Construction Sector Weakened by Rising Rates

Construction activity has softened further as material costs continue to collide with higher interest rates, dampening demand for labour.

The latest Performance of Construction Index, a survey-based monthly barometer of activity produced by Ai Group and the Housing Industry Association, showed home building dropped for a fourth consecutive month in August.

Activity in housing and apartment construction fell 1.3 and 12.5 points respectively compared to July.

HIA economist Tom Devitt said higher interest rates along with uncertainty about future increases reduced demand across house building as more builders reported a drop in enquiries.

Four back-to-back rate rises, sparked by a shock 6.1 per cent inflation result, have meant the cash rate has risen from a record low 0.1 per cent to 1.85 per cent in just 12 weeks.

Characterised as the RBA moving to an inflation-fighting footing, it is the most aggressive tightening cycle in almost 30 years and is a long way from the outlook in late 2021 of rates on hold until 2024.

“The RBA’s cash rate increases have brought an end to the housing boom,” Devitt said.

“Climbing borrowing costs are compounding the costs of construction that have surged on the back of land, labour and materials shortages.”

“Fewer people are visiting display villages, sales volumes have dropped, and there is less lending for the purchase of new and existing homes.” 

Australian Performance of Construction Index 

The sector as a whole lifted fractionally, by 2.6 points to 47.9—a reading above 50 points indicates that construction activity is generally expanding; below 50, it is declining. 

New orders rose by 7.9 points to 51 points, following two months of contraction while construction prices eased again, dropping slightly to 92.6—but remained very high after peaking in June.

Average wages, which have been under significant pressure for well over a year, rose again after easing in July while capacity utilisation lifted by 2 percentage points to 82.6.

Record low-interest rates and government stimulus sparked a wave of construction during the pandemic. Between June 2020 and April 2021, building approvals jumped from about 14,000 a month to more than 20,500.

Since April, approvals have been declining and official figures last week revealed that building approvals fell sharply over July, tumbling a further -17.2 per cent.

The sharp decline was led by a lack of council approvals for units, especially large complexes, with a -43.5 per cent fall in private sector apartments recorded. Approvals for new houses remained flat, rising 0.7 per cent.

There was also a drop across all categories year-on-year with all housing types down by -25.9 per cent, houses down by -17.4 per cent and other housing types down by -43 per cent, according to the ABS’ seasonally adjusted figures.  

New home sales fell -13.1 per cent in July, led by the -15.5 per cent drop in Queensland, -15.3 fall in New South Wales and a -13.5 per cent decrease in Western Australia.

The value of new loan commitments for housing also fell -8.5 per cent to $28.4 billion after a fall of -4.4 per cent in June.

Master Builders chief executive Denita White said it was up to the federal government to align all its economic levers to ensure that the economy was pulling in the right direction.

“In the residential building sector builders who have borne the brunt of inflationary pressure for many months now face reduced demand for new homebuilding,” White said.

“We understand the severity of the challenges we face and the need to normalise monetary policy, but interest rates are a blunt instrument, and we don’t want to see a situation where the Reserve Bank is left on its own to tackle inflation.”