Data centre boom offset by fall in residential approvals: CreditorWatch

Colhoun expects strong non-residential activity to keep pressure on labour and materials costs, despite high interest rates and weaker house prices impacting housing construction.

“Given the lags between approvals and activity, softening is only likely to occur in the first half of 2027, but data centre construction is likely to keep overall building activity very strong, likely maintaining pressures on labour and materials costs,” Colhoun said.

CreditorWatch expects this rise in overall building activity to persist for 12 to 18 months.

Weaker results for residential approvals

While non-residential construction is up, there was a softening in residential building approvals (down 3.6 per cent month on month), following last month’s large increase of 6.9 per cent.

This was not unexpected, Colhoun said.

“The largest component of residential approvals (detached/free-standing houses) dropped 4.2 per cent month on month, though this followed two months of relatively solid gains,” Colhoun said.

Despite this, other approvals, mainly apartments and townhouses, did better than house approvals, dropping only 0.4 per cent month on month after rising 15.7 per cent in June.

“The combination of still higher interest rates and reduced housing turnover and prices is a challenging one for the home building industry and real estate, though other parts of construction will benefit from stronger activity,” Colhoun said.

“I continue to expect the RBA Board to decide to take out some further insurance – in the form of an additional interest rate increase – at the Board meeting at the end of September, given the unacceptably high inflation outcome recorded for July.”

“While that outcome likely reflected the impact of higher wages more than strong demand pressures, the Board’s credibility is already weak and it cannot afford further damage if inflation does not return to target in the second half of next year.”