Future forecasts: Construction and Property Services Skills

Transcription

1 R E P O R T Future forecasts: Construction and Property Services Skills Prepared for Construction and Property Services Industry Skills Council May 2013 THE CENTRE FOR INTERNATIONAL ECONOMICS

2 The Centre for International Economics is a private economic research agency that provides professional, independent and timely analysis of international and domestic events and policies. The CIE s professional staff arrange, undertake and publish commissioned economic research and analysis for industry, corporations, governments, international agencies and individuals. Centre for International Economics 2013 This work is copyright. Individuals, agencies and corporations wishing to reproduce this material should contact the Centre for International Economics at one of the following addresses. C A N B E R R A Centre for International Economics Ground Floor, 11 Lancaster Place Majura Park Canberra ACT 2609 GPO Box 2203 Canberra ACT Australia 2601 Telephone Facsimile cie@thecie.com.au Website S Y D N E Y Centre for International Economics Suite 1, Level 16, 1 York Street Sydney NSW 2000 GPO Box 397 Sydney NSW Australia 2001 Telephone Facsimile ciesyd@thecie.com.au Website DISCLAIMER While the CIE endeavours to provide reliable analysis and believes the material it presents is accurate, it will not be liable for any party acting on such information.

3 Future forecasts: Construction and Property Services Skills iii Contents Abbreviations Summary vii viii 1 Introduction 1 Context for this report 1 Report structure 2 2 Projected skills requirements in the CPS sectors 3 Skills projections for the CPS sector 3 More details on the projections 9 3 Contributions of the construction and property services sectors 17 Number of businesses in CPS sectors 18 Direct contribution of CPS sectors to the economy 19 Economywide perspective of CPS sectors 23 Implications for this study 27 4 Demand drivers short and long term perspectives 28 Underlying demand for housing 28 Housing affordability and consumer confidence 30 Increasing importance of non-residential construction 35 Property services 39 5 Key supply side factors short and long term perspectives 43 Demographics of the labour force 43 Long term macroeconomic conditions 44 Productivity in the construction sector 47 6 Macroeconomic drivers and modelling approach 52 Key macro drivers accounted of the analysis 52 Economywide approach 55 7 Strategic priorities and key issues 57 General reform agenda 57 Removal of government constraints on housing 59 Increasing productivity 62 Maintain and grow the CPS skill base 63 APPENDICES 71

4 iv Future forecasts: Construction and Property Services Skills A Review of other employment projections 72 DEEWR employment projections 72 AWPA employment projections 75 B Details on the construction and property services sectors 82 Structure of businesses operating in CPS sectors 82 Value of sales and value added 82 Total labour costs and employment 86 C Demographic and economic assumptions 89 Population and workforce 89 Household formation 93 Economic growth 94 D Detailed projections by CPS industry and occupation 97 References 105 BOXES, CHARTS AND TABLES 2.1 Projected employment change in CPS related occupations Australia Projected employment change in CPS related occupations in Projected employment change in CPS related occupations in Projected total employment by state Share of full-time employment in total employment Projected total employment by industry Projected total employment by occupation Projected employment in CPS sectors Projected employment in some CPS related occupations Comparison of projected annual growth rates Revision of IMF economic projection in April 2013 to previous projections ANZSIC industry coverage at the 4-digit level Number of national CPS businesses by turnover size Number of national CPS businesses by employment size National value of sales of the CPS sectors National value added of the CPS sectors Value added per person employed for construction Value added per person employed for property services CPS employment by industry for Australia CPS employment compared with population by state Distribution between trades and non-trades in the CPS sector Multiplier approach Impact on residential building, construction and GDP under full employment Reduction in houses as a share of new dwellings 30

5 Future forecasts: Construction and Property Services Skills v 4.2 National dwelling commencements Westpac-Melbourne Institute consumer sentiment index Household saving as a proportion of gross disposable income Index of dwelling prices and average weekly earnings, Australia, Average annual price growth for capital cities houses and project homes REIA Home loan affordability Australia Index of prices for housing construction and non-residential output Increase in the value of non-dwelling (non-residential) construction Investment in the NBN in nominal terms Mining investment buildings and structures and total in current terms Estimates of planned expenditure in mining in nominal terms Committed investment in nominal terms Planned mining expenditure by state Value of production of property operators and real estate agent services Value of production for building cleaning pest control and gardening services Value of production for architectural and surveying services Resident population and labour force projections Trends in the age cohorts of labour supply Changed youth employment, by industry Construction industry workers, by state Construction industry workers residential or non-residential construction Multi-factor productivity in construction sector Average annual growth in multi-factor productivity Annual growth rate of Gross State Product Annual growth of MFP by industry Annual growth of Australian exports Annual growth rate of residential building starts Annual growth in investment in selected sectors Modelling approach Key findings of COAG Housing Supply and Affordability Report Taxes on housing Potential scale of inefficient or excessive tax on a dwelling Age distribution of bricklayers relative to construction and the labour force Age distribution of surveyors visa applications granted by category for construction visa applications granted by category for property services Construction trades apprentices 67 A.1 Average annual growth rates of key labour force variables 73 A.2 DEEWR Projections of employment by industry 74 A.3 DEEWR Projections of employment by state 75 A.4 AWPA Employment by CPSISC occupation 76

6 vi Future forecasts: Construction and Property Services Skills A.5 AWPA Projected industry employment growth by industry 78 A.6 AWPA Projected industry employment growth by scenario 79 A.7 AWPA Projected state employment growth by scenario 79 A.8 AWPA Projected industry employment growth by scenario 80 A.9 AWPA Projected industry employment growth by scenario 81 B.1 Number of CPS businesses by turnover size B.2 Number of CPS businesses by employment size B.3 Sales and service income by CPS sector 85 B.4 Value added by CPS sector 86 B.5 Wages and salaries by CPS sector 87 B.6 Employment of the CPS sectors by industry and status 88 C.1 Population projections 90 C.2 Summary of population growth rates 91 C.3 Labour force as at June C.4 Workforce projections 92 C.5 Summary of labour growth rates 92 C.6 Changes to average household size, past five, 10, 15 years 93 C.7 Gross State Product forecasts 95 C.8 IMF WEO Economic Growth Forecasts of GDP 96 D.1 Projected change in CPS related occupations New South Wales 97 D.2 Projected change in CPS related occupations Victoria 98 D.3 Projected change in CPS related occupations Queensland 99 D.4 Projected change in CPS related occupations South Australia 100 D.5 Projected change in CPS related occupations Western Australia 101 D.6 Projected change in CPS related occupations Tasmania 102 D.7 Projected change in CPS related occupations Northern Territory 103 D.8 Projected change in CPS related occupations Australian Capital Territory 104

7 Future forecasts: Construction and Property Services Skills vii Abbreviations ABS ANZSCO ANZSIC AWPA CIE CPS CPSISC Australian Bureau of Statistics Australian and New Zealand Standard Classification of Occupations Australian and New Zealand Standard Industrial Classification Australian Workforce and Productivity Agency Centre for International Economics Construction and Property Services Construction and Property Services Industry Skills Council CPS Skills ANZSCO occupations of interest to this study DEEWR E-Scan GDP GFC ISC MFP NBN NHSC VET WH&S Department of Education, Employment and Workplace Relations CPSISC Environmental Scan Gross Domestic Product Global Financial Crisis Industry Skills Council Multifactor productivity National Broadband Network National Housing Supply Council Vocational Education and Training Workplace Health and Safety

8 viii Future forecasts: Construction and Property Services Skills Summary This study The Construction and Property Services Industry Skills Council (CPSISC) has commissioned the Centre for International Economics (the CIE) to independently develop a research document to inform and augment demand forecasts for the construction and property services sectors. Employment projections by industry, occupation, and region have also been produced by the Department of Education, Employment and Workplace Relations and the Australia Workforce and Productivity Agency to better inform government and industry decision making around skills formation. This report uses a similar approach but with a specific focus on construction and property services (CPS) sectors, making a detailed appraisal of each of the component CPS sectors out to and a snapshot at Because of the uncertainties around scenarios for key drivers of the national economy and the CPS sectors, a conservative approach was taken. Employment forecasts By , additional skills will be required to respond to the projected uptick in construction, especially in the residential sector (p. 13). By , the projected demand for CPS Skills (occupations of interest to this study) across Australia will be nearly persons higher than in , representing a 14.6 per cent increase. By , an anticipated recovery in residential construction is expected to contribute to an increase in employment requirement of persons, or 4.5 per cent, compared to levels. These increases are from a base of 1 million persons in CPS Skills, selected out of total employment in the CPS sectors of 1.7 million in These additional persons, do not directly replace the gap caused by recent shortfalls in apprenticeship flows and aged attrition trends occurring over the next decade, which indicates a slightly larger skills gap will actually need to be filled. In terms of CPS employment by sector, non-residential building construction and heavy and civil engineering construction is projected to grow by 2.3 and 2.4 per cent per annum, while residential building employment would increase by 1.2 per cent per annum between and Construction services employment will grow by 1.4 per cent per annum for the same period. Overall, construction employment has above average growth during this initial period. However, as mining sector investment slows, the employment in the construction industry will grow by 0.98 per cent per annum between and Property services is forecast to grow at 0.82 per cent each year on average through to and at 0.65 per cent between and Over the longer term,

9 Future forecasts: Construction and Property Services Skills ix these projections not only reflect changes in construction but also activity levels in the property market and expenditure levels by final consumers. Although at lower growth levels beyond 2016, construction is set to continue as a key component of the economy and as an employer through to 2026 (p. 13) The CPS sectors will continue to provide stable and sustained employment growth through to compared to other sectors of the economy (p. 13). A key feature of the projections is that productivity change within both construction and property services are expected to be in-line with that recently observed. These business-as-usual projections do not identify any productivity shifts across the sectors as a result of new practices, or widespread adoption of new or existing technologies. The timing, level of adoption, and the savings of these technologies are important drivers of future employment forecasts but are difficult to quantify. In addition, no change in policy settings for CPS sectors have been incorporated. Projected employment growth rates are lower than those of DEEWR, and in the middle range of the scenarios reported by AWPA. For example, DEEWR projected the total employment in Australia will grow by 1.4 per cent per annum from 2011 to 2016, while our projection points to 1.1 per cent. These projections are a conservative and reliable starting point to quantify the future CPS skill requirements and would be potentially stronger if the appropriate policy priorities are given to construction, which will also improve the outcomes for property services. These priorities are identified below and in chapter 7 of the report. Size and contribution of the CPS sector Construction is the third largest contributor to trend annual GDP and is the third largest employer (p. 17 and 19). The CPS sectors, which include areas such as housing construction, security and real estate services, and surveying, are a vital component of the economy accounting for over businesses, with more than two-thirds of these having a turnover of less than $ In , total value added by CPS sectors was estimated to be $141 billion. Construction contributed 62.6 per cent or $89 billion with value added of property services being $53 billion in nominal terms.1 The construction sector, on its own, is the third largest in terms of employment, accounting for over 1 million (seasonally adjusted labour force) or 8.75 per cent of total employed persons for Working proprietors, particularly sub-contractors, operating in small businesses make up a large proportion of the workforce for both construction and property services 1 The analysis was based on data from ABS Catalogue Australian Industry, rather than estimates of industry gross value added from the ABS Catalogue Australian National Accounts: National Income, Expenditure and Product. Australian Industry reports industry data at a higher level of detail (2-digit ANZSIC level) and also provides consistent data on a range of other industry variables.

