty with the war in the Middle East. Those factors, you’re not going to be able to isolate these tax changes and say, aha, look, this is the full impact because there’s so many other metrics at play. And your comments about confidence, I think is extremely well made. And one only has to look at Melbourne and Victoria and go, you look at the states, and it lacks confidence, it lacks momentum and that that’s feeding into just nothing really happening in the housing market. You compare that to Southeast Queensland that has huge confidence, huge momentum. And buyers seem to be just pushing prices up more and more and more, notwithstanding the fact that they also are encountering major issues with its interest rate increases and building cost increases. I suppose my question to you, or it’s just really just getting your views is, do you think that the government’s there is their modelling and the assumptions are made on a normal housing market in equilibrium when obviously it’s coming from a long way back and in many areas is actually dislocated. What do you think about that?
Trent: I think it’s hard to incorporate that confidence effect into a model. So I know that the models they use are probably based on the reserve banks sort of tulip Saunders housing model of the Australian housing market. And it doesn’t really have that confidence effect, but those models are more based on the sort of medium-term projection. So, there’ll be a short term impact and then in the longer, medium or long term, the effects sort of net out a little bit. But I think that’s right that the price effects could be more significant initially. The government, you know, somewhat unlucky in terms of bringing these changes in just at the time when all these things are happening as well. But I would note also that part of the aim of this package is to actually lower the price of housing, to make it easy for first-time buyers. So in some respects, that’s kind of the aim. Of course, we don’t want to see that sort of flow into a big price hole that’s sort of destabilizing for the economy, but that is somewhat the intention of the changes. But yeah, the treasury numbers are very much excluding that confidence effect, which when you have those other two headwinds, the rising interest rates and expectations of further rate rises as well and the Middle East conflict. Yeah, I think the impacts will be more severe in the short term.
Richard: Look, I certainly agree with you. Let’s shift gears. There’s another topic I wanted to talk to you. It was basically about negotiations for new projects. Now, my research on the ground when I chat with different builders or different developers, you can almost break it into the pre-pandemic and post-pandemic environments. I’m sure there’s other ways to chop it up, but really that’s how I’ve looked at it. And it seems that there’s a huge amount of difference risk sharing going on right now. I’m interested to know what your observations are with all of that.
Trent: Yes, we certainly have great insights into that. Quantity surveyors are sort of involved right in that process in even devising some of those techniques about risk sharing. So I’d go back to what I said sort of right at the start. So we certainly saw in the April, May period, lots of uncertainty, people holding off committing to projects, given how uncertain the world was. More negotiations, that’s eased off and know, projects are proceeding. Some of the things we’re seeing in the negotiation between developers and builders are contractors or builders applying shorter tender price validity periods. Often in more normal times, it’d be sort of 60 or 90 days, the tender would be valid. Now it’s often 30 days because things change so much. Builders just don’t want to commit to a certain price when the diesel price could rise or fall. Another strategy is early procurement for some products that take a while to come in. So, for example, a lift system, that might be 18 months before that actually arrives. So thinking about, developer thinking about securing that before even signing the contract. And then another one you mentioned, the risk sharing clauses. So still not very that common, but being explored by a lot of contractors sort of floating the idea of, well, particularly for. diesel, that’s the big one because that’s been so volatile and for some projects so important. And often in the early stage of a project, a lot of diesel gets used, we’re clearing a site or things like that. So, thinking about what’s a benchmark price if it rises above X dollars a litre, we’ll share half the cost or something like that. It’s being explored, it’s not super common, but it’s certainly being floated. And I think contractors saying, know, if things continue, this will definitely become more common, but it’s not, I think for the past few weeks, it’s not for all contracts, but yeah, it’s something that’s being explored quite a bit.
One other thing I just noted on sort of shipping delays. So that was certainly a fear at the outbreak of the COVID, were big delays from shipping um problems. That hasn’t really happened. We are not really seeing people seeking extensions from suppliers or anything like that. But not to say it won’t happen. um So that’s on the sort of shipping supply chains. Not really pulling apart from um in WA, which I mentioned earlier. Another one is that even though shipping problems haven’t or supply chains haven’t sort of lengthened too much. We have seen shipping costs actually jumped just in the past few weeks. If you look at sort of the shipping indices actually jumped quite a bit. So it actually lagged from where they were. So, it didn’t really impact shipping costs too much, but now it might actually start to have a bigger impact on prices in the coming weeks, even though the conflicts may be winding down a little bit.
