Conditions remain fairly dire for Australia's residential construction sector

Gonzalo Arroyo Moreno/Getty Images
  • Conditions across Australia’s construction sector remain weak, but they’re not quite as severe as they were earlier in the year.
  • Activity levels for residential and commercial construction are going backwards but are stable for engineering firms.
  • Jobs continue to be shed and margin pressures remain acute.
  • New orders are also declining, pointing to continued weakness in the quarters ahead.

Condition across Australia’s construction sector remain weak, especially for residential work. However, they’re not quite a bleak as they were earlier in the year.

The Australian Industry Group’s (Ai Group) Performance of Construction Index (PCI) rose to 45.6 points in March in seasonally adjusted terms, up 1.8 points on the level reported in February.

The PCI measures 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 45.6 points, the PCI indicates that activity levels continued to weaken last month, albeit at a slightly slower pace than February.

Ai Group

According to the March report, activity levels for housing and apartment construction continued to deteriorate at a rapid pace during the month.

“Residential building respondents mainly commented on subdued market conditions due to soft new orders, tight lending conditions, and falling prices and caution by prospective buyers,” the Ai Group said in a statement accompanying the release.

The feedback fits with data from the ABS which revealed approvals to build new houses and other residential dwellings slumped 12% and 32.6% respectively in trend terms in the year to February.

Conditions for commercial construction weakened at a faster pace while those for engineering firms were relatively unchanged from a month earlier.

With conditions continuing to weaken across most sub-sectors, construction firms reduced staffing levels for an eighth consecutive month, adding to downside risks for broader hiring levels in the months ahead given the sector is the third-largest employer in the country behind healthcare and retail.

Margin pressures also remained acute with input prices continuing to increase sharply, albeit at a slightly slower pace than February, while selling prices continued to decline.

“Rising input prices and other costs are not, on average, being passed on to customers,” the Ai Group said.

“This reflects the continued strong competition among builders in securing work. The on-going gap… demonstrates that profit margins remain tight for many businesses in the construction industry.”

Ai Group

Pointing to the likelihood that conditions across the sector will remain weak for some time yet, new orders continued to decline across all sub-sectors with the most acute falls seen in residential work.

Survey respondents cited strong competition, cost pressures and the slowdown in the economy in recent quarters, along with uncertainty ahead of the federal election, as the chief areas of concern in March.

While another weak report card on the current state of the construction sector, Peter Burn, Head of Policy at the Ai Group, offered cautious optimism towards the outlook for activity levels ahead.

“There are some encouraging signs that the overall rate of contraction has eased,” Burn said.

“Looking ahead, the construction industry is likely to remain in negative territory over coming months due to the ongoing fall being recorded in new orders.

“On the positive side, there is clearly capacity to lift construction activity if policymakers are looking to stimulate the slowing economy.”

That’s a not-so-subtle hint to the government ahead of Australia’s federal election next month.

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