10 x Future forecasts: Construction and Property Services Skills especially in construction services (trades workers) and in building cleaning and pest control. Trades workers and trained professionals form a large proportion of the overall skill base of CPS sectors. Prevailing economic conditions determine employment levels and demand for skills. Since the financial crisis, the performance of CPS sectors has been mixed. With subdued market conditions, growth and profitability in residential construction and construction services have been flat. This has contrasted with strong growth in engineering construction and associated professional services because of investment in the mining sector and public infrastructure. The performance of the property services is tied directly and indirectly to the construction sector, either through the flow of investment expenditures or related to the stock of dwelling and non-dwelling and engineering works (p. 39). Improving productivity and addressing skill shortages over the medium term has the greatest potential to benefit the CPS sectors, through expanding output and improving profitability, and to maximise the contribution that will flow on to the rest of the economy (p. 27 and 49). Removal of inefficient taxes on housing, such as state stamp duties, have scope to address affordability and stimulate demand for new housing with significant flow-on effects. For every dollar of extra activity in residential housing, national GDP increases by $2.26. Demand side drivers There are a wide variety of demand side drivers, and these affect the CPS sectors differently. Residential housing is a critical part of the equation. While it is expected that latent demand for housing will continue to be driven by population growth and incomes out to , housing affordability will remain a critical issue. Factors that have contributed to falling affordability and consumer confidence will continue to be important, particularly those imposed by government regulation and taxes and by shortages in certain trades. Overall we expect growth in residential construction to be around dwellings each year out to , with a shift away from standalone housing. There will be more than half a million additional Australians in the resident population aged 60 or more by By , there will be an additional 2.3 million Australians aged over 60who are likely to downsize their housing to provide funds for retirement (p. 28). The outlook for the non-residential construction sector remains positive going forward but at lower levels than previously forecast. The investment phase of the mining sector expansion, in concert with a substantial government expenditure program on infrastructure, has resulted in sustained growth in demand for engineering construction.

11 Future forecasts: Construction and Property Services Skills xi While there remains significant investment committed in the mining sector beyond , a slowing of the global economy and falls in commodity prices could dampen these plans. Similarly, there remains significant public works in the pipeline, but this could be moderated by reduced government infrastructure expenditure caused by greater budgetary pressures. Non dwelling construction activity will continue to impact on labour supply for construction skills through to 2016 (p. 35 to 37). Property services is a diverse group of industries with not only direct sales linkages to investment activities by construction and to the capital stock base of the economy, but to industries in the wider economy and by final consumers. For example, services provided by security guards are used outside of the building and property sectors. Supply side drivers Challenges to the CPS sectors moving forward include slowing in the underlying labour force growth, and how structural change and productivity have the potential to affect affordability and to change skill requirements. An ageing Australian population should lead to a slowing in the growth of the labour force across all sectors and could result in a higher proportion of part time workers. This could be offset to some extent by higher anticipated levels of immigration and higher fertility rates as observed in recent trends. The age cohort between 15 and 24 years is forecast to increase at 65 per cent the rate of the entire labour force by , increasing competition for the recruitment of new workers across all industries. This increased competition has already been demonstrated by the mining sector expansion over recent years. A slowdown in mining investment and a transition to the operational phase may provide the CPS sectors with an opportunity to attract young workers. Continued structural change within the Australian economy, including the impact of the high exchange rate, particularly on manufacturing, is likely to make more workers available to the CPS sectors. Productivity growth in the CPS sectors has the potential to benefit the wider Australian economy but also to address housing affordability and skill shortages. Two broad forms of productivity change were identified: maintaining ongoing productivity improvements from improving workplace practices (labour productivity) and industry consolidation (more effective utilisation of industry fixed costs); and significant structural change in the CPS sectors through the widespread adoption of new technologies or approaches such as pre-fabrication and information technology. Structural adjustment is unlikely to happen quickly in the construction sector. This is due to the structure of the firms in the industry, many of which are working proprietorships (p. 22 and 49).

12 xii Future forecasts: Construction and Property Services Skills A key finding of this report is that the CPS sectors will continue to rely on regular improvements in productivity, and are less likely to be affected by a one-off structural change. While techniques such as pre-fabrication have already been adopted in the nonresidential sector, the timing of widespread adoption in residential construction is not easily predicted. This is the result of the nature of the residential construction industries, where adoption of new technologies is likely to be slow and steady due to resistance by industry and consumers alike. However, based on trends in Europe, this could change quickly. For the wider CPS sectors, Building Information Modelling technology has the potential to improve efficiencies through the entire lifecycle of buildings. For other CPS sectors, such as surveying and geospatial services, significant improvements in technology that have improved access to, and processing of, spatial information could have a profound impact on the skills profile required. Macroeconomic drivers Models are used to help understand possible future scenarios and effects of changes. In this case, the modelling approach involved a wide range of information, data and assumptions: Gross State Product (GSP) growth and productivity growth; external demand for Australian goods and services, population growth, shocks specific to the CPS sectors; and the nature and structure of the labour market, such as full time versus part time, sectoral composition and geographical distribution of the labour force. Recent trends towards higher levels of net overseas migration and structural budget deficits will impact on the CPS sectors and the wider economy.(p. 54). Policy implications This report identifies that there are a number of key challenges for the CPS sectors going forward, including: improvement in the affordability of construction, especially in the residential sector; taking actions to address current and emerging skill shortages; and maintaining flexible and responsive workplaces such that productivity enhancing technologies can be adopted as required. Three primary areas, of specific actions that can be undertaken, were identified during the course of this study: the removal or reduction of inefficient taxes and other regulations for new housing including the reform of inefficient and costly infrastructure charges and levies; maintaining and improving productivity through ongoing structural adjustment and through the adoption of improved on-site practices that are responsive to changes in available technologies and to the needs of both workers and businesses; and

13 Future forecasts: Construction and Property Services Skills xiii maintaining and improving the skills base especially for construction and certain parts of property services. In terms of potential payoffs, the benefits for some actions are easier to identify than for others. The removal of half of the inefficient taxes and regulation could reduce the cost of new housing by around 10 per cent. An example of what could be achieved in the housing sector is the continuation of the gradual shift towards prefabricated housing or transportable housing, which has the potential to reduce the cost of a new dwelling by a minimum of 10 per cent excluding the purchase cost of land (see Miller 2011). Potentially, the impact on affordability and skills mix required for a shift toward prefabrication is large and scope for adoption appears to be limited by both demand and supply side factors. Apprenticeship starts have decreased and mature workers are set to leave the industry over the next years (p. 63 and 67). Workforce development by industry, and in conjunction with government, will continue to be important (p. 68). Overall, it is critical that workplace and vocational training remains sufficiently flexible and responsive to structural changes in the CPS sectors that result from productivity enhancing developments that are underway now or likely to take place. Businesses should have ongoing access to skills through the 457 temporary visa program to address short term skill shortages, but this facility may not be effective to address longer term shortages across all occupations identified in this report. Strategies identified to maintain and improve the skills base are largely already in place, by: improving the attractiveness, effectiveness and relevance of vocational training by creating flexible study periods, alternative modes of delivery, and by continuously improving courses and their assessment to ensure they are relevant to the contemporary needs of both workers and employers; ongoing monitoring of licensing and other requirements for certain skill categories that better reflect the role of technology and other structural developments such as onthe-job training, while maintaining a necessary focus on consumer protection; extension of effective working lives, particularly in physically demanding occupations, through the use of improved work practices (labour saving technology) or through retraining with new skills to keep them in the industry: Promotion of initiatives that improve the business skills of workers that would complement the attainment of key competencies around trades and professions skills may also be of use. identification of factors that lead to low completion rates during apprenticeships and traineeships especially in construction and related trades.

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15 Future forecasts: Construction and Property Services Skills Introduction The Centre for International Economics (the CIE) has been asked by the Construction and Property Services Industry Skills Council (CPSISC) to conduct research that will support forecasts of demand in Construction and Property Services (CPS) sectors. The key objective of the study is to forecast the labour requirement of the CPS sectors out to with a longer-term snapshot of sector demand through to In summary, the study aims to do this by: forecasting prospects for CPS sectors by state; by accounting for a range of drivers including general economic conditions, and where possible, industry specific developments such as changes in consumer preferences, technology, productivity and the regulatory environment. translating industry prospects into demand by detailed skill category; by linking demand for skills back to sectoral performance and by accounting for changes in technology and work practices that impact on the number employed. Specifically, key outputs of the research will be: identification of the significant role of the CPS sectors to the economy including the multiplier effect into the economy; forecasts of labour requirements for the CPS sectors out to , as well as a snapshot of the sector demand as at : including state by state forecasts by sector and by skill; identification of longer term structural shocks and risks for the sectors; consolidation of construction and property services occupations to the National Skills Needs lists for the medium term to ; and identification of the policy changes that may help the CPS sectors. This information will be then used to provide a priority list for policy change for the CPS sectors in terms of what the industry should be addressing and what government can do to ensure the economic strength of the CPS sectors. Context for this report A key document for the CPS sectors is the Environmental Scan (E-Scan) published by the CPSISC. The objective of the E-Scan is to provide Commonwealth and State governments and ISC stakeholders, with information about current and upcoming market conditions that will influence demand for skills and guide workforce development planning and future needs of CPS sectors.

16 2 Future forecasts: Construction and Property Services Skills As part of the context for the E-Scan and this report, a number of significant studies have already been completed that project future skills requirements by occupation and region across all sectors of the economy. Most notably, these studies are by: Department of Education, Employment, and Workplace Relations (DEEWR), Industry Employment Projections: 2012 Report; and Australian Workforce and Productivity Agency (AWPA), Resources Sector Skill Needs, Report These projections are inputs to a wide range of decision-making and planning documents regarding skills formation and labour productivity. For example, Future focus: 2013 National Workforce Development Strategy sets out a vision how Australia can position itself for growth in the Asian century, in a competitive global environment, where technology and patterns of work are rapidly changing. The results of both of these studies are summarised in appendix A of this report. Because of the respective approaches of both of these reports, those projections are necessarily designed to reflect broad sectoral trends that result from projected rates of growth, and at a regional and national level. That analysis is done within an economywide framework that recognises key linkages between industries and regions, especially through the perspective of demand for skills. Consultation indicates there is a more recent and relevant assessment underway in the property services sector relating to skill shortages for surveying and geospatial professionals (BIS Shrapnel, 2013). That report will be an example of a very detailed study looking at the demand-supply balance for one occupation which required detailed data collection and calculation methodologies. The scope of the current study provides projections of demand for skills with a strong construction and property services focus, but maintains the core of an economywide approach taken by the broader DEEWR and AWPA studies. However, the resulting projections could be further informed by evaluations at the specific occupational level, such as that for surveying and geospatial professionals. The projections presented in this report are based on best bet scenarios for key economic drivers of the national economy and for the CPS sectors. They also assume that government policies, especially those directly relevant to the CPS sectors, remain at their current settings. Therefore, this report aims to provide conservative, moderate and base level of projections for the CPS sectors. Report structure Details on the projected skills requirements across the CPS sectors is presented in chapter 2 of this report. These projections are the result of developing a realistic scenario for the Australian economy and, more specifically, for individual CPS sectors. This scenario draws together industry information drawn together across chapters 3 to 6 concerning the structure, contribution and recent performance and key drivers looking forward. Finally, chapter 7 outlines policy conclusions and future actions that can be taken by industry and government.

17 Future forecasts: Construction and Property Services Skills Projected skills requirements in the CPS sectors Determining the skill requirements in the CPS sector used an economywide approach. At a state level, the key drivers are population, gross product and demand for Australian exports. These were complemented by specific drivers for residential and non-residential construction, which then flow onto property services, and assumed no change in key government policy settings for the CPS sectors. The employment projections reported reflect a downward revision from previous studies, as a result of lower world, and domestic growth. As such, they represent a conservative and reliable start point to quantify the CPS Skills requirements going forward. Results are potentially better if the appropriate weighted policy priority is given to construction, which will improve the outcomes for property services. The projection of employment in the CPS sectors has two timeframes: a short term, annual, projection to ; and a long term snapshot to In this chapter, we will report the projections, and compare the results to those of DEEWR. The following chapters provide the detail behind the scenarios, and the trends that underpin the employment projections. Skills projections for the CPS sector By , the projected demand for CPS Skills (skill categories of interest to this study) across Australia will be nearly persons higher than in , representing a 14.6 per cent increase. Table 2.1 shows that a recovery in the construction sector by , particularly the residential sector, is expected to increase demand by over persons or 4.5 per cent compared to levels. These increases are from a base of 1 million persons in CPS Skills, out of total employment in the CPS sectors of 1.7 million in These additional persons, do not directly replace the gap caused by recent shortfalls in apprenticeship flows and aged attrition trends occurring over the next decade, which indicates a slightly larger skills gap will actually need to be filled. Projections out to indicate that employment for construction-based skills will increase faster than for property services because of the uptick for the industry, but out to , employment growth between the sectors should move in line with each other reflecting a high degree of interdependency over the long term. A key feature of the projections is that productivity change within both construction and property services are expected to be in-line with that recently observed for these industries.

