AUSTRALIA SUMMARY
Australia Construction Market Update
Construction cost escalation to rise in most cities in 2026
REGIONAL INTELLIGENCE UPDATE
AUSTRALIA SUMMARY
Construction cost escalation is expected to pick up in 2026, led by markets with stronger public and infrastructure pipelines and more constrained subcontractor capacity. The Middle East conflict has pushed up costs via higher prices for fuel, freight and oil-linked materials.
RLB estimates the conflict added around 1.5% to 3.5% to overall project costs, depending on the nature of the development, with the greatest exposure on civil, infrastructure, freight-intensive and services-heavy projects.
But the effect on tender prices has been more muted than initially expected as diesel, surcharges and some material pressures have eased from their April peak. In Sydney and Melbourne, competitive market conditions continue to influence pricing dynamics. In stronger markets such as Darwin, Queensland, Western Australia and South Australia, contractors are showing firmer pricing positions, with potential for further adjustments in the second half of the year if the effects of the war linger.
But the conflict is expected to generate only a temporary lift in pricing for contracts in 2026, with tender prices from 2027 expected to be broadly unaffected by the conflict. Data centre construction is also emerging as a major national pressure point, adding demand for specialist labour, electrical equipment, and grid-connected infrastructure.
Construction activity remains elevated but the outlook has softened since the March quarter. Higher oil prices and input costs, rising interest rates, and tax changes are expected to weigh on project feasibility, approvals and construction activity in the near term.
RLB ANNUAL TENDER PRICE INDEX UPLIFT %
Notes: Per cent change from December to December each year. Forecasts assume the Middle East conflict is mostly resolved by the September quarter 2026, with prices for refined oil products and other oil-linked products falling during 2026 and returning to more normal levels by 2027.
Construction cost escalation to pick up temporarily in some markets in 2026 driven by rising input costs
RLB’s Tender Price Index slowed across most of Australia in 2025, but tender costs were still rising faster than pre-pandemic. ABS producer price data also showed that escalation moderated through 2025, although price pressures were building even before the Middle East conflict. Overall building construction output prices rose 4.2% in the year to March 2026, up from 2.2% growth in the year to June 2025. House construction output prices rose 4.1% over the year, a sharp rebound from falling prices in late 2024 and early 2025.
The Middle East conflict added renewed pressure through higher fuel, freight and energy-intensive material costs, notably plastic pipe and fittings (PVC / PE / PP), bitumen and asphalt (Table 1). Diesel prices doubled shortly after the conflict began, but have fallen in recent weeks (Chart 1). Shipping costs have jumped in recent weeks, although contractors are not yet reporting widespread shipping delays.
CHART 1: DIESEL PRICES HAVE FALLEN FROM THE APRIL PEAK
Notes: Excise discount of 32 cents per litre from 1 April 2026. Source: AIP
Project costs 1.5% to
Significant price rises and concerns about shortages of diesel and other oil-derived products weighed on industry sentiment in April and early May. Developers were reluctant to sign new contracts, and tender price validity periods shortened.
But the impact of the Middle East conflict on the construction sector has been more muted than initially expected. There has been an easing in cost pressures in recent weeks. Diesel prices have fallen – the spread between diesel prices and crude oil prices has fallen back from the extreme highs seen in April as supply ramped up and the likelihood of an end to the conflict increased. Fuel and delivery charges have been scaled back and cost pressures have also eased for other inputs (for example, concrete production surcharges have fallen substantially since April).
While some of the initial price increases have moderated and the most acute cost pressures have eased from their mid-April peak, RLB’s latest estimates suggest the conflict has added around 1.5% to 3.5% to overall project costs, depending on project type, location and procurement exposure. The impact is not uniform: projects with high freight, plant, civil works, asphalt, bitumen, PVC / PE / PP, steel, cement or long-lead imported equipment exposure are likely to face the greatest risk. Across all markets, contractors are placing greater emphasis on shorter price validity periods, early procurement, risk sharing for volatile inputs and more active management of long-lead items. However, contractors are not currently experiencing widespread shipping delays or seeking extensions from suppliers.