Richard: Again, just as you’re talking, my mind is wondering to go, are there still costs that are going to flow through into the data? It almost seems that there’s obviously lead and lag indicators and perhaps certain parts of the supply chain, takes longer for costs to actually flow through. I wonder, again, I’m not as close to it as you are, but my instinct just says, and I’ve spoken to enough people on the ground to trust some of what they’re saying, I still think that there’s in certain materials or certain projects more, more costs flowing through or increases flowing through how much that’s increased. Obviously, I don’t know, but I like the idea of sharing those risks. I think that’s very pragmatic. I suppose we will just have to wait and see how it does flow through. Maybe some of those imported products that might take a while to arrive. That’s probably some of those ones that the cost pressures might flow in a little bit later. But having said that, you know, the Australian dollar’s strengthened a little bit, which maybe has softened a little bit. So, you know, there’s lots of things happening that I mean, you know, make the answer not clear for all projects.
Richard: Okay. Look, let’s shift gears again into the final section of today, which is just the actions. I’m keen. It’s all well and good for us to talk about some of the stats or even sometimes some of the problems or the risks. Let’s talk about what needs to be done. We’ve got a housing accord that needs to be fulfilled. We’ve got huge infrastructure projects, whether it’s data centres or just city shaping infrastructure that needs to be delivered. In your view, and on the ground. What are some of the issues that need to be addressed or reformed or discussed in more detail?
Trent: Yeah, lots to talk about. Maybe we’ll start on data centres. That’s super topical. Not only seeing the news, you’re seeing it in the data as well. So I’ve got a couple of charts in there and stats in the report about how big data. like I’m no data centre expert, I’m learning more and more about them. But if you just look at the numbers, so Data centre commencements. So we’re about 10 billion, over $10 billion in 2025. And that’s up from under a billion dollars a few years ago. So just a massive increase. That’s commencements. Approvals, about $14 billion over the year to March. That’s up 146%. So it’s been a big increase and more to come. So that’s a huge growth sector for RLB, for numerous building companies as well sort of shifting into data centre work because it seems like it’s a real growth area. Mainly in Sydney and Melbourne, particularly Melbourne, sort of the approvals pipeline seems really strong, but other states as well. So it’s an Australia wide story. That’s where some cost pressures are really building out. So skill shortages in the electricians area. That’s been well reported on. Potential constraints though, I think this is where the sort of policy debate might happen. So. planning policies where these data centres get built. Like we’ve seen stories in the paper about, you know, neighbours not realizing how big this data centre was going to be near them. So, there might be more community pushback against some of the big projects being floated. I think that’s one. The environmental footprint of the projects. Like again, I’m sort of no expert on this exact issue, but I see this being a headwind to the growth of the sector. Water, power, they’re very water hungry, very power hungry. I know new designs are sort of alleviating that little bit, but still I think there’ll be a constraint, that the pipeline is going to be huge. I think it’ll be a big policy debate. It’ll be a big challenge to get the skills. But on the optimistic side, it’s a real growth area for the construction sector and for the economy. know that Westpac put a great note out on this recently about the potential impact is like, potentially like a mini mining boom, what we saw in the 2000s or 2010s.
Richard: I actually have a theory that if Victoria gets its life and house in order that we could actually leverage the opportunity for data centres to pull us out of the hole, the financial hole.
Trent: And I think you sort of seeing that in the numbers a little bit. That’s right. Yeah. It’s just, are those constraints going to be binding on that potential pipeline is big, but other environmental planning skills constraints going to actually slow that down.
Richard: I just, I, and I’ve said it before, we actually had had a guest who kindly came on speaking about all things data centres and explain the opportunity and I genuinely feel that as you’ve said it’s a mini mining boom or perhaps even maybe not even so much of a mini mining boom. Yeah, but it’s a sector that Victoria can leverage and my goodness we need investments into Victoria we need we need that infrastructure in I mean we also needed office in the resi housing space but I just I feel that that is an industry that we could jump all over and you’ve seen the mining states how they’ve benefited from you know, very strong cycles. So certainly, I think that there’s a lot more to come in that space. And let’s hoped that the correct policy decisions are made by the state and the federal government. What else are you seeing on the ground or what else are you thinking that our listeners need to be aware of?