18 4 Future forecasts: Construction and Property Services Skills Projected employment change in CPS Skills related occupations Australia a ANZSCO Occupation persons persons persons persons persons 1331 Construction managers Surveyors and spatial scientists Other engineering professionals Civil engineering draftspersons and technicians Bricklayers and stonemasons Carpenters and joiners Painting trades workers Plasterers Roof tilers Wall and floor tilers Plumbers Signwriters Other miscellaneous technicians and trades workers Security officers and guards Auctioneers, and stock and station agents Real estate sales agents Other sales assistants and salespersons Crane, hoist and lift operators Other stationary plant operators Commercial cleaners Domestic cleaners Other cleaners Concreters Paving and surfacing labourers Structural steel construction workers Other farm, forestry and garden workers Other miscellaneous labourers Total a Change from employment levels. Source: CIE projections. These business-as-usual projections do not identify any significant productivity shifts across the sectors, in addition to underlying productivity trends, as a result of new practices or widespread adoption of new or existing technologies. The projected changes in the level of employment in the CPS sectors, by occupation, are summarised in table 2.2 as at , and in table 2.3 as at on both a state and Australia-wide basis. These projections depend on the base level of employment for each state and the relative growth rates of industries between states and territories. Queensland and Western Australia are expected to continue to grow at a faster rate than for Australia as a whole out to and through to in line with their exposure to the mining sector and population growth.

19 2.2 Projected employment change in CPS Skills related occupations in a ANZSCO Occupation NSW VIC QLD SA WA TAS NT ACT Australia persons persons persons persons persons persons persons persons persons 1331 Construction managers Surveyors and spatial scientists Other engineering professionals Civil engineering draftspersons and technicians Bricklayers and stonemasons Carpenters and joiners Painting trades workers Plasterers Roof tilers Wall and floor tilers Plumbers Signwriters Other miscellaneous technicians and trades workers Security officers and guards Auctioneers, and stock and station agents Real estate sales agents Other sales assistants and salespersons (Continued next page) Future forecasts: Construction and Property Services Skills

20 2.2 Projected employment change in CPS related occupations in a (continued) ANZSCO Occupation NSW VIC QLD SA WA TAS NT ACT Australia persons persons persons persons persons persons persons persons persons 7121 Crane, hoist and lift operators Other stationary plant operators Commercial cleaners Domestic cleaners Other cleaners Concreters Paving and surfacing labourers Structural steel construction workers Other farm, forestry and garden workers Other miscellaneous labourers Total a Change from employment levels. Source: CIE projections. 6 Future forecasts: Construction and Property Services Skills

21 2.3 Projected employment change in CPS related occupations in a ANZSCO Occupation NSW VIC QLD SA WA TAS NT ACT Australia persons persons persons persons persons persons persons persons persons 1331 Construction managers Surveyors and spatial scientists Other engineering professionals Civil engineering draftspersons and technicians Bricklayers and stonemasons Carpenters and joiners Painting trades workers Plasterers Roof tilers Wall and floor tilers Plumbers Signwriters Other miscellaneous technicians and trades workers Security officers and guards Auctioneers, and stock and station agents Real estate sales agents Other sales assistants and salespersons Crane, hoist and lift operators (Continued next page) Future forecasts: Construction and Property Services Skills

22 2.3 Projected employment change in CPS related occupations in a (continued) ANZSCO Occupation NSW VIC QLD SA WA TAS NT ACT Australia persons persons persons persons persons persons persons persons persons 7129 Other stationary plant operators Commercial cleaners Domestic cleaners Other cleaners Concreters Paving and surfacing labourers Structural steel construction workers Other farm, forestry and garden workers Other miscellaneous labourers Total a Change from employment levels. Source: CIE projections. 8 Future forecasts: Construction and Property Services Skills

23 Future forecasts: Construction and Property Services Skills The projections for other states and territories are mixed and depend heavily on the underlying scenarios, particularly for the residential construction sector, which are outlined in more detail chapter 4 of this report. Of particular note is the projected fall in employment of nearly persons for the CPS sectors in Victoria by , and in particular, in occupations that are strongly linked to residential construction. This outcome is a function of the underlying scenario, where housing starts are projected to fall by around 17 per cent compared to levels. The high base of housing starts in and the projected oversupply in following years, particularly in the Victorian metropolitan area, are key drivers. To put this result in perspective, the fall of persons represents only 3 per cent of the CPS employment base for , which is then projected to recover to an increase of over persons by More details on the projections Table 2.4 reports the total number employed and the growth rate from 2012 to 2026 for each state and territory as well as the nation. Total employment will increase by 1.15 per cent per annum, from million in 2012 to million in Consistent with the assumptions, resources rich states, such as Western Australia and Queensland, will continue to have a higher than average employment growth rate. 2.4 Projected total employment by state Total number of employed Annual growth s 000s 000s 000s 000s 000s % % NSW VIC QLD SA WA TAS NT ACT Australia Source: CIE projections. Underlying these numbers is the fact that there are a large number of working proprietors in the industry, particularly in residential construction, many of whom are sub-contractors. Consultation with industry indicated that this part of the workforce may not be adequately measured by official labour force statistics in Australia. Chart 2.5 shows the projected split between full and part time employment. At a national level, the change in this composition reflects the progression of the workforce through age cohorts and structural shifts in employment by industry rather than any change in working hours for a specific occupation employed by industry by region. For example,

24 % 10 Future forecasts: Construction and Property Services Skills Share of full-time employment in total employment NSW VIC QLD SA WA TAS NT ACT Data source: CIE projections. people will tend to seek more part time work as they get older, regardless of the industry in which they are employed. Also, some industries (construction) are characterised by full time workers while others (in property services such as cleaning) rely on workers at lower hours. Overall, the composition of full-time and part-time employment at a state level as shown in chart 2.5 does not change significantly. Tables 2.6 report the projected employment by broader industry occupation categories. Employment in the mining industry will see the highest growth at 4.27 per cent per annum from 2012 to 2016, followed by that in financial and insurance services at 2.32 per cent and in agriculture, forestry and fishing at 2.27 per cent. These results reflect the structural changes that are likely to continue out to Projected total employment by industry Total employment Annual growth s 000s 000s 000s 000s 000s % % Agriculture, forestry and fishing Mining Manufacturing Electricity, gas, water and waste services Construction Wholesale trade Retail trade Accommodation and food services Transport, postal and warehousing (Continued next page)

25 Future forecasts: Construction and Property Services Skills Projected total employment by industry (continued) Total employment Annual growth s 000s 000s 000s 000s 000s % % Information media and telecommunications Financial and insurance services Rental, hiring and real estate services Professional, scientific and technical services Administrative and support services Public administration and safety Education and training Health care and social assistance Arts and recreation Services Other services Total Source: CIE projections. Construction employment will grow by 1.53 per cent per annum between 2012 and 2016, higher than the national average, reflecting that there is significant investment spending during the period. However, as this investment expenditure slows after , then the growth in construction employment will slow out Consistent with the assumption of moderate economic growth and even flatter growth in the residential building market, employment in rental, hiring and real estate services sector will grow by 0.45 per cent per annum during the projection period. It is important to note that other sub-sectors of property services, such as Surveyors and spatial scientists, are part of a larger industry Professional, scientific and technical services in table 2.6. Table 2.7 shows that demand for managers, technicians and trades workers and machinery operators and drivers are projected to grow faster than employment across all occupations. 2.7 Projected total employment by occupation Total employment Annual growth s 000s 000s 000s 000s 000s % % Managers Professionals Technicians and trades workers (Continued next page)

26 12 Future forecasts: Construction and Property Services Skills Projected total employment by occupation (continued) Total employment Annual growth s 000s 000s 000s 000s 000s % % Community & personal services workers Clerical and administrative workers Sales workers Machinery operators and drivers Labourers Total Source: CIE projections. Employment in CPS related industries and occupations Table 2.8 reports CPS employment at a more detailed sub-industry level. Employment in non-residential building construction and heavy and civil engineering construction is projected to grow by more than 2 per cent per annum, while that in residential building by 1.2 per cent per annum between 2012 and Construction services employment 2.8 Projected employment in CPS sectors (ANZSIC) Total employment Annual growth ANZSIC Industry s 000s 000s % % 30 Building construction Residential building construction Non-residential building construction Heavy and civil engineering construction Construction services Land development and site preparation services Building structure services Building installation services Building completion services Other construction services Property operators Real estate services Architectural, engineering and technical services Building cleaning, pest control and gardening services Total construction Property services Total construction and property services Source: CIE projections.

27 Future forecasts: Construction and Property Services Skills will grow by 1.44 per cent per annum for the same period. Overall, construction employment should have above average growth during the period. However, as investment expenditure slows, the employment in the construction industry will grow by 0.98 per cent per annum between 2016 and 2026, which is lower than the national employment growth. Property services employment is projected to grow by 0.82 per cent per annum for the projection period out to Property services is a diverse group of industries with sales linkages to investment activities by the construction sector and to the capital stock base of the economy. In addition, parts of property services rely on sales to a large number of industries outside of construction and mining, such as the retail and financial sector, and on demands by final consumers. Over the longer term, these projections not only reflect changes in construction but also activity levels in the property market and expenditure levels by consumers more generally. The projections of employment by CPS sector shown in table 2.8 reflect assumptions around the key drivers (as detailed in chapters 4 to 5) and that significant structural adjustment within the sector is unlikely. Key uncertainties include likelihood of higher immigration and population growth, world economic outlook and budgetary positions of Australian governments have led to this conservative approach (see chapter 6). By , additional skills will be required to respond to the projected uptick in construction, especially in the residential sector. Beyond 2016, the CPS will continue to provide stable and sustained employment growth through to compared to other sectors of the economy. Detailed employment projections by occupation and state In its 2012 Environmental Scan report, the CPSISC identified 36 high demand occupations (at ANZSCO 6-digit level). These occupations belong to 27 occupations at the 4-digit level. Table 2.9 reports our projections for these occupations. Detailed tables of employment projections by CPS occupations and by state are provided in appendix D. 2.9 Projected employment in some CPS related occupations Total number of employment Annual growth ANZSCO Occupation s 000s 000s % % 1331 Construction managers Surveyors and spatial scientists Other engineering professionals Civil engineering draftspersons and technicians Bricklayers and stonemasons Carpenters and joiners (Continued next page)

28 14 Future forecasts: Construction and Property Services Skills Projected employment in some CPS related occupations (continued) Total number of employment Annual growth ANZSCO Occupation s 000s 000s % % 3322 Painting trades workers Plasterers Roof tilers Wall and floor tilers Plumbers Signwriters Other miscellaneous technicians and trades workers Security officers and guards Auctioneers, and stock and station agents Real estate sales agents Other sales assistants and salespersons Crane, hoist and lift operators Other stationary plant operators Commercial cleaners Domestic cleaners Concreters Paving and surfacing labourers Structural steel construction workers Other farm, forestry and garden workers Other miscellaneous labourers Source: CIE projections. Total Comparison with the DEEWR projections Table 2.10 compares the CIE projections to the DEEWR projections (Appendix A summarises and reviews the employment projection by DEEWR). From this table, the projected growth rates from this report are persistently lower than those of DEEWR. For example, DEEWR projected that the total employment in Australia will grow by 1.4 per cent per annum from 2011 to 2016, while our projection points to 1.1 per cent. The difference in growth rate is more obvious for the CPS sectors. DEEWR projected that employment in construction and property services will grow by 2.4 per cent per annum and 2.1 per cent per annum, respectively, compared to 1.5 per cent and 0.8 per cent in the CIE projection.

