Property Wind Down Continues as Apartment Construction Takes a Hit

An otherwise “orderly retreat” from boom conditions in the apartment sector is being threatened by interest rate hikes and possible changes to tax policy settings, with construction activity experiencing a sharp decline in October.

A faster decline in house and apartment building and commercial construction reinforced overall falls in the sector – with apartment building falling at the sharpest rate in six years, according to the Performance of Construction index.

The monthly index, run by the Australian Industry Group and the Housing Industry Association, indicates that construction activity is “generally expanding” with a reading above 50, while a mark below 50 represents a decline.

Construction activity is a good temperature check on the wider health of the property market.

The overall construction index contracted 2.9 points to 46.4 in October, the sharpest decline since October 2016 and signalling a second consecutive month of decline after 19 months of growth.

Engineering construction, bolstered by a solid pipeline of public sector investment, was the construction industry’s strongest sector. House building contracted 1.6 points to 44.8, while apartment building fell at the sharpest rate since 2012 – falling 14.6 points to 26.6 points in October.

Related: Developers Need to Take Appropriate Measures to Prepare for Downturn: EY

The perceived threat of tax policy changes along with negative sentiment, APRA’s interventions and the fallout from the royal commission were blamed for the slowing house and apartment market.

“The economic environment that supported the expansion of residential building over the last few years has passed,” HIA acting principal economist Geordan Murray said.

“The housing market has cooled and activity in the residential building sector is set to contract over the year ahead.”

Ai Group head of policy Peter Burn said that the wind down of boom conditions reinforced further declines in the apartment and home building sectors.

“To date there has been an orderly retreat from boom conditions in the apartment sector but the outlook is now very sensitive to any further increases in borrowing costs and possible changes in tax policy settings,” Burn said.

“Looking ahead, conditions look more fragile than they have for some time with new orders declining further into negative territory driven by weakness in the apartment and commercial construction sectors with flat-to-steady pipelines of new work for the rest of the industry.”