Despite strong residential build, Australia's construction sector is still contracting

Peter Macdiarmid/Getty Images

Australian construction is stuck in the slow lane, according to the release this morning of the AiGroup/HIA performance of construction index (PCI). Even though the index rose 0.7 points, it’s still well in the contraction zone with a print of 47.1 in July.

AiGroup said that all sub-indexes were contracting “including construction activity (down 1.0 point to 47.6) for a ninth consecutive month, and new orders (unchanged at 45.4), employment (up 2.0 points to 47.5) and deliveries from suppliers (up 3.6 points to 49.0)”.

Looking at the construction sub-sectors there are further signs of risk for the construction industry. That’s because the only real strength is being shown in the sector favoured by property investors. The apartment building sub-sector surged another 9 points to 62.

The risk here is that APRA’s efforts to rein in investor lending has seen a new pricing regime for investors who will now pay higher rates and have to find bigger deposits. That should impact demand.

Equally yesterday the CBA just sent out a big warning to property investors with its moves to lower the amount it will lend to developers. This again could impact this subsector.

Elsewhere in the construction industry the news wasn’t great. The PCI showed “house building was stable, declining 1.7 points to 50.0. Engineering construction activity contracted for a 13th consecutive month (down 2.2 points to 43.0) amid further drops in new engineering construction and investment. Commercial construction recorded a ninth consecutive month of contraction, declining a further 3.7 points to 45.2.”

HIA economist Diwa Hopkins said:

Today’s Australian PCI® results are consistent with the suite of indicators showing that conditions in non-detached housing are very strong, while detached house building has remained steady at elevated levels. With residential construction a labour-intensive subset of the broader construction sector, its performance has assisted overall employment outcomes during this latest upcycle. The employment sub-index of the Australian PCI® is now closer to being in expansionary territory compared with 18 months ago, when the residential construction recovery was still just gathering legs. Overall, today’s PCI results highlight the ongoing strength in residential construction and its role in mitigating weakness elsewhere in the broader domestic economy.

The problem is there is is only one driver of growth at the moment and APRA and the RBA have it in their sights.

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