29 Future forecasts: Construction and Property Services Skills `2.10 Comparison of projected annual growth rates ANZSIC Industry DEEWR ( ) CIE ( ) % % 30 Building construction Residential building construction Non-residential building construction Heavy and Civil Engineering Construction Construction services Land Development and Site Preparation Services Building structure services Building installation services Building completion services Other construction services Property operators Real estate services Architectural, Engineering and Technical Services Building Cleaning, Pest Control and Gardening Services Total construction Property services Total construction and property services Total national employment Source: DEEWR (2012) and CIE projections. DEEWR (2012) does not provide details of its projection methodology, especially the underlying assumptions, which makes it difficult to compare the results and to understand the difference between them. However, it is most likely that the differences come from different perceptions of future economic conditions. When DEEWR made the projections, it would rely on then available information on the Australian and global economies, and at that time there was relatively high confidence on the economic growth. This outlook has been changed when the IMF revised downward its world economic outlook in April As shown in chart 2.11, for example, the IMF s forecast in April 2013 of the GDP growth in Australia between 2013 and 2017 is 0.2 to 0.5 percentage points lower than its previous forecast in April As a result of the conservative approach taken, the projections presented in the report can be considered to be a conservative and reliable start point to quantify the CPS Skills requirements going forward. The demand for employment by industry and by skill would be potentially at higher levels if the appropriate weighted policy priority was given to significant constraints facing the construction sector, which in turn, will improve the outcomes for property services.

30 % 16 Future forecasts: Construction and Property Services Skills Revision of IMF economic projection in April 2013 to previous projections revision to 2012/4 revision to 2011/9 revision to 2012/4 revision to 2011/9 revision to 2012/4 revision to 2011/9 World Advanced economies Australia Note: Change in GDP growth rate forecast. Data source: IMF (2011, 2012ab) World Economic Outlook.

31 Future forecasts: Construction and Property Services Skills Contributions of the construction and property services sectors The CPS sector encompasses skills-based occupations across a diverse mix of industries across the economy. The contribution of the sector is substantial in terms of employment, value added, and number of small businesses. Since the global financial crisis, the contribution of individual sectors has reflected structural change within the sector. Two critical dimensions are the importance of trades and professional based skills and the reliance on working proprietors. After accounting for the direct and indirect contribution of the CPS sectors, maintaining and improving productivity and removal of inefficient taxes were identified as being critical to maximising this overall contribution. The CPS sectors are an important part of the Australian economy, contributing significantly, directly and indirectly, to overall economic activity and employment. The construction sector, on its own, is the third largest in terms of employment accounting for million people or 8.79 per cent of total employed persons for the year ending August In terms of contribution to Australian GDP, construction accounted for $107.7 billion of gross value added in (using trend chain volume measures) representing 7.4 per cent of gross domestic product.3 The direct contribution of the property services sector is more difficult to account for because these industries are not grouped conveniently in one broad category in the labour force survey or the national accounts. The analysis in this chapter accesses data from ABS Catalogue Australian Industry, rather than estimates of industry gross value added that are available from the ABS Catalogue Australian National Accounts: National Income, Expenditure and Product. The choice to use the data was made because not only does Australian Industry report industry data at a higher level of detail (2 digit ANZSIC level) but it also provides consistent data on a range of other industry variables such as sales and service income, industry value added and employment that are relevant to this analysis. Therefore a more complete dataset can be used than would otherwise be the case. The starting point for the analysis is defining the CPS sectors as being characterised by 24 construction sub-sectors and eight property services sub-sectors as shown in table ABS Catalogue Labour Force, Australia, Detailed, Quarterly ending August ABS Australian National Accounts: National Income, Expenditure and Product, Catalogue no , Industry Gross Value Added, Trend Chain volume measures.

32 18 Future forecasts: Construction and Property Services Skills ANZSIC industry coverage at the 4-digit level Construction Property services a 3011 House Construction 2911 Solid Waste Collection Services 3019 Other Residential Building Construction 2919 Other Waste Collection Services 3020 Non-Residential Building Construction 2921 Waste Treatment and Disposal Services 3101 Road and Bridge Construction 2922 Waste Remediation and Materials Recovery Services 3109 Other Heavy and Civil Engineering Construction 6711 Residential Property Operators 3211 Land Development and Subdivision 6712 Non-Residential Property Operators 3212 Site Preparation Services 6720 Real Estate Services 3221 Concreting Services 6921 Architectural Services 3222 Bricklaying Services 6922 Surveying and Mapping Services 3223 Roofing Services 7311 Building and Other Industrial Cleaning Services 3224 Structural Steel Erection Services 7312 Building Pest Control Services 3231 Plumbing Services 7313 Gardening Services 3232 Electrical Services 7712 Investigation and Security Services 3233 Air Conditioning and Heating Services 3234 Fire and Security Alarm Installation Services 3239 Other Building Installation Services 3241 Plastering and Ceiling Services 3242 Carpentry Services 3243 Tiling and Carpeting Services 3244 Painting and Decorating Services 3245 Glazing Services 3291 Landscape Construction Services 3292 Hire of Construction Machinery with Operator 3299 Other Construction Services (nec.) a Note that part of property services ANZSICs may not be in the terms of reference. Source: ABS ANZSIC classification and the terms of reference. In addition to these core CPS sectors, there are also sectors that have been identified as being important in terms of employment of CPS occupations. At the 2-digit ANZSIC level these are: 27 Gas supply; 28 Water supply, sewerage and drainage services; and 94 Repair and maintenance. Number of businesses in CPS sectors The CPS sectors have a low level of concentration in comparison to the rest of the economy, despite a small number of large, highly visible, companies in the industry. Table 3.2 shows that over 60 per cent of all businesses in CPS sectors have a turnover over of less than $ Detailed tables by 4-digit ANZSIC can be found in appendix D of this report.

33 Future forecasts: Construction and Property Services Skills Number of national CPS Skills businesses by turnover size All businesses With less than $ turnover no no % Construction Property services Total CPS Source: ABS Catalogue no Within these businesses, there are a range of ownership and employment structures. Table 3.3 shows that around 70 per cent of individual businesses rely on working proprietors only (non-employing), more so in the property services sector, while businesses with less than 20 employees account for over 90 per cent of total businesses with employees in CPS sectors. This dataset indicates the importance of businesses with one or two employees, one of which may be an apprentice or trainee, to the CPS sectors. 3.3 Number of national CPS Skills businesses by employment size Non employing Less than 20 persons All businesses Non-employing Less than 20 persons a no no no % % Construction Property services Total CPS Skills a In total businesses with employees. Source: ABS Catalogue no Direct contribution of CPS sectors to the economy A detailed representation of the CPS sectors was built up from 2-digit ANZSIC level data from the ABS Australian Industry publication. It is important to note that this data provides a time series in nominal terms and, as a result of its methodology, will yield estimates that may not be directly comparable to other ABS sources. Chart 3.4 estimates that the value of sales or equivalent to the value of production of the CPS sectors for was $398 billion in total with construction accounting for $297 billion or 74.7 per cent of the total, and property services accounting for $96 billion. This leaves $4 billion contributed by industries outside of construction and property services. Industry value added better reflects the direct contribution to GDP through the total value of wages and operating surplus. In , total value added by CPS sectors was estimated to be $147 billion (chart 3.5). The CPS sectors were therefore responsible for 10.5 per cent of nominal GDP of $1 404 billion for

34 20 Future forecasts: Construction and Property Services Skills National value of sales of the CPS Skills sectors a 500 Related CPS industries Property services Construction 400 $ billion a Sales and service income. Data source: ABS Catalogue , published 27 June 2012, and CIE calculations. 3.5 National value added of the CPS Skills sectors a Related CPS industries Property services Construction $ billion a Includes wages and earnings before tax and interest. Data source: ABS Catalogue published 27 June 2012, and CIE calculations. Therefore, the contribution of property services to GDP is proportionally higher than construction because of its higher value-added to sales ratio (57 per cent) compared to construction (30 per cent). This reflects the higher input of labour, especially skilled labour, into the total value of output in each sector. On a per person basis, value added in construction has been steady recently (chart 3.6), while for property services it has been steadily increasing, in nominal terms (chart 3.7). Over this period, the purchasing power of income, as reflected by the consumer price index, fell by an annual average rate of 2.9 per cent.

35 $ 000s per person employed Future forecasts: Construction and Property Services Skills Value added per person employed for construction a Building construction 31 Heavy and civil engineering construction 32 Construction services a Nominal terms. Data source: ABS Catalogue published 27 June Value added per person employed for property services a $ 000s per person emplyed Property operators and real estate Professional, scientific and technical services Building cleaning and pest control Public order, safety and regulatory services (private) a Nominal terms. Professional scientific and technical services as indicative of Architectural and surveying services and Public order, safety and regulatory services (private) as being representative Investigation and Security Services. Data source: ABS Catalogue published 27 June Heavy and civil engineering construction was the big winner (increasing by 5.2 per cent each year in real terms). Value added per person for construction services declined in real terms over the period to this indicator fell by 11 per cent. Property services as a group increased strongly at an average annual rate of 1.3 per cent in real terms with building cleaning and pest control the standout increasing by 4.3 per cent each year in real terms.

36 22 Future forecasts: Construction and Property Services Skills CPS employment by industry for Australia s persons Per cent Working proprietors Employees Residential Nonresdiential Construction Construction services construction Property operators and real estate Architectural and surveying services Building cleaning and pest control Investigation and Security Services Data source: ABS Catalogue , published 27 June As shown in table 3.3, the CPS sectors are dominated by a very large number of small firms, many of which rely on owner-managers or working proprietors, many of whom are sub-contractors. Chart 3.8 shows the importance of this group to overall employment in the CPS sectors. With a total of 1.72 million persons in CPS sectors, 1.08 million are employed in construction and in property services and: working proprietors accounted for 20.6 per cent of total employment in construction but in property services they account for 42.7 per cent; and building cleaning and pest control are two areas dominated by working proprietors who account for 55 per cent of total employment. It should be noted here that for construction, this source estimates total employment of million for while the Australian Labour Force estimate is million. Regional dimension There are differences between the states in terms of employment in the CPS sectors (chart 3.9). 3.9 CPS employment compared with population by state 40 Per cent of total CPS employment Per cent of total population NSW VIC QLD WA SA TAS NT ACT Data source: ABS, 2011 Census data via Tablebuilder.

37 Per cent Future forecasts: Construction and Property Services Skills For instance, NSW accounts for around 32 per cent of Australia s population, but only around 28 per cent of employment in the CPS sectors. In Victoria the ratios are similar to each other both around 25 per cent. While in Queensland and Western Australia the relationship is reversed the percentage employed in the CPS sectors is greater than the per cent of Australia s population that they represent. It is difficult to avoid the conclusion that this difference is due, in part, to the large impact that mining has in both Queensland and Western Australia. Skill dimension Within the CPS sectors there are differences between whether a sector is considered a trade or not. Of the 37 sub-sectors identified in table 3.1, the first 22 have been classified as trades and the remaining 15 have been classified as non-trades. As a proportion of the total employment in the CPS sectors, there is a difference between trades subsectors and non-trades by state. Tasmania has the highest proportion in trades, 76 per cent while NSW has the least, 71 per cent (chart 3.10). This is, in part, driven by the higher proportion of residential and non-residential property operators in New South Wales Distribution between trades and non-trades in the CPS sector 100 Trades Non-trades TAS WA VIC NT QLD ACT SA NSW Data source: ABS, 2011 Census data via Tablebuilder. Economywide perspective of CPS sectors The construction and property services sectors interact with the rest of the Australian economy through a complex web of connections. These interactions are significantly beyond those direct contributions identified above. The CPS sectors can be viewed in two parts: one that adds to or replaces the capital stock of the economy; and a sector that services the ongoing requirements of that capital stock.

