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Construction Sector Performance Weakest in Three Years

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Apartment and commercial construction have continued to wane over November with lower investment spending and insufficient progress on planned developments to blame, the latest Performance of Construction index shows.

Australia’s housing market, now in its fifth month of recovery, is yet see to flow through to construction figures which declined for a 20th straight month with the headline index slipping a further 3.9 points to 40 last month.

The index, based on survey responses of industry officials, expresses sentiment on an index centred on 50. A reading above 50 shows expansion, while a reading below means contraction. The further the index is from the 50 mid-point, the faster the pace of growth or decline.

According to the index, ongoing weakness in business conditions was associated with a steeper fall in employment and a continued reduction in deliveries from suppliers.

Activity declined most rapidly in engineering construction with apartment building not far behind.

House building was the best performing sector (49.7 points trend) in November with activity stabilising following 15 months of contraction.

However, weighing heavily on overall industry conditions was a continued decline in apartment building activity (37.0 points trend) with activity in the sector falling at a rate that was only marginally slower than the previous month.

The employment sub-index fell 8.4 points in November to 39.4, the largest dive in four months, indicating a worrying trend in Australia's construction industry which employs 9.1 per cent of the nation's workforce, equating to 1.2 million people.

Pressures on selling prices have continued with wages and input costs continuing to rise and intensifying margins, said Ai Group head of policy Peter Burn.

“November's fall in employment was the sixteenth consecutive month of decline across the sector and unfortunately, the further drop in new orders is pointing to the likelihood of further falls in the months ahead.”

Mirroring the downward trend, the latest Australian Bureau of Statistics figures revealed new dwelling approvals fell by 8.1 per cent from September to 13, 049, according to the seasonally-adjusted figures, driven by a 11.3 per cent drop in private dwellings such as apartments and townhouses.

“While this is not an indication that home building is returning to the strong conditions of recent years, it is not declining as fast as was apparent over the past year,” HIA economist Thomas Devitt said.

“The slingshot in prices in the two biggest cities will help support a positive wealth effect, broader confidence across the economy and eventually increased demand for housing.”

However, the latest ABS figures reveal that the volume of construction work in the September 2019 quarter declined in comparison with the previous quarter.

Despite the rebound in sentiment the September quarter performance is, in fact, the weakest recorded in three years.

In a call to arms, the Commonwealth Bank of Australia last month warned that the stronger-than-expected rebound in house prices could cause a “phenomenal” growth in housing demand in the nation’s two largest cities arguing that the decline in residential construction is taking place at a time when the excess of supply is small.

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Article originally posted at: https://theurbandeveloper.com/articles/construction-continues-to-contract