Australia's construction sector just contracted at the fastest pace in 20 months, driven by a slowdown in apartments

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Business conditions across Australia’s construction sector deteriorated at the fastest pace in 20 months in October.

And it was led by the apartment subsector.

The latest Performance of Construction (PCI) released by the Ai Group on Monday fell by 5.5 points to 45.9 in October.

The PCI, like the PMI and PSI released by the group, measures changes in operating conditions across Australia’s construction sector from one month to the next. A reading above 50 signals that conditions improved while a sub-50 figure points to a deterioration from one month earlier.

In essence, the higher the number the better.

According to the Ai Group, the weakness in October was broad based, led by the apartment subsector.

“Apartment building experienced a significant drop from recent peak conditions, with the sector contracting at its steepest pace in 39 months,” it said.

“House building recorded a third month of decline, suggesting that activity in this sector is continuing to moderate from more robust mid-year levels.”

That news was replicated in engineering and commercial construction, said the Ai Group.

“Engineering construction returned to negative territory in October following two months of solid recovery while commercial construction declined at a sharper pace with respondents noting a continuation of patchy conditions across the major project categories.”

The weakness in engineering was a disappointing outcome given increased optimism that a surge in public-sector works would be able to offset expected weakness in residential construction in the years ahead.

It still may.

Mirroring the weakness in the subsector performance, all of the surveys activity gauges fell during the month, led by some particularly sharp declines in employment, supplier deliveries, selling prices and new orders.

The weakness in the new orders subindex is of particular concern given it is perceived to be a lead indicator for activity levels across the sector in the months ahead.

“New orders contracted for a third consecutive month in October, with this key sub-index registering 44.6 points,” said the Ai Group.

“This was a decline of 4.1 points from September and the lowest new orders result in five months.

“This extended period of decline in new orders points to a high probability of weaker construction activity in the months ahead.”

All subsectors registered a decline in new orders compared to the levels seen in September.

This table from the Ai Group shows how each component within the survey fared in October. The group uses three-month moving averages to help smooth out month-to-month volatility in the readings, not that it had much impact last month given the scale of the declines recorded.

The Ai Group said the steep decline seen in October was attributed “to a drop in demand and fewer new tender opportunities”.

“Apartment builders also pointed to reduced enquiries and sales in the month,” it said.

That, says Shane Garrett, senior economist at the HIA, adds to evidence that Australia’s high-rise apartment building boom has peaked.

“Today‚Äôs results provide further evidence that apartment building has peaked, and that the high-density sector is likely to see a considerable reduction in activity over the next few years,” he said.

“It also indicates that detached house building activity contracted in October for the third consecutive month.

“However, we expect that the reduction in house building over the coming years will be quite measured compared with the apartment segment.”

According to the Australian Bureau of Statistics, private building approvals for apartments plunged by 16.3% to 9,166 in September, leaving the decline on a year earlier at 9.9%.

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