38 24 Future forecasts: Construction and Property Services Skills In terms of sales in the CPS sectors (where CPS sector output is used), construction and parts of property services are responsible for the formation and sale of new capital stock for the economy that: enables other industries to maintain and increase their productive base; and provides households with accommodation. The remainder is more concerned with the support for existing capital stock including operation and maintenance activities such as cleaning and other services. In addition to these sales linkages, the CPS sectors are also linked to the rest of the economy through their purchases of goods and services and by their contribution to overall demand for labour. Traditionally, economic multipliers have been used to conduct this type of analysis, but are restricted in how they can be used (box 3.11). Economywide models have been used to correct the limitations of multipliers and to capture and explain these forward and backwards linkages with other industries, consumers and the rest of the world. An economywide modelling approach is used in this report Multiplier approach A common approach to estimating the impact of one industry on the wider economy is the use of so-called economic multipliers. For example, a one dollar increase in activity in construction leads to an x dollar increase in gross domestic product (GDP), or one job created in construction leads to y jobs in the whole economy. There are some significant constraints with the concept of economic multipliers, including that they: are a one-way measurement, that is, it reflects the impact of one industry on the whole economy. In many cases the impact of the macroeconomic conditions or changes in the supply of labour on a specific industry is also of interest; over-simplify economic interactions. Changes in the activity of one industry may be caused by different drivers, and so lead to very different values of the multiplier; assume that relative prices do not change between the outputs of industries or for factors of production such as labour, capital and land; do not account for constraints faced by the industries such as the availability of skilled labour or specialist capital. The direct and indirect effect To estimate the total contribution to the Australian economy, a without the CPS sectors scenario would need to be developed. Because of the integral nature of this sector to the wider economy, such a scenario is difficult to imagine. One alternative scenario would be to assume that all outputs and services of the CPS sectors were imported from overseas.

39 Future forecasts: Construction and Property Services Skills This scenario could then be applied to an economywide model to identify the impact on other industries and overall economic activity as shown by gross domestic product and aggregate employment. Such a scenario would require a large number of assumptions, many of which may not be realistic. Rather than this type of analysis, a more practical and instructive approach would be to examine the marginal contribution of the sector to the rest of economy. That is, what happens to the interaction between the CPS sectors and rest of the economy when key performance drivers are changed, with all other factors held constant. These drivers are those that impact on the size of the sector and how it interacts with the rest of the economy, including changes in: productivity; labour availability; taxes; and demand. A detailed study has already been completed by CIE (2012) for the Housing Industry Association Limited (HIA) focussing on residential construction. In this report, a general equilibrium model of the Australian economy, CIE-REGIONS, was used to quantify the relationship between construction and the wider economy under different assumptions about the Australian labour market, and with different causes of the changes in construction and other industries and the whole economy. The measure used to report the economywide impact was an impact ratio that was calculated by relative changes in the gross value of production of the construction or residential building industry and the gross domestic product (GDP). Each of the scenarios were conducted under two employment scenarios: a tight labour market where there is close to full employment and a slack market where all workers in all occupational groups can be acquired at the going wage rate. Chart 3.12 summarises the CIE s modelling results of the impacts of a range of economic changes focusing on national residential building, construction and GDP under a situation of full employment. As expected, productivity growth in the rest of the economy (outside of construction) has the largest impact on the size of construction and the economy as a whole, given a scenario of full employment where labour supply is constrained. This change has the largest impact on residential and construction activity and arises from a sizeable increase in GDP and flow-on to the demand for housing. However, achieving this productivity is out of the control of the CPS sectors. Of more relevance, a 1.0 per cent multifactor productivity increase for the construction industry (including residential and non-residential construction) was estimated to increase national GDP by $2.36 billion a year. That is, one dollar of additional construction activity resulted in $4.75 of additional GDP due to construction passing on lower costs to the rest of the economy and also freeing up resources to be used elsewhere, primarily in the mining sector. While causing the construction sector to expand by 0.39 per cent, the productivity improvement also enables mining to expand by 0.62 per cent, manufacturing by 0.07 per cent and the rest of the economy by 0.34 per cent.

40 26 Future forecasts: Construction and Property Services Skills Impact on residential building, construction and GDP under full employment Higher productivity in rest of the economy Higher demand for residential building Higher productivity in manufacturing Cutting inefficient tax Higher construction productivity Higher productivity in residential building Higher productivity in mining Residential building Construction GDP Lower transport price Lower rate of return Lower energy price Data source: CIE (2012) for Housing Industry Association Limited. A 1.0 per cent total factor productivity increase for the residential housing sub-sector alone is estimated to increase national GDP by $863 million a year. The flow-on impact is similar, being $4.19 of additional GDP per increased dollar of activity in residential activity. Similarly, in terms of relevance to the CPS sectors, a reduction in inefficient taxes on residential housing that would lower the cost of residential building by approximately 1.0 per cent would raise residential building activity by around 0.6 per cent. In a previous report, the CIE found that taxation accounts for a sizeable proportion of the cost of new and existing housing and apartments. This change would also increase GDP by $780 million. For every dollar of extra activity it created in residential housing, it would expand national GDP by an estimated $2.26. A 1.0 per cent increase in the demand for new residential housing investment has a very different impact to a 1.0 per cent increase in productivity or a reduction in inefficient taxes. Rather than causing other industries to expand, a 1.0 per cent increase in residential housing investment demand causes mining and manufacturing to contract by 0.2 and 0.04 per cent respectively. Under a situation of full employment, an increase in housing can only occur by diverting resources away from other industries. %

41 Future forecasts: Construction and Property Services Skills How these results transfer to property services The performance of the property service sector is linked directly or indirectly to the construction sector, either through the flow of investment expenditures or related to the stock of dwelling and non-dwelling and engineering works. While generally property services has a higher level of value added per unit of output, and is more reliant on working proprietors, it would be expected that the majority of the lessons from flow-on effect in construction will apply and that both of these sectors will naturally move together. Sensitivity analysis All the results above assume full employment and a tight labour market. Under a situation of less than full employment, an easing of the labour constraint, impacts change and generally increase. For example, under a scenario of less than full employment a 1.0 per cent increase in construction sector multifactor productivity would increase GDP by 37 per cent more than under the full employment scenario. Essentially, expansion in construction and other sectors could take place more cheaply. Moreover, the flow-on impact would be greater, instead of each dollar in construction activity leading to $4.75 in GDP, the comparable GDP increase is an estimated $5.21. Implications for this study Improving productivity over the medium to long term has the greatest potential to benefit the CPS sectors, through expanding output and improving profitability, and to maximise the contribution that will flow on to the rest of the economy. This is especially the case for residential construction where productivity improvements that partially address affordability issues, then flow on to the rest of the economy. Removal of inefficient taxes on housing has a significant impact on addressing affordability, but with limited flow-on to the rest of the economy. Recent performance shows the resilience of the CPS sectors over the past five years in the face of flat demand, especially in the residential sector. A significant factor is the capacity of small to medium sized businesses with working proprietors to absorb lower levels of profitability. However, in the long term this capacity may also constrain their ability to restructure and adopt productivity improvements that are widespread across the industry. While the modelling shows that with less than full employment the impacts of productivity improvements and other changes may be larger, in the long term Australia s labour supply is expected to remain relatively tight. In addition, employing more people involves substantial additional costs such as costs of training, risks in employing people, relocation, immigration hurdles, search and placement costs and the need for higher wages or lower incomes taxes to induce people into employment. These additional costs are borne by both individual industry groups, such as the CPS sectors, and the wider economy.

42 28 Future forecasts: Construction and Property Services Skills Demand drivers short and long term perspectives Market conditions in residential construction have been challenging since the global financial crisis. While population growth will ensure strong underlying demand for housing out to , low consumer confidence and affordability will constrain dwelling starts for the short to medium term. In contrast, there has been a distinct shift in the importance of the non-residential construction sector as a result of the significant and large scale investments by government in public infrastructure and the mining sector. While these investments may slow as a result of budget pressures, and a shift to operational phase in the mining sector, they will continue to drive strong demand for construction and property services beyond Property services is a diverse sector that is strongly linked to investments in the residential and non-residential construction and to the stock of buildings and other capital assets in the economy. Performance of the sector will continue to depend on relative exposure to each market segment. Underlying demand for housing The underlying demand for housing is determined by the number of households, which, in turn, changes in population size and demographics and housing preferences. The National Housing Supply Council (NHSC) estimates that under their medium scenario by 2025, the number of Australian households will have grown by 2.5 million, primarily driven by population growth (NHSC 2011). Population growth forecasts used in this report are underpinned by net migration growth of each year. The most recent estimates from the Department of Immigration and Citizenship estimate net overseas migration at persons (see appendix C). There will be more than half a million additional Australians in the resident population aged 60 or more by By , there will be an additional 2.3 million Australians aged over 60who are likely to downsize their housing to provide funds for retirement. The number of households in is estimated to have been over 9 million. In the subsequent four years to , it is estimated that the number of households would need to increase by around ( each year) to meet underlying demand. In the period from to , it is estimated that the number of households will increase by around million ( each year).

43 Future forecasts: Construction and Property Services Skills In total, the number of Australian households is expected to grow at an average rate of each year between and The projected increase in the underlying demand for dwellings also partially reflects the modest reduction in the size of the average household, which is a key variable. At a national level, the 2011 Census indicated that the average size of Australian households had not reduced further between 2006 and However, the ABS predicts that average household size will continue to fall from 4.5 in 1911 to between 2.4 and 2.5 people per household by 2031 (ABS 2012). The ageing of the population, as well as the longer life expectancy of women over men and the delay of marriage, are some of the factors that underpin the projected growth in one person households (ABS, 2012). These social factors are expected to result in the increase in single person households by around 40 per cent or 1 million to approximately 3.4 million households in This represents the fastest projected increase of all household types. The number of Australians aged over 70 years is projected to grow to 3.5 million or 16 per cent of Australia s population by While many will continue to live as couples, around one third of those older than 75 years are expected to reside alone (ABS, 2012). In addition, couples without children are expected to increase at a faster rate than families with children. These demographic changes, without accounting for any additional changes in consumer tastes, are expected to result in a change in the level and composition of housing demand. The ageing of the population is anticipated to result in an increased demand for semidetached housing and flats relative to separate housing. According to modelling of housing demand by the ANU, the relative demand for new flats and semi-detached housing in 2024 is expected to be higher than for new separate houses across Australia, particularly in Western Australia and South Australia (McDonald and Temple, undated).4 Historically, the percentage of new dwellings that are houses (rather than semi-detached dwellings and flats) has been greater than 80 per cent. Many forecasts continue to assume that the composition of new dwellings will remain relatively consistent over time. However, industry knowledge and data held by HIA suggest there has been a more significant change in the composition of new dwellings. According to the HIA, houses represent approximately 65 per cent of new dwellings while the remaining 35 per cent is comprised by semi-detached dwellings and apartments. HIA data suggests that over the past decade, there has been a decrease in the relative demand for houses by around 0.9 percentage points each year (see chart 4.1). At the time of preparation this report, we were aware that ABS are in the process of rebasing estimates of dwelling numbers back to At this time, the exact size of the adjustments are not known, however we expect that forecasts on a percentage change basis will remain accurate. 4 Exceptions include Sydney, where the demand for separate housing remains stronger and Brisbane where the relative demand does not vary between dwelling type.

44 30 Future forecasts: Construction and Property Services Skills Reduction in houses as a share of new dwellings 80% Houses as a share of new dwellings (%) Multi-units as a share of new dwellings (%) 70% 60% 50% 40% 30% 20% 10% 0% Note: and are forecasts. Demand varies widely between states due to land availability and demographic factors. Data source: Actual data supplied by HIA. Forecasts by CIE. Housing affordability and consumer confidence The number of households implies the level of potential demand for housing, and it is expected to increase by approximately dwelling each year. However, it is unlikely that the actual demand for housing will be sufficient to meet this requirement. In the past decade, the construction of new dwellings has only reached these levels in and (see chart 4.2). The number of dwellings expected to be constructed over the next three years averages each year based on recent trends. 4.2 National dwelling commencements Houses Multi-units f Note: , and are forecasts; other years reflect data of actual housing starts. Data source: HIA Housing Forecasts March 2013.

45 Per cent Index Future forecasts: Construction and Property Services Skills This can partly be attributed to weak confidence with the consumer sentiment index lower than those levels observed since the recovery from the GFC (see chart 4.3). 4.3 Westpac-Melbourne Institute consumer sentiment index Data source: RBA, Statistical Table G8, GICWMICS. As a result of this lack of confidence, there has been an increase in the rate of savings as households seek to reduce, rather than increase, household debt even after consideration of (chart 4.4). 4.4 Household saving as a proportion of gross disposable income Data source: ABS, , Series: A L and A W. Without higher wage growth, which is likely to require significant economic reform to promote higher productivity in the economy, affordability is unlikely to improve without government and industry strategies to lower costs. In addition, over the long term, capacity constraints in particular labour shortages in the CPS Skills sectors are expected to limit the capacity to meet the annual increase in potential demand.

