Data centre boom lifts Australian non-residential approvals

A surge in data centre-related building approvals is lifting non-residential construction in Australia and is likely to keep pressure on labour and material costs, CreditorWatch says.

Non-residential approvals rose 14.4% in July to their second-highest level on record, according to CreditorWatch's reading of the latest building approvals data. Chief Economist Ivan Colhoun said data centres were the main driver and had sharply increased the value of non-residential approvals over the past two years.

The figures point to a widening gap between commercial and housing activity in the construction sector. Commercial work tied to digital infrastructure is accelerating, while residential approvals are starting to ease after a period of gains.

Residential approvals fell 3.6% month on month. Detached house approvals, the largest part of the residential market, dropped 4.2%, reversing some of the increases recorded in the previous two months and returning to levels last seen in February.

Approvals for other dwellings, mainly apartments and townhouses, were steadier. That category edged down 0.4% after a 15.7% rise in the previous month.

Colhoun said the latest fall in house approvals could mark a turning point for the sector after earlier resilience. He attributed the shift to higher interest rates, changes in federal budget tax settings, and weaker house prices and turnover.

Even so, the broader pipeline means any slowdown in residential construction activity is unlikely to appear immediately. CreditorWatch expects the effects to emerge in the first half of 2027, reflecting the lag between approvals and construction starting on site.

Cost pressure

The stronger commercial pipeline matters beyond the construction industry because it may keep inflation elevated. Demand from data centre projects is likely to sustain pressure on wages and building materials even if housing work softens, Colhoun said.

That could complicate the Reserve Bank of Australia's task. In many cycles, weakness in housing would help cool inflation and reduce the case for tighter monetary policy, but Colhoun said the current upswing in non-residential investment changes that pattern.

"The main story at the present time is in the non-residential approvals category, with the value of approvals jumping 14.4% in July to the second highest level ever. This is where data centre approvals show up in the data. The value of non-residential approvals has risen very sharply over the past two years, broadly doubling," said Ivan Colhoun, Chief Economist, CreditorWatch.

The Australian Bureau of Statistics has already noted that the June quarter recorded the highest volume of construction activity ever in Australia. That suggests builders and developers may continue to face tight labour and supply conditions even if the housing market loses momentum.

Housing outlook

The residential side of the market remains important to the federal government's target of building 1.2 million dwellings over five years. Colhoun said the direction of approvals in coming months would help determine how far short of that target the country may fall.

Detached housing is likely to be especially sensitive to borrowing costs and weaker home values. Lower turnover in the property market can also feed through to weaker demand for new homes, adding to pressure on builders already operating in a high-cost environment.

For the home building industry and the real estate sector, that combination could prove difficult. Other parts of construction, by contrast, may benefit from the rise in non-residential work tied to digital infrastructure investment.

Rate view

Colhoun also linked the approvals data to the inflation debate and the interest rate outlook. He said persistent strength in overall construction activity reduced the significance of softer housing approvals for monetary policy because pricing pressure in the sector may remain strong.

"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," said Colhoun.

His assessment suggests Australia's building sector is being shaped by two opposing forces: a softer housing market and a sharp rise in investment linked to data centres. The result is likely to be continued pressure on labour demand, wages and material prices even as residential approvals begin to lose momentum.