Trent: I think a big one is sort of the macroeconomic picture. So interest rates, we’ve seen, you the Reserve Bank raised rates three times this year. I did some work earlier in the year about what does this mean for the sector? I sort of compared what the expectations were in late 2025 of interest rate cuts in 2026 compared to the reality now of interest rate rises. If we’ve seen three, we’ll probably see one or two more. And on my numbers based on sort of the research in terms of how much that, what a interest rate rise has on construction activity, that’ll probably be a $50 billion hit to the sector if we that sort of change. So you know, the most, the sector’s most responsive or most impacted by rising rates are the high-rise sort of residential sector, but also renovations activity, new home building as well. So you know, people respond to rates and potentially this has been buried a little bit by the Middle East conflict has come in and, you know, really dominated headlines, but the effect of high rates is starting to flow through I think, and that’s, you know, that’s, the aim of higher interest rates is to slow the economy. We know it’s a blunt instrument. It affects the property sector more than other sectors, but that’s sort of what the Reserve Bank has to do to get inflation under control. So, from a macro perspective, what should happen? Look, I think governments around the country need to be very wary of spending too much. Government spending puts upward pressure on inflation, makes the Reserve Bank more likely to raise rates. If governments can sort of pull back and be more constrained. At a macro level where the economy sort of was overheating, probably come off a little bit, touch, but that’s a factor behind high rates. And that’s, you know, flowing through into the construction pipeline.
Richard: I’d actually not considered, I mean, it would be on the back of my mind, but not really looked into that. And so going back to your, did you say fifty million or fifty billion?
Trent: 50 billion.
Richard: Yeah I mean, that sounds significant, but is that… Let’s put that into some context.
Trent: So for houses, you’d say compared to the baseline of rate cuts, which we’re expecting like 2020 and 2025 compared to actual rate rises, that means house construction activity over the 26/27 to 29/30 period. So those years be 21 billion fewer, 21 billion worth of houses fewer built. So, spit that out. And then so it’s about 9% fewer houses built, in percentage terms. Apartments and townhouses, similar sort of percentage terms, about 8% fewer homes built there. And then less of an impact on non-residential and engineering construction, which aren’t as interest rate sensitive, but you know, big magnitudes. And that’s one of the main channels of monetary policies through the construction sector.
Richard: Gotcha, that absolutely fascinating. All right, the final, I suppose, talking point for me to you today is you said that you’re obviously doing a bit of consulting work and meeting with clients. I suppose what’s probably or let’s just do to the single biggest question that they’re asking. What is some of the advice that you’re giving just at a high level to them?
Trent: Yeah, apart from the Middle East conflict, which is the number one thing is going to what’s the dollar impact on costs or what’s the percentage impact on costs. That’s clearly the number one question that everyone’s asking. And hopefully I’ve tried to answer that a little bit today. So that’s sort of the number one. Like, what does all this mean for the cost of my project we’re going to build. And it’s become easier in the past few weeks to sort of answer that question because things have settled down a little bit. Who knows what will happen tomorrow, but that’s sort of the situation at the moment. So, because things have settled, we sort of had that number that I mentioned earlier, sort of that one and a half to three percent increase in costs generally for projects is sort of the number based on the war somewhat resolving in Q3. So that’s the big question that clients want to know. What does this mean for the cost of my project?
Richard: Gotcha. Look Trent, I know we’re out of time today. I wanted to do two things. First of all, thank you for coming on the show, but also acknowledge that what I’ve been asking you today is some of the hardest things to actually talk about, to be honest with you. I’ve had other people on the show, no disrespect to them. They know their space very well, but it’s not as volatile and as uncertain as the construction sector is. So thank you for letting me ask some pretty hard-hitting questions. I get asked them all the time. I get absolutely hammered by certain financiers and it doesn’t bother me. I quite enjoy actually the interactions with them, but they are under significant pressure. They’re trying to make investment and development decisions. And certainly, what I try to do with the podcast, and I know you share a lot of these views is we do try to push the boundaries in a good way in terms of actually going well, what does the data, what does the evidence say? What do our professional views and educated views of the will say so.