46 32 Future forecasts: Construction and Property Services Skills Changes in affordability since 2000 Chart 4.5 shows dwelling prices and average weekly earnings from 1994 to Index of dwelling prices and average weekly earnings, Australia, Index of house prices in capital cities Index of earnings per full time worker Note: Dwelling prices are an average over eight capital cities. The index year is Earnings are the weekly average for all adults working full time ordinary hours. Data source: ABS House Price Index: Eight Capital Cities, ABS Average Weekly Earnings 2012.Updated from original chart citied in the National Housing Supply Council, State of Supply Report This chart suggests that the average wage has not increased proportionately to the average price of a house. The average increase in established houses and project homes from 2002 to 2012 is shown in table 4.6. On average, prices have increased by more than 6.2 per cent while project homes have increased by 3.9 per cent. However, if removing the past few volatile years, price growth in established houses was 7.5 per cent Australia wide, and 4.8 per cent for project homes. This includes significant price growth in excess of 14 per cent for homes in Perth, Hobart and Darwin. On the other hand, average wage growth has been between around 4 per cent each year over the period. 4.6 Average annual price growth for capital cities houses and project homes City Established houses Project homes Established houses Project homes per cent pa per cent pa per cent pa per cent pa Sydney Melbourne Brisbane Adelaide Perth Hobart Darwin Canberra Weighted average of eight capital cities Source: CIE. Raw data from ABS

47 Future forecasts: Construction and Property Services Skills The affordability of Australian housing in recent times is characterised by three distinct phases (Fox and Finlay 2012): during the mid-1980s where there was a relatively stable price to income ratio; from the late 1980s to the early 2000s which saw an increased ratio; and from 2003 to present where there has been a flattening of the ratio (and more downwards trend recently). The difference between prices and earnings should not be relied upon as the only indicator of affordability or housing demand. Chart 4.7shows that at a national level, home loan affordability has improved since 2010 although being a significantly lower levels than those observed during the 1990s and the early 2000s. 4.7 REIA Home loan affordability Australia a Index a The Home Loan Affordability Indicator is the ratio of median family income to average loan repayments. An increasing value reflects improving affordability of housing loans. Data source: REIA. Interest rates were a key driver of the recent improvement. Further cuts are seen as indicative of, or concurrent with, worsening economic conditions and inflation below target levels. However, there is some scope for autonomous interest rate reductions by commercial banks as their cost of funding decreases and stability returns to financial markets, as has happened over 2012 (RBA 2013). There is scope for lower house prices, but the catalyst for this is not obvious. House prices have generally been steady over the past few years, and over the past year there has been a slight increase in most capital cities (RP Data-Rismark 2013). Changes in the taxpayer base and possible implications As shown above, owners of dwellings have experienced considerable asset price appreciation on average over the past decade. This was a period of greater willingness among the population to bid up the price of housing. This is likely to be the result of several unique factors:

48 34 Future forecasts: Construction and Property Services Skills a long period of low interest rates and low unemployment; the flow through of greater participation of women in the workforce and resulting shift from single to dual income households; and the strong demand for housing as an investment vehicle (such as through negative gearing and the capital gains tax exemption) for the baby boomer generation which were on high wages and paying high levels/rates of taxation. Australia is facing considerable change in the composition of the population and workforce, which have implications for the level of demand and composition of demand for housing. There will be nearly half a million additional Australians in the resident population aged 65 or more by By , there will be an additional 1.8 million Australians aged over 65 and a further 1.6 million over 60. This means a significant sector of the population will largely be dependent on their savings. This cohort is likely to want to downsize their housing to provide funds for retirement. In addition, those dependent on superannuation incomes no longer face the same incentives for negative gearing as their superannuation income attracts a tax rate of no more than 15 per cent. In other countries, significant changes in population demographics due to ageing have placed significant downward pressure on housing prices. Where prices have been sustained, this is most likely to be on a regional basis as a result of inter-state migration or movement between regions primarily of the result of mining. Perth and regional areas in Western Australia and Queensland are good examples. However, at a national level, the type of growth in housing prices experienced in Australia over the past decade is unlikely to be sustained. This is likely to cause an improvement in the affordability of the existing housing stock relative to wage growth while also reducing the level of demand and stimulus for investment in housing. Construction prices The price growth for labour and materials has been constrained since This corresponds to falling demand growth in the residential and non-residential construction sectors. Prior to the financial crisis, in the 2000s, the average annual growth in housing construction prices was 4.4 per cent while the average annual growth in non-residential output prices was 6.2 per cent. Since the global financial crisis, the house construction (price) index has increased at just 1.8 per cent each year while the non-residential output (price) index increased by just 1.9 per cent each year (chart 4.8). This may be due to the inability of firms to pass on higher input and labour costs to customers and to adapt to sluggish market conditions such as through restructuring business operations to share fixed costs. This had resulted in downward pressure on construction margins. Over the medium term, prices of construction outputs will need to increase to enable firms to remain viable.

49 Future forecasts: Construction and Property Services Skills Index of prices for housing construction and non-residential output Index of prices Index of earnings Data source: ABS (2013) house prices; and (2012) earnings index. Increasing importance of non-residential construction The value of dwellings as a share of total value of all construction has fallen over the past decade. Chart 4.9 shows the value of product, accounting for the annual rate of depreciation, across dwellings and non-dwelling construction. During the 2000s, the value of non-residential construction increased at just less than double the rate of residential building construction. More recently, since the onset of the global financial crisis, the value of non-dwelling construction continued to grow at around 11.2 per cent each year, while the value of dwellings grew at just 1.7 per cent. 4.9 Increase in the value of non-dwelling (non-residential) construction 160 Dwellings Non-dwelling construction Value of construction ($bn) Data source: ABS

50 36 Future forecasts: Construction and Property Services Skills While the demand for residential housing appears to be on a reasonably predictable pathway, it is less certain whether the value of non-residential construction work will continue to increase in an exponential way. One relatively stable and small component of non-dwelling construction is non-residential building construction. This is made up of private and public sector investment in building work not for dwellings. In the 2000s, private sector investment increased by an average of 9 per cent per annum before becoming negative over the global financial crisis. This reflected positive growth in Western Australia and the Northern Territory, counteracted by negative or flat growth in most other states. In contrast, public sector investment deviated from a pathway of 3 per cent average annual growth and expanded significantly over the downturn due to expansionary fiscal policies including public construction programs. This stabilised total investment in nonresidential building and has stayed roughly the same over the global financial period. Together, public and private sector investment has averaged $34 billion over the past five years, made up of two thirds by private sector investment and one-third public sector investment. The remainder of non-dwelling construction is made up by infrastructure and civil and heavy engineering. The determinants of this component will include the timing of the investment in the National Broadband Network (NBN), the extent of ongoing public investment in infrastructure and the timing of the end of high investment in the mining sector. National Broadband Network construction and other public works The construction of the NBN across Australia is expected to take 10 years from According to the NBN Corporate Plan (shown in table 4.10): total expenditure for the construction period ( ) is expected to be $64.2 billion in nominal terms; between 2012 and 2016, approximately $27.9 billion (in capital expenditure and operating expenditure) will be spent. Investment is expected to peak in 2016, but stay above $6.5 billion each year until 2022 in nominal terms; and the government is expected to provide the majority of this investment, contributing $25 billion by 2016 and $30.4 billion by Investment in the NBN in nominal terms Capital expenditure Operating expenditure Total investment $billion $billion $billion (Continued next page)

51 Future forecasts: Construction and Property Services Skills Investment in the NBN in nominal terms (continued) Capital expenditure Operating expenditure Total investment $billion $billion $billion Total over construction period Potential annual maintenance cost ( ) Note: This investment is reliant on the ALP s policy position and could change if the Coalition wins the election expected in September Source: NBN Co Corporate Plan , CIE. It is difficult to assess the future level of public investment in infrastructure, more generally. The CIE is aware of approximately $14 billion of non-building infrastructure projects in the pipeline that is due for completion by 2016, excluding the NBN. In addition, there is at least $5.2 billion in flood reconstruction works largely allocated to non-building construction works. However, this is small in comparison to the potential investment in mining over the next four years. Construction/investment in the mining sector Chart 4.11 shows the level of mining sector investment over the past 20 years Mining investment buildings and structures and total in current terms Buildings and structures Equipment, plant and machinery Expenditure ($bn) Note: Data does not include expenditure in the last quarter of Data source: ABS Mining expenditure increased sharply from $10 billion in 2004 to $40 billion in 2010 and $70 billion in the first three quarters of From 2004 to 2012, the investment in the mining sector construction (buildings and structures) sharply increased above mining

52 38 Future forecasts: Construction and Property Services Skills sector investment in equipment, plant and machinery. Investment in buildings and structures grew from approximately half of mining expenditure to more than 80 per cent of mining expenditure by Most of this expenditure was undertaken in Western Australia, while Queensland experienced a significant increase in investment in the past few years. While it is widely anticipated that the high levels of investment in the mining sector will end as firms move from the construction phase to the operational phase of mining, potential projects announced for the next five years exceeds current investment levels. Chart 4.12 shows planned expenditure from 2013 to Estimates of planned expenditure in mining in nominal terms Coal Oil Gas/LNG Metal ore Other mining Proposed investment ($bn) Data source: CIE, original data from the Bureau of Resource and Energy Economics. Key points to note from this chart are: in 2013, proposed investment in new projects in the mining sector amounts $50 billion with close to 90 per cent of this committed; from 2014 to 2017, annual investment may exceed $80 billion per year and previous investment levels in the current mining sector expansion: proposed expenditure starting in 2017 amounts to more than $180 billion; the composition of proposed projects changes over the forecast period: LNG and coal seam gas developments increase from 14 per cent of planned investment in 2013 to 80 per cent in 2017; and substantive investment is planned for expansions or new developments in coal mining and metal ore, with investment in each of the two categories peaking in The extent to which these announced investments will proceed is unknown. However, table 4.13 indicates the percentage of planned expenditure, which has satisfied project feasibility studies, and for which funding has already been committed. As we would expect, the portion of announced investment that is committed is high for 2013 (89 per cent committed) and generally reduces as the investment date is further out.

53 Future forecasts: Construction and Property Services Skills Committed investment in nominal terms Units / Total Value of committed projects $b Total value of announced projects $b Percentage committed % Data Source: BREE, Resources and energy major projects, October More than 80 per cent of planned expenditure is for projects in Western Australia (46 per cent) and Queensland (35 per cent) as shown in chart In addition, 6.4 per cent of total expenditure is planned for projects in the Northern Territory, mostly in 2017, while approximately 4.9 per cent of investment is planned for New South Wales Planned mining expenditure by state QLD WA NSW NT Other Proposed expenditure ($bn) Note: Other incorporates states, territories or regions where the planned expenditure is less than 2.5 per cent of total planned expenditure: the National Offshore territory, South Australia, the Joint Petroleum Development Area, Victoria, and Tasmania. Data Source: BREE, Resources and energy major projects, October Property services The markets for components of property services are strongly linked to construction, through construction investment and the stock of residential and non-residential building and other capital assets in the economy, and between components of the property services sectors. Chart 4.15 shows that value of sales for property operators and real estate agent services accounted for around $70 billion in and has grown at an average annual rate of 3.7 per cent since in nominal terms. Property operators are a significant part of the overall property services picture. Their role is to maintain the operation of the stock of buildings used by industries throughout the economy. They have strong sales linkages to the construction sector, wholesale and retail trade, accommodation and food service and the finance industry.

54 40 Future forecasts: Construction and Property Services Skills Value of production of property operators and real estate agent services a $ billion Real estate agent services Non-residential property operator services a Sales and service income in nominal terms. Data source: ABS Catalogue published 27 June 2012, and CIE calculations. Activity levels in the real estate agents sector largely depend on the state of the housing and commercial property markets in relation to the turnover of the existing stock rather than as a function of new sales. Licensed agents are reasonably mobile and are sensitive to current levels of profitability in the market. With improved performance, particularly in residential, people will be attracted back to the sector. More than half of those employed are working proprietors. Building cleaning, pest control and gardening services also support the maintenance of operation of the current stock of buildings across the economy. Chart 4.16 shows that the value of production of this sub sector has grown steadily at a rate of 7.7 per cent each year in nominal terms over recent years. Building cleaning accounts for around 64 per cent of the total, and accesses casual labour. As many of the operators are fragmented across a large number of small to 4.16 Value of production for building cleaning pest control and gardening services a Gardening services Pest control services Building and other industrial cleaning services nec $ billion a Sales and service income in nominal terms. Data source: ABS Catalogue published 27 June 2012, and CIE calculations.

