Australia's residential building boom looks like it's past its peak

Picture: Red Bull

The value of Australian construction work done fell in the first three months of the year, according to data released by the ABS today, driven by a steep decline in residential construction which offset gains in non-residential and engineering work.

And that looks set to make a small negative contribution to Australia’s Q1 GDP report, scheduled for release in early June.

That’s not the best news given the weak contribution retail sales — something that will feed into household consumption — will make to the headline GDP figure.

According to the ABS, the value of work performed during the quarter fell by 0.7% to $46.417 billion in seasonally adjusted terms, with
a lift in public sector construction of 3% overridden by a 1.7% fall in private construction.

This chart from the Commonwealth Bank shows the split in the value for residential, non-residential and engineering work.

Source: CBA

The value of residential construction slumped by 4.7% to $17.219 billion, leaving it down 3.1% on the same quarter a year earlier.

Housing and apartment construction fell 3.8% and 5.5% respectively, while alternations and additions also declined by 6.3%.

While weak, Kristina Clifton, economist at the Commonwealth Bank, said that the recent trend in Australian building approvals suggests that residential building work will slow “but remain at fairly healthy levels”.

The decline in residential construction more than offset an increase of 1.0% in non-residential construction over the same period.

It rose by 1% to $9.008 billion, thanks largely to a sharp 18.7% lift in Victoria. It was largely flat year-on-year.

While a promising sign, particularly given the likelihood of further weakness in residential construction, Clifton doesn’t expect that it will herald the start of a strong uplift in non-residential activity.

“Non-residential approvals spiked higher late last year, but have since returned their average level of recent years,” says Clifton. “We would need to see a further lift in approvals in order to see this component of business investment lift meaningfully.”

Combined, total building work declined by 2.8% to $26.227 billion, leaving it down 2.1% on the same quarter in 2016.

While net-net a disappointing outcome, there was some better news for engineering construction with the value of work rising 2.2% to $20.19 billion, the first quarterly increase reported since the June quarter of 2015.

It was driven by a lift in public infrastructure works, notes Clifton.

“Engineering construction is getting a boost from the ramp up in infrastructure spending from the State governments,” she says.

Looking ahead, and in stark contrast to the trend seen in recent years, the outlook for construction activity will likely be dictated by whether an expected boost in engineering work will able to offset a likely slowdown in residential investment.

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