Trent: Yeah, it’s nice to be able to give advice as an economist, but not have to pull it pull the trigger on some of these decisions that are, you know, really big.
Richard: Well, just so you’re aware, when I’ve had a bit of anxiety about giving similar types of advice to what you’ve just done today, a lot of clients actually turn around, they’ve gone, look, we may not necessarily agree with everything that you’ve said, that’s not the point. We like your and we respect your viewpoint, because you just have one most people don’t most people will just regurgitate other people’s ideas rather than actually putting forward their own ideas or forecasts. What we typically do with all these data points is we’ll grab as many as possible, we will then triangulate what we think the direction is that it’s going to go. And so, thank you very much for coming on the show and actually adding that value because people will go away, they’ll hear what you’ve had to say. Obviously, your report very well articulates what you’ve said and some of those charts, especially with data centres are just ridiculous, that 10 time increase. But also your forecasts are very valuable because almost the number one question that I’m getting asked right now is it applies to construction is where are costs going? How do we mitigate risks? Are there elements of construction costs that are higher or lower? Where is the market going? What are some of the factors that we need to be aware of? And you’ve articulated all of that in your report and sure, they could change from day to day. I mean, it’s incredibly difficult with someone like Donald Trump in power.
That being said, you’ve still put a viewpoint forward. There are data points there. you’ve certainly also qualified it by going, well, there’s certain things that can change. And that’s certainly, I do that all the time. And I commend you for doing that. And I hope and certainly the listeners will have access to all that information. I do hope that the listeners reach out to you. I’m no doubt they probably will. They probably, I mean, they certainly know who RLB is. So they can reach out to you and just talk more generally. But I suspect especially for areas like Southeast Queensland, where the risks from, I think it’s the middle of 2027 up to the Olympics are absolutely acute. And your comments about the TPI or the tender price index, rising at twice what it typically has done, just underscores the risk in that sector that just needs to be acknowledged. So I’ll leave it there for today. But again, thank you so much for coming on and sharing your views.
Trent: Thanks Rich.
Richard: All right, everyone. I hope you have a good rest of the day. Thank you very much.
Hi everyone, I hope you’re having a lovely week and I also hope that you very much enjoyed the episode with Trent. I certainly found it absolutely fascinating. The three key takeouts that I’d like everyone to just think about over the course of the next week are as follows. I enjoyed his findings about certain prices, or suppose prices overall, starting to actually stabilise a lot more quickly than I suppose the industry had anticipated even six weeks ago. And whilst I appreciate that we still need to wait for the next month or so to actually see with some of the lag indicators coming through just how much prices have changed, I thought it was very refreshing to hear that and I was reminded to always look back at the data and the stats because Trent’s comment about prices not increasing as materially as certain people had thought, or the industry had thought, and also certain items not actually escalating as much is really very well made and certainly I have not seen any of that making the media headlines or the papers and I think it’s an important finding for him to keep in mind.
The second point I thought also was very interesting was the fact that price rises are not being passed on in every state. That I found quite fascinating. I’d always assumed that it just did get passed on. And it does then beg the question, why in certain states are they able to be passed on if it’s not necessarily the case and who’s actually wearing these costs? I think that’s something, and it may well be project specific or developer specific. But it is just I suppose food for thought. The final point I’ll make is just with the federal budget. You heard Trent’s comments and his views about the impact of the federal budget, the opportunities or risks that have been created by the federal budget. In the insight that we actually, this is Charlie Keck Cramer put out a month or two ago, I made the comments that the federal budget and the federal changes need to be supported by the respective states. They need to basically meet the federal governments in the middle. If this does not occur, I have very real concerns that a lot of the probably well-intentioned tax changes may not actually be successful at all. And I do commend the Queensland government. I know with the residential activation fund, I believe that’s what it’s called, they are actually working together to respond to some of the infrastructure contribution money that could be given in the Greenfield house and land market. And I think that is an example. It’s just one example of how the state governments are actually coming to the table to help some of these changes be implemented. Over a lot more needs to be done, really to set that up for success. And if that does not occur, it stands to actually significantly distort the housing market or the market more generally, which certainly is not the government’s intention. And I do hope that policy makers are actually listening, because I do know number of government listeners listen, and that the correct policy decisions are made. Anyway, that’s all I wanted to say for today. Thank you very much.
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