Apartment construction in Australia is tanking
- Activity levels across Australia’s construction sector improved for a 19th consecutive month in August.
- While overall activity levels improved, they deteriorated among a majority of sectors, particularly for apartment builders.
- Experts don’t see the outlook for residential construction improving anytime soon.
Activity levels in Australia’s construction industry continue to improve on the back of strength in engineering work.
However, activity levels in all other sectors are deteriorating, especially in apartment construction.
The Australian Industry Group’s (Ai Group) Performance of Construction Index (PCI) fell to 51.8 points in August in seasonally adjusted terms, down 0.2 points on the level reported in July.
The PCI measures perceived changes in activity levels across Australia’s construction sector from one month to the next. Anything above 50 signals that activity levels are improving while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.
So at 51.8, while activity levels still improved, they did so at the slower pace.
Despite the steep moderation, seen in the chart below, activity levels have now improved in each of the past 19 months, the longest stretch of growth in the history of the survey. However, momentum across the sector is slowing fast.
Despite continuing to improve, the headline PCI masked weakness in most construction sectors last month.
“The construction sector grew at a modest pace in August on the back of continued strength of engineering construction and despite a further significant drop in apartment building,” said Peter Burn, Ai Group Head of Policy.
And for the apartment sector, they basically plunged, deteriorating at a faster pace than July.
Like the headline PCI, a reading below 50 indicates a deterioration in activity levels. The further away from 50, the steeper the decline.
“Apartment building activity contracted for a sixth consecutive month in August, and at a sharper rate,” the Ai Group said.
“The apartment sector has now experienced steady or declining activity in 12 of the past 13 months following a cooling in new orders over the second half of 2017 and through 2018.
“Apartment builders indicated that activity was being driven lower in response to project completions, reduced inquiries and falling investor demand.”
The decline in apartment construction was close to the fastest in six years.
At the other end of the spectrum, activity levels among engineering firms improved for a 17th consecutive month, helped by a “boost from state government capital works”.
The weakness outside of engineering was also seen in hiring levels with firms reporting that they shed staff during the month.
“Employment growth stalled in contrast to the general expansion of jobs over the past year or so,” Burn said.
Reflecting weaker demand for labour, growth in wages also slowed compared to the levels reported in July.
Hinting that overall activity levels across the sector may continue to improve in the month ahead, the new orders subindex bounced sharply to 56.8 points as stronger order books for engineering and commercial work offset weaker demand for residential construction.
Suggesting that margin pressures for construction firms remain intense, survey respondents said input costs continued to increase at a rapid pace while selling prices actually fell.
“The ongoing gap between these price series demonstrates that tight profit margins persist for businesses in the construction industry. This is consistent with reports of a highly competitive tender pricing environment across the construction industry,” the Ai Group said.
Looking ahead, Burn says the recent divergence in activity levels between residential and non-residential construction looks set to persist.
“Lower levels of new orders in the residential sub-sectors point to further slowing whereas for commercial construction and engineering construction the pipelines of new work grew more rapidly in August, pointing to further gains in the period ahead,” he said.
Diwa Hopkins, Economist at Australia’s Housing Industry Association (HIA), agrees the outlook for residential building is unlikely to improve anytime soon.
She said pressures with “access to finance are unlikely to ease in the near term — only yesterday did other major lenders hike their mortgage rates, with more independent moves likely to follow,” she said.
“Add to these factors a situation of falling house prices in the key Sydney and Melbourne markets, and the list of deterrents to investor activity is quite varied.
“We expect credit conditions to continue to weigh on new home building activity into 2019.”
Source: Business Insider David Scutt 07Sep18