55 Future forecasts: Construction and Property Services Skills medium sized businesses, and are not allied with the industry association, ABS estimates are the only data source. Between 22 and 25 per cent of the total sales of each of these sub-sectors are accounted for by sales to the property operators services industry.5 Chart 4.17 below shows that the nominal value of architectural and surveying services. In , the combined estimated value of production for these sub-sectors was over $9 billion. These sub-sectors are closely linked to new investment in the construction and mining industries. Architects specialise across sub-sectors of the residential, commercial and public building construction. BIS Shrapnel (2013) illustrate this specialisation by linking the demand for different specialists within surveyors and geospatial professionals to industry segments: cadastral surveyors to private dwelling commencements; construction surveyors to private multi-residential construction and non-dwelling buildings; engineering surveyors to utilities and transport engineering construction; and mining surveyors: mining and heavy industry construction Value of production for architectural and surveying services a Surveying and mapping services Architectural services $ billion a Sales and service income in nominal terms. Data source: ABS Catalogue published 27 June 2012, and CIE calculations. There is some uncertainty around the value of the security service industry, but it is clear that it is growing strongly. The private security industry in Australia encompasses: security officers: licensed premises and unlicensed premises; debt collectors, armoured guards, locksmiths; and investigators and advisors Australian National Accounts: Input-Output Tables (Product Details, Electronic Publication,

56 42 Future forecasts: Construction and Property Services Skills One estimate is the value of the Investigative and security services industry from the input-output tables at $4.3 billion.6 Using trends from the ABS industry Public order, safety and regulatory services (private), from ABS catalogue , this could be worth up to $5 billion in terms. This industry can be separated into those that contribute to the operation and maintenance of buildings and those that provide other security services at public events and venues. The relevant security services to the CPS sectors are used widely across industries and final consumers but with key linkages to property operators. The value of this component of security services is expected to continue to move in line with the stock of buildings. Security services that depend on public events and venues are likely to be the area of future growth where increasing demand is a function on the presence of security at these occasions Australian National Accounts: Input-Output Tables (Product Details), Electronic Publication,

57 Future forecasts: Construction and Property Services Skills Key supply side factors short and long term perspectives Factors that shape the labour force will continue to be challenging for the CPS sectors especially the ageing of workers and increased competition for workers in the age cohort 15 to 24 years. Other contributing factors to skill shortages include strong mining investment and structural adjustment in other sectors of the economy. Productivity in the CPS sector is critical as it addresses skill shortages, affordability and profitability. A key issue for construction, and specifically the residential sector, is the contribution of on-going productivity improvements and developments that may result in significant structural change in the industry. This chapter discusses some of the key contributing factors including underlying labour force growth, and how structural change and productivity has the potential to change skill requirements. Demographics of the labour force The resident population is expected to increase at an average rate of 1.7 per cent between and , and at a similar rate from to The supply of labour is expected to keep pace with the growth in the resident population, despite the ageing of the population (see chart 5.1). 5.1 Resident population and labour force projections People (millions) Resident population Labour force Data source: CIE Labour force forecasts based on ABS and Productivity Commission.

58 44 Future forecasts: Construction and Property Services Skills Structural change in the workforce The resident population over 60 years of age will increase from 20 per cent to 23.7 per cent over the period. This is associated with a larger portion of the labour force approaching retirement in this period as well as an increase in the proportion of the labour force that is 60 and over (see chart 5.2). Of the 2.6 million people over the age of 45 years and working full time at present, more than two fifths intend to transition to part-time work before they retire (ABS 2011). 5.2 Trends in the age cohorts of labour supply 0.20 Percentage of the labour force Labour force over 60 years (%) Labour force between 15 and 24 years (%) Data source: CIE Labour force forecasts based on ABS and Productivity Commission. Correspondingly, there is an increase in the workforce participation rate among many cohorts, in particular, in the over 60 cohorts and among females. This will not have any significant impact in the period to , but may have a subtle impact on the labour force by In addition, the percentage of the labour force aged between 15 and 24 years will fall from 18.8 to 17.5 per cent over the period such that there is increasing competition for the recruitment of new workers. That is, while the overall resident population is forecast to increase by 4.8 million over the forecast period, the labour force cohort between 15 and 24 years is forecast to increase by just while the portion of the labour force aged 60 and over increases by half a million. Again, this is unlikely to have a significant impact in the short term. However, it may subtly affect the supply of young workers relative to the labour force by Long term macroeconomic conditions Implications of the end of the extensive mining investment The construction sector has an ageing population. One aspect that has contributed to this has been the rise of the mining sector. For instance, between 2006 and 2011, there has

59 Future forecasts: Construction and Property Services Skills been an increase in the proportion of young people (ages 15-24) employed in this industry. Over the same period, the construction industry grew by 10 per cent (table 5.3). The high levels of investment that have been experienced in the mining sector are expected to level out as the sector moves into the income generation phase after the next five years. This may provide some return of workers from the mining industry into the construction industry although it may reduce the number of workers in heavy engineering construction. In addition, the reduction in workforce requirements is expected to dampen wage inflation for other competing sectors including for skilled workers in the construction sector. The implication is that higher rates of youth unemployment may have been avoided. 5.3 Changed youth employment, by industry Industry of employment Difference no % no % % Mining Arts and Recreation Services Health Care and Social Assistance Electricity, Gas, Water and Waste Services Construction Education and Training Accommodation and Food Services Other Services Public Administration and Safety Transport, Postal and Warehousing Inadequately described Administrative and Support Services Information Media and Telecommunications Professional, Scientific and Technical Services Retail Trade Rental, Hiring and Real Estate Services Financial and Insurance Services Wholesale Trade Manufacturing Agriculture, Forestry and Fishing Not stated Not applicable Total Note: Youth is defined here as aged Data source: ABS 2006 and 2011 Census. Structural change caused by a high Australian dollar As well as a key determinant of the demand for labour in the construction sector, economic conditions will impact the availability of skilled and unskilled labour. If the Australian dollar remains high, there are potential implications for the Australian manufacturing sector employment, which may release more workers into the construction industry. This may point to the need for retraining in the event that continued restructuring of the Australian economy takes place.

60 46 Future forecasts: Construction and Property Services Skills Employment by the construction industry and region According to the 2011 Census there was an increase in employment in the construction industry. In an absolute sense, there was around employed in the industry in 2006 and this increased to around in 2011 (table 5.4). However, over this time, there was also population growth. As such, an alternative measure of employment growth is the proportion of the population that is employed in the construction industry. 5.4 Construction industry workers, by state Difference no % of population no % of population % New South Wales Victoria Queensland South Australia Western Australia Tasmania Northern Territory Australian Capital Territory Other Total Data source: ABS 2006 and 2011 Censuses. There were considerable differences in employment growth between states from 2006 to For instance, the Northern Territory, Tasmania and Western Australia experienced the largest growth, while Queensland and New South Wales experienced the lowest. Victoria and the ACT were in the middle. Analysing the Construction sector in more detail allows a demarcation between workers in the residential and non-residential construction industries. It is clear that there has been an increase in the proportion of employment in non-residential construction Australia-wide (table 5.5). This is most evident in Queensland, but holds for all of the states: New South Wales, Victoria, South Australia, Western Australia, and Tasmania. The exceptions are the two territories. 5.5 Construction industry workers residential or non-residential construction Residential Non-residential Residential Non-residential % % % % New South Wales Victoria Queensland South Australia Western Australia Tasmania Northern Territory Australian Capital Territory Other territories Total Source: ABS 2006 and 2011 Censuses.

61 Future forecasts: Construction and Property Services Skills Impact of economic growth on skills requirements The construction sector is highly responsive to changing economic conditions and the structure of the Australian economy. Recent forecasts contained in the AWPA discussion paper, Australia s skills and workforce development needs, for a range of scenarios are summarised in appendix A. The report suggests that construction sector employment will experience positive annual growth out to 2025 if: growth in the global economy recovers by ; and the Australian terms of trade remains reasonably high including from sustained growth in demand for Australian commodities. However, construction sector employment is forecast to decline if the global demand for Australian commodities falls, resulting in significant structural change in the Australian economy, and/or where global economic conditions remain highly volatile. Forecasts contained in the discussion paper, suggest that from 2011 to 2025 the projected annual demand for qualifications will increase between: 2.9 per cent and 4.4 per cent for Certificate 3 and above; and 3.1 per cent and 4.5 per cent for Certificate 3. The lower estimate is based on below-trend, conservative assumptions for migration ( each year), productivity growth (0.6 per cent each year), and output growth (1.35 per cent). Therefore, on the basis of these estimates we might expect workforce skills requirements to increase by 3 per cent each year to Productivity in the construction sector Ongoing productivity improvements, including rationalisation of industry fixed costs, are required to improve affordability and margins. Chart 5.6 shows multi-factor productivity in the construction industry, compared to the market sector over time. Industry productivity estimates are published for the construction industry in total (at the 1-digit 5.6 Multi-factor productivity in construction sector Index (1975 = 100) Construction Market sector Data source: ABS Experimental estimates of multifactor productivity, Australia: Detailed Productivity Estimates (2011); Productivity Commission (2009) Productivity estimates and trends, February 2009.

62 48 Future forecasts: Construction and Property Services Skills ANZSIC level), which includes engineering construction as well as residential and commercial construction. Multifactor productivity estimates for the construction industry are summarised in table 5.7 noting that constructing accurate productivity estimates is inherently difficult and so should be used with caution. During the 1990s, multi-factor productivity (MFP) in the construction industry stayed relatively constant. The performance of the construction industry during this period was in contrast to the market sector, where MFP grew relatively strongly. 5.7 Average annual growth in multi-factor productivity Construction industry Market sector % % Source: ABS Experimental estimates of multifactor productivity, Australia: Detailed Productivity Estimates (2011); Productivity Commission (2009) Productivity estimates and trends, February In the period between and , MFP in the construction industry grew at an average annual rate of 2.8 per cent, despite a sharp decline in MFP following the introduction of the GST. Total growth in MFP during this period was around 21.5 per cent. Productivity growth in the construction industry outpaced the broader economy during this period and there were likely a number of contributing factors such as the introduction of the performance-based building code in 1996 and potentially, the industrial reforms for the commercial construction sector in In the 2000s, the construction sector outperformed the rest of the economy in terms of productivity growth. In the market sector, from to , multifactor productivity fell by around 0.4 per cent each year but recovered to levels by the end of the period. On the other hand, productivity in the construction sector grew over the same period by approximately 0.4 per cent. Furthermore, the ABS estimates productivity growth in the construction sector recently was around 4 per cent. If this is incorporated, productivity growth in the construction sector over the past decade is, on average, 0.8 per cent. CPS specific estimates Productivity estimates are not routinely estimated for the sub-components of construction and property services. However, several sources indicate significant productivity growth in commercial construction, a subcomponent of the construction industry, due to industrial reforms implemented in 2002 and further reinforced in A report by Independent Economics (2012) concludes that annual productivity growth in the commercial construction sector may have been close to 1.5 per cent between 2004 and 2012.