TABLE 1: ESTIMATE OF PRICE INCREASES BASED ON CURRENT SUPPLIER INFORMATION, AUSTRALIA, FEBRUARY TO JUNE 2026
How these cost pressures are being passed on to tender prices differs across Australia.
- In Sydney and Melbourne, market dynamics remain competitive, shaping contractors’ pricing behaviour, with many contractors not passing on higher costs. As a result, the TPI forecasts for 2026 are unchanged. Reflecting the softer conditions, there is a wider spread of tender prices from contractors. Some contractors have flagged higher input costs as a risk and reserved the right to pass them on if they remain elevated. In Sydney, tendering conditions are currently subdued before an expected pick-up in activity from late 2026.
- In some of the stronger markets, particularly Darwin, Queensland, Western Australia and South Australia, firmer conditions are evident. Some upward price pressure could emerge in the second half of the year if oil and diesel prices remain elevated. In effect, the conflict is expected to generate a temporary uplift in pricing through the June, September and potentially December quarters (with annual TPI growth broadly consistent with current forecasts), while tender price growth from 2027 is expected to be largely unaffected by the conflict. In Perth and Darwin, higher rates of TPI growth in 2027 and 2028 continue to be driven by underlying demand pressures, rather than Middle East-related input costs.
- In Canberra, the TPI is now forecast to rise by 4.7% in 2026, up from the 4.5% forecast in the March quarter due to cost pressures arising from the Middle East conflict.
"Across all markets, contractors are placing greater emphasis on shorter price validity periods, early procurement, risk sharing for volatile inputs and more active management of long-lead items."
The Reserve Bank has raised interest rates 0.75 percentage points to
Further out, forecast escalation remains uneven across Australia. South-east Queensland, Townsville, Adelaide, Perth and Darwin are expected to face the strongest pressure due to large public sector pipelines, defence and infrastructure work, labour shortages and limited Tier 1 subcontractor competition. In Sydney, cost pressures are expected to pick up as residential, data centre and infrastructure activity absorb available capacity. Melbourne’s construction market is more subdued, with the TPI forecast to grow at 4% annually over the next few years.
"South-east Queensland, Townsville, Adelaide, Perth and Darwin are expected to face the strongest pressure due to large public sector pipelines, defence and infrastructure work, labour shortages and limited Tier 1 subcontractor competition."
Other drivers of escalation across cities:
- Adelaide: A strong pipeline of major projects is tightening Tier 1 capacity, with skilled labour shortages and limited Tier 1 subcontractor competition pushing up costs.
- Brisbane, Gold Coast and Townsville: Firm public sector pipelines, Olympics-related positioning, skilled labour shortages, low productivity and constrained Tier 1 subcontractor capacity are adding to cost pressure.
- Canberra: Public-sector projects are keeping activity elevated, with capacity constraints and labour shortages increasing reliance on interstate resources at higher cost.
- Darwin: Defence and infrastructure demand is continuing to drive activity, while labour shortages and limited Tier 1 competition are adding to cost pressure.
- Melbourne: Labour shortages, mega-project cost over runs and a limited Tier 1 subcontractor pool are continuing to push up costs.
- Perth: The market is operating near capacity, with skilled labour shortages, wage pressures, limited Tier 1 competition and regional delivery constraints driving cost pressures.
- Sydney: Current tender competitiveness is helping contain price growth, but labour shortages and a strong future housing pipeline are expected to add to cost pressures from late 2026.
Construction activity remains elevated, but the outlook has softened
Construction activity has been strong, with construction work done up 4.5% in the 12 months to March 2026 to a record $324.8 billion (Chart 2). Residential construction activity rose 6.9% over the year, with apartment construction growing particularly strongly. Non-residential activity growth was solid, with work in some segments, notably data centres, growing rapidly. Engineering activity grew by a more modest 2.5%, driven by energy infrastructure such as transmission lines, solar, wind and pumped hydro, and water infrastructure.
Forward-looking indicators point to a further rise in activity in the near-term. The volume of building approvals rose 17% in the 12 months to March 2026. Residential approvals have been supported by apartments and semi-detached dwellings, while non-residential approvals have been lifted by data centres, as well as health, education, entertainment and recreation.
