Fuel prices & rates reshape Australia's construction

CreditorWatch chief economist Ivan Colhoun has warned that rising fuel prices and higher interest rates are beginning to reshape Australia's construction pipeline and household spending. He linked those pressures to the Iran conflict and the closure of the Strait of Hormuz.

Residential building approvals fell 10.2 per cent month on month in March after a 30.9 per cent jump in February. Despite the decline, Colhoun said the figures still pointed to an underlying recovery in housing activity before the conflict escalated.

The data also showed a sharp reversal in the volatile apartment segment. Apartment approvals dropped 26 per cent in March after rising 101.1 per cent in February. Approvals for larger freestanding houses rose to their highest level since November 2021, reinforcing signs of a strengthening development pipeline.

Colhoun said the near-term outlook for residential construction remained broadly positive. Higher interest rates were likely to become a bigger drag, although activity could continue to recover if geopolitical tensions eased.

He also highlighted the sector's sensitivity to energy costs. Many building materials are energy intensive, and higher fuel prices would flow through to input and freight costs, especially if the Strait of Hormuz remained closed for an extended period.

Construction insolvencies have stabilised over the past 18 months, a trend Colhoun linked to earlier interest rate cuts, slower input price growth and an improving work pipeline. But the risk profile is shifting again as borrowing costs rise and fuel-linked expenses increase.

A prolonged conflict would likely push insolvencies higher. A faster peace agreement would ease some of the pressure, though higher interest rates would still constrain activity.

Wage Setting Warning

Colhoun also raised concerns about temporary price shocks flowing into wage decisions. Many industries could face lasting cost pressures if minimum wages rose sharply in response to what may prove to be a short-lived spike in fuel-driven inflation.

His comments come ahead of the Fair Work Commission's Minimum Wage Case decision. He argued that locking in a permanent wage increase in response to a temporary energy shock would risk more persistent inflation and weigh on employment in vulnerable sectors such as construction.

Household Spending Shift

Separate CreditorWatch analysis showed households had already begun adjusting their spending patterns by March. Overall household spending rose 1.6 per cent month on month, in line with economists' expectations.

Transport spending increased 5.1 per cent during the month, with the Australian Bureau of Statistics reporting a clear effect from higher fuel costs. Food spending rose 1.7 per cent amid signs of precautionary stockpiling.

Spending across all other categories, excluding transport and food, still grew 0.7 per cent. Colhoun said this suggested consumers entered the conflict period in relatively solid shape. Hotels, cafes and restaurants were the only category to record a slight decline, while some recreation and culture spending may also have been affected by higher jet fuel costs and airfares.

He said the February and March figures largely provided a pre-shock baseline. The full impact of higher diesel and broader energy prices was likely to appear in April and May data as transport and production costs moved through supply chains and into retail prices.

RBA Rate Hike Impact

The economic backdrop shifted further when the Reserve Bank of Australia raised the cash rate by 25 basis points to 4.35 per cent, its third consecutive increase. The move reversed the three cuts delivered in 2025 and followed an 8-1 vote in favour of tightening.

"While there is little argument that a further increase in interest rates was warranted to moderate stubbornly above-target Australian inflation, we saw a credible argument that it was prudent for the RBA to await further clarity on how the Iran conflict might play out and its impact on the economy and inflation. Still much higher oil prices and considerably weaker economic conditions could result if there is no quick resolution to the closure of the Strait of Hormuz. Either way, the combination of higher interest rates and higher energy prices will add to pressures not only on household budgets, but also on the costs of doing business. This is likely to result in some increase in insolvencies in the months ahead unless a peace agreement can be reached relatively soon," Colhoun said.

He said the key risk now was how long fuel prices remained elevated and whether oil markets faced further disruption. April and May outcomes for both consumer spending and business insolvencies will be critical indicators of how the economy is adjusting to the dual pressure of higher borrowing costs and higher energy prices.