63 Future forecasts: Construction and Property Services Skills Structural adjustment is unlikely to happen quickly in the construction sector. This is due to the structure of the firms in the industry, many of which are working proprietorships. We expect that productivity growth in the residential construction sector has been limited, which could be explained by a wide range of factors. For example, the prevalence of small businesses, which may reduce the scope for innovation, and the conservative nature of the industry and its customers. It is also possible that gains from productivity were offset by increased costs from changes to building standards. The property services sector is also dominated by small businesses and working proprietors especially those based on professions. The cleaning industry is an example where there is considerable reliance on part time workers. We would expect that long term productivity improvements would be similar to those in residential construction. Product manufacturing and design capabilities Chapter 3 demonstrated that housing affordability was a key driver behind current market softness. One way to address this constraint is for the industry to innovate to provide low cost alternatives for housing. With uncertainty expected to persist for potential market entrants over the next four years, there is a strong imperative for innovation in residential construction. An increase in product manufacturing and design capabilities, such as 3D printing, beyond existing 3D CAD capabilities, and prefabrication (offsite manufacturing), has the potential to deliver benefits to households and builders. Embracing such opportunities, however, may require a shift in the skills and training mix of industry as well as attitudes of consumers and builders. Some of the major benefits of offsite-manufactured products include: lower on-site construction time a house with pre-fabricated walls and roofing can be completed within 1.5 to 3 months and reach the lockup stage in around 10 days (Miller, 2011). This provides significant cash flow benefits to builders and earlier income generation for clients; lower skilled labour requirements (trades workers) for example, prefabricated walls and roofing can alleviate the requirement for bricklayers; lower workplace health and safety (WH&S) risks onsite due to reduced time and personnel on site and lower exposure to hazards; and more efficient design and engineering that could result in: cost reductions relative to comparative products for example, the MiiHome Building System can provide wall and roofing cost savings of approximately 25 per cent compared with rendered brick veneer, which results in an overall reduction in the cost of a house (excluding the purchase price of the land) by around 10 per cent (see Miller, 2011). greater control of quality and costs; and reduced wastage on site, greater insulation and other properties associated with sustainability.

64 50 Future forecasts: Construction and Property Services Skills At the same time, it is important to recognise the limitations that are placed on consumer choice. For instance, it may be that the internal feel of the house is different because of the materials used. That is, off-site homes may not be a strong substitute for those built on-site but rather a different and distinct segment of the market. While prefabricated buildings and components are becoming commonplace in the commercial sector, such as tilt-up concrete slabs, the adoption of prefabricated housing is minimal in Australia (Daly, 2009). However, prefabricated housing components in the form of prefabricated housing frames and trusses and cladding systems, kitchens and bathrooms are becoming more widely utilised. In addition, modularised building is offered for homes, schools and shelters. Currently the demand for offsite manufacturing of houses is believed to be less than 5 per cent of the total new housing market. One reason for this is that manufacturing lines for residential construction are required to provide greater versatility in products to meet consumer tastes, greater cost efficiency than traditional building methods and lightweight products for cost effective transportation (Daly, 2009). In theory, it is possible to envisage that prefabricated housing and housing components may be extended further due to the benefits identified above. However, there are a range of impediments to the adoption of offsite manufacturing, including the mix of skills and structure of training in the Australian construction industry. Industrial knowledge of offsite manufacturing in the Australian construction industry is limited. Prefabricated housing erection is undertaken by general tradespeople with generic building and construction qualifications, who have learned their skills outside of the Australian Qualifications Framework (Daly, 2009). As well as a general lack of support for prefabrication among the residential side of the construction industry, there is resistance from the building and construction advisory councils to specialisation for discreet prefabricated housing skills sets (Daly, 2009). The structure of the industry limits the extent of ongoing training. Almost all apprentices graduating from group schemes move into private employment or establish their own business such that the construction industry has a strong sub-contractor basis (Daly, 2009). Investment in further training is seen as a cost impost and typically invested in for subordinate staff (rather than managers) as they are more likely to have a closer involvement in terms of complying with regulation, and knowledge of construction methodology and/or materials (Daly, 2009). While some skills requirements can be reduced from offsite manufacture, such as through replacing some tradespeople for labourers, integrated offsite manufactured products need to be designed and implemented in a way that is appropriate to the climate, site, client and regulators. In the United Kingdom, project managers are used to research material and structural lifespan and integrity in order to satisfy building regulations and provide a conduit between professionals, tradespersons and clients (Daly, 2012). The additional complexity associated with the integration of new processes and products is likely to be more difficult for small to medium sized enterprises to adopt.

65 Future forecasts: Construction and Property Services Skills This would be possible to overcome if there were strong demand from consumers. However, the conservative attitudes in the construction industry towards innovation and prefabricated housing reflects the low level of demand from consumers, perhaps because the perceived benefits to consumers do not outweigh their reservations around the process and attributes of prefabricated housing. Prefabrication may therefore have a gradual impact but is unlikely to be a panacea for the expected gap between housing supply and underlying demand. Improvements in information technology There is little doubt that improvements in communications and information technology has had a significant impact across not only all businesses, in construction and property services, but across all industries in the economy. Indeed, part of the productivity gains observed in the construction industries can be attributed back to the improved portability of and access to communication and information and through from the adoption of e-commerce. This would be especially the case when managers or workers are on-site. It is likely that improvements in portable communications and computing will continue to be important in the future, but unlikely to have a greater contribution to productivity than for other industries especially in the service sector. However, there are some cases where recent developments indicate this view may be no longer valid. Building and construction techniques, and the potential for greater efficiency, is becoming more apparent from integrating Building Information Modelling (BIM) technology. Integrating lean construction technology such as 5 dimensional BIM is being incorporated into the design and construction phase to further reduce construction costs from the design stage, through the construction stage, to subsequent refits, through to demolition. BIM design and data also potentially creates efficiencies for property services throughout the ongoing operation and servicing life cycle. In the case of surveying and geospatial services, the significant improvements in technology that have improved access to, and capability to processing, spatial information could potentially have a profound impact on that industry and so the skills profile required. While we know that these developments have significant potential for construction, or are already critical to industries such as the surveying and geospatial services, it is very difficult to quantify how productivity will be improved (that is, labour saving versus output augmenting productivity improvement) or how large these improvements will be compared to the ongoing or underlying productivity change.

66 52 Future forecasts: Construction and Property Services Skills Macroeconomic drivers and modelling approach Key macro drivers accounted of the analysis This section outlines the macro scenario that has been developed for each of the economic drivers of the state economies and the construction and property services sectors. Gross State Product growth Table 6.1 lists the assumed annual growth rate of gross state product (GSP), which is based on the relevant state and territory treasuries forecasts as reported in table C.7 in appendix C, adjusted to be consistent with the changes in the latest World Economic Outlook from IMF (2013). The latest GSP forecasts are only available for for some states. For some states and territories, the available official forecasts are for an even shorter timeframe. 6.1 Annual growth rate of Gross State Product to % % % % New South Wales Victoria Queensland South Australia West Australia Tasmania Northern Territory Australian Capital Territory Source: State and Territory treasury forecasts and CIE assumptions. We assume there will be steady or small increase in the growth rates in and For and beyond, we assume the growth will continue albeit with slightly lower rates. Productivity improvement Table 6.2 lists the annual growth rate of gross output based industrial multi-factor productivity (MFP) for different periods from the ABS estimates. In general the productivity has been negatively affected by the global financial crisis (GFC) which tended to be mainly demand driven. Because the demand side shocks are explicitly modelled, we adopt the 10 year average growth rate before GFC as the underlying ongoing force for economic growth. In other words, we assume that the fundamentals of the supply side drivers are not changed.

67 Future forecasts: Construction and Property Services Skills Annual growth of MFP by industry 10 years before GFC after GFC last 10 years last 20 years % % % % Agriculture, forestry and fishing Mining Manufacturing Electricity, gas, water and waste services Construction Wholesale trade Retail trade Accommodation and food services Transport, postal and warehousing Information, media and telecommunications Financial and insurance services Rental, hiring and real estate services Professional, scientific and technical services Administrative and support services Arts and recreation services Other services Data source: CIE calculations based on ABS Estimates of Industry Multifactor Productivity, Table 15: Gross output based MFP indexes. It should be noted that the MFP growth in the construction sector has been low 0.38 per cent per annum, and that in the rental, hiring and real estate services even negative at per cent per annum, it appears the worst performing sector in terms of MFP growth. These assumptions may different from those adopted by other projections, such as DEEWR s. External demand Australian economy is highly integrated into the world economy, and thus affected by the external demand for its goods and services. We use a general equilibrium model of the global economy, Dynamic GTAP, to estimate the future growth of Australian exports to the global market. The global modelling draws information of global economic growth projections by the International Monetary Fund (table C.7 in appendix C), world population growth and likely trade liberalisation. Table 6.3 reports the modelling results of Australian exports growth. Mining and agricultural exports will continue strong growth in the short term, while manufacturing exports will fall. Services exports will see mixed patterns in growth, but because they account for small share of total Australian exports, their impact on overall demand is limited. For example, although utilities (electricity, gas and water) exports growth rate will be big negatives, they account for less than 1 per cent of total Australian exports.

68 54 Future forecasts: Construction and Property Services Skills Annual growth of Australian exports % % % Agriculture, forestry and fishing Mining Manufacturing Electricity, gas and water Construction Wholesale & Retail trade Accommodation, cafes and restaurants Transport & Communication Finance and insurance Property and business services Other services Source: Dynamic GTAP simulations Population and immigration As detailed in appendix C, we adopt the Series A of population projections produced by ABS, which is the optimistic estimate of future Australian population. Key assumptions are that there is a net overseas migration level of persons for the foreseeable future and high female fertility. This is consistent with recently released information concerning fertility rates and net immigration levels. For example, for , the Department of Immigration and Citizenship estimates a net migration level of persons which is around more than the current policy of Out to 2016, the Department forecasts net overseas migration is forecast to be thousand. Fiscal policy The scenario around Australian economic growth used in these projections implicitly includes judgments about the likely course of fiscal policy, and in particular, net budgetary positions across all Australian jurisdictions. Recent evidence has emerged that a prolonged period of budget deficits is likely for the Australian Government and for some states and territories. How these impact oin growth and the CPS sectors, in particular, is difficult to predict because it depends on how, where and over what period, the reduction of budget deficit is achieved. Equally important is how these decisions impact on the confidence of industry and consumers. The economic growth projections above assume that fiscal policy will remain around current settings. However, the shift to a structural deficit over the medium to long term has the capacity to slow economic growth across Australian regions, but the size of this reduction depends on a range of factors including the response of respective state and territory governments. The bottom line is that a succession of structural budget deficits: would require a further downward revision of growth prospects; and may flow through to reductions in expenditure on public investments thus putting further pressure on the CPS sectors.

69 Future forecasts: Construction and Property Services Skills CPS specific assumptions In consultation with relevant stakeholders, we adopt the following assumptions (tables 6.4 and 6.5): investment growth in resources sectors and infrastructure will continue at present levels, at least through to ; and residential building will see mixed pictures across regions with resources rich states continuing relatively high growth while others stagnant or even declining. 6.4 Annual growth rate of residential building starts to % % % % % New South Wales Victoria Queensland South Australia West Australia Tasmania Northern Territory Australian Capital Territory Australia Source: CIE assumptions in consultation with HIA. 6.5 Annual growth in investment in selected sectors to % % % % % Mining Utilities Roads and freeways Rail projects Other transport Communications Refinery Chemicals Other heavy industries Source: CIE assumptions in consultation with AIG. Economywide approach Chapters 2 through 5 of this report analysis have assembled a wide range of information and assumptions, at a macro and industry level, that need to be brought together in a systematic and consistent framework to project employment and skills requirements for the CPS sectors. This approach involves a number of components:

70 56 Future forecasts: Construction and Property Services Skills supply side drivers: GSP growth and productivity growth; demand side drivers: external demand for Australian goods and services, population growth, shocks specific to the CPS sectors; and the nature and structure of the labour market, such as full time versus part time, sectoral composition and geographical distribution of the labour force. The whole process is composed of sequential simulations and calculations involving different types of models: a general equilibrium model of the global economy, Dynamic GTAP, to model the external demand for Australian goods and services based on the world economic outlook from the International Monetary Fund (IMF); a general equilibrium model of the Australian economy, CIE-Regions, to simulate all the supply and demand side shocks including those from the global modelling; and an employment module to transform the state and industrial employment results from the CIE-Regions modelling results to detailed employment projections based on the Census and ABS statistics. Chart 6.6 illustrates the overall approach of projecting employment. 6.6 Modelling approach SUPPLY SIDE DEMAND SIDE GSP by state Productivity Global economic forecast Population CPS specific shocks residential Dynamic GTAP infrastructure mining heavy industry External demand CIE-Regions State and sectoral employment Census and ABS statistics Detail employment state industry (ANZSIC 4-digit) occupation (ANZSCO 4-digit nature (full, part) Source: CIE.