CHART 2: CONSTRUCTION ACTIVITY IS AT A RECORD HIGH
Source: ABS
While the near-term pipeline is strong, the medium term outlook has softened due to three main headwinds:
- Higher interest rates: the Reserve Bank has raised interest rates 0.75 percentage points to 4.35% in response to high inflation that was present before the outbreak of the Middle East conflict, the risk that inflation expectations will rise, and a resilient labour market. The financial markets are forecasting that the Reserve Bank will raise rates further in 2026. Higher interest rates will reduce the pipeline of construction activity, particularly in more interest-rate-sensitive sectors such as houses, apartments and townhouses. Non-residential building and engineering construction should be more resilient to higher interest rates, particularly where projects are publicly funded or linked to essential infrastructure.
- Higher construction costs from the Middle East conflict: higher fuel, freight and energy-intensive material costs have pushed up construction costs and weighed on industry confidence (see above). If the conflict continues to disrupt global oil markets and costs remain elevated and are passed on to developers, some new projects will not be feasible and could be delayed or cancelled. Uncertainty created by the conflict may also mean some developers pause their projects until oil markets normalise.
Unemployment rate in April
- Tax changes in the 2026–27 Federal Budget: housing tax changes in the budget included limiting negative gearing to newly built homes from 1 July 2027 and replacing the 50% CGT discount with cost-base indexation or a minimum 30% tax rate. Treasury modelling forecast that around 35,000 fewer homes (~1.5% fewer homes) will be built over the decade due to these changes. But there is a possibility that new housing supply will be even weaker in the near term if prices fall by more than expected due to the impact on buyer confidence. However, there is also the possibility of more investment in new dwellings than anticipated, meaning the supply impact will be more limited. The Budget also contained some measures that should support housing supply, including a $2 billion Local Infrastructure Fund, faster environmental approvals, changes to how migrant workers’ skills are assessed, and support for modern methods of construction. Overall, the net effect of the changes in the budget will probably be to weigh on new housing supply in the near-term.
The broader economy has also softened in the face of higher interest rates and the fallout from the Middle East conflict. Consumer and business confidence have fallen sharply, dwelling prices are falling in Sydney and Melbourne, discretionary spending is slowing and there are signs of softening in the labour market, with the unemployment rate rising to 4.5% in April. The net effect of these changes is that construction activity is likely to be softer in 2026 and 2027 than previously forecast. The Australian Construction Industry Forum is now forecasting construction work done to fall by 0.8% in 2026, compared with its late-2025 expectation of modest growth of around 2%. The Reserve Bank has also revised its forecasts and now expects housing construction to decline in 2027 and 2028.
‘Commercial nec’ approvals increase in the year to March 2026
Data centre activity is booming
Data centre construction has grown strongly over the past few years and is now the strongest part of non-residential construction. ABS data show a sharp rise in ‘commercial not elsewhere classified (nec)’ commencements, a category that is mostly data centres, from under $1 billion pre-pandemic to over $10 billion in 2025 (Chart 3). Most data centre construction is concentrated in Sydney and Melbourne, but activity is also picking up in other cities. Data centres have been a major driver of total non-residential building activity. Data centre commencements rose 208% in 2025 compared with 2024, while other non-residential building rose by only 3%.
Building approvals data and company announcements also point to continued growth in data centre construction. ‘Commercial nec’ approvals rose 146% in the year to March 2026, to almost $14 billion. Recently announced major data centre projects include large-scale developments at Eastern Creek and Guildford West in NSW, and Fishermans Bend in Victoria.
The strong pipeline of data centre construction adds to escalation risk. Data centres are capital intensive, services heavy and exposed to electrical equipment, cooling systems, imported plant, skilled trades and grid connection constraints. As activity grows, competition for specialist labour and equipment may intensify, pushing up costs and placing pressure on parts of the construction supply chain.
"Data centre commencements rose 208% in 2025 compared with 2024, while other non-residential building rose by only 3%."
CHART 3: DATA CENTRE COMMENCEMENTS HAVE RISEN SIGNIFICANTLY
Source: ABS