Falling activity, declining orders and layoffs: The signs Australia's housing construction boom is over

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  • Activity levels across Australia’s construction sector declined for the first time in 20 months.
  • Weakness was acute in residential construction and marginally weaker for commercial work. The only area of strength came from government-backed engineering work.
  • New orders declined, staff were shed and margin pressures for firms were intense.

There’s now little doubt Australia’s residential construction boom is over.

Activity levels declined sharply in September, fitting with an ugly drop in building approvals reported in July and August and recent weakness in new home sales.

More worryingly, the steepest decline was seen in home building, rather than in apartment construction.

The Australian Industry Group’s (Ai Group) Performance of Construction Index (PCI) slumped to 49.3 in seasonally adjusted terms, down 2.5 points on the level reported in August.

Ai Group

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 49.3, it indicates that activity levels across the construction sector weakened during the month, the first time that’s been seen in close to two years.

As seen in the table below from the Ai Group, the activity readings for residential construction were horrendous.

Ai Group

The subindex measuring home building slumped 7.8 points to 42. Like the headline PCI, a reading below 50 indicates that activity levels declined from a month earlier.

Despite a sizeable 11.4 point bounce in the apartment subindex, that was only enough to see it lift to 44.2, indicating that activity levels still deteriorated, just at a slower pace than August.

“House building declined for a second consecutive month and at the steepest rate in just over two years while apartment building recorded a seventh month of contraction,” the Ai Group said.

“House building respondents linked the weakening in demand conditions to tighter lending conditions, reduced enquiries and softer home buyer sentiment.

“Apartment builders indicated that activity remained in decline in response to project completions, falling investor demand and oversupplied markets.”

Ai Group

Adding to the downbeat report, activity levels also deteriorated for firms involved in commercial construction, albeit marginally.

Helping to explain the resilience in the headline PCI, activity levels at engineering firms boomed with the subindex surging 10.7 points to 65.7, indicating a large improvement from the levels seen one month earlier.

“Engineering construction was the strongest performing area of activity with its rate of growth lifting solidly in the month on the back of an expanding pipeline of publicly funded investment in large-scale infrastructure projects,” the Ai Group said.

However, while in stark contrast to the performance seen in residential and commercial construction, that was not enough to prevent capacity utilisation across the sector which fall one percentage point to 76.2%, leaving it below the average seen over the prior 12 months.

Nor was it enough to prevent firms from shedding staff at the fastest pace in 21 months.

“Construction employment drifted further into negative territory in September with the employment subindex decreasing by 2.2 points to 46.9,” the Ai Group said.

“This marked a second consecutive month of contraction in employment and the third decline in the past four months, consistent with the more subdued readings on activity from mid-2018.”

Suggesting job losses may continue in the months ahead, the new orders subindex — a lead indicator for activity levels in the future — tumbled by 9.7 points to 47.1, indicating a mild decline in new work during the month.

It was the lowest reading in nearly two years.

Adding to concern, new orders fell for both residential and commercial work, while those for engineering firms grew at a slower pace than August.

“The housing and apartment building sub-sectors both experienced steeper rates of decline while new orders in the commercial construction sector turned negative following 13 months of growth,” the Ai Group said.

“The engineering construction sub-sector experienced an eighth month of expanding new orders, although the rate of increase moderated from August. “

By sub-sector, the new order subidex for home building fell to 41.3 while that for apartments slumped to 39.4. Fitting with recent weakness in commercial building approvals, the commercial subindex plummeted 9 points to 46.6.

The engineering new order subindex fell 12.9 points to 55.5.

Even with activity levels weakening across most parts of the sectors, margin pressures for firms remained fierce with input costs rising significantly faster than selling prices during the month.

The former stood at 76.1 points, indicating a rapid rise in costs, while the latter stood at just 50.6 points, suggesting a slight improvement.

“Cost pressures remain high for many businesses due to robust demand for construction materials, elevated energy input costs and supplier price hikes related to strength in commodity prices,” the Ai Gorup said.

“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.”

Falling activity levels, declining new orders, staff shedding and intense margin pressures. Not exactly a glowing report card on the current state of the sector.

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