Home building in Australia just suddenly slowed

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  • Australia’s construction sector expanded at the slowest pace in over a year in June.
  • The deterioration was driven by a slowdown in housing construction and outright decline in apartment building.
  • New orders across the sector fell marginally, pointing to the likelihood of slower activity levels ahead.

Australia’s construction sector expanded at the slowest pace in over a year in June as residential activity weakened.

Like so many other housing market indicators recently, the APRA-led crackdown on risky lending now appears to be impacting housing construction.

The Australian Industry Group’s (Ai Group) Performance of Construction Index (PCI) fell to 50.6 points in June in seasonally adjusted terms, leaving it at the lowest level in 17-months.

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 50.7, while activity levels still improved, they did so at the slowest pace since early 2017.

Despite the steep moderation, seen in the chart below, activity levels have now improved every month over this period, the longest stretch of growth in the history of the survey.

Ai Group

The Ai Group said strength in commercial and engineering construction was offset by a slowdown in home building and another outright contraction in the apartment sector.

“Commercial construction was the strongest performing area of activity with its rate of growth lifting slightly in June. This reflects a range of projects in planning or underway including industrial, accommodation and education buildings,” the group said.

“Engineering construction expanded at a slower rate.

“However, June was the sector’s 15th consecutive month of growth amid on-going support from a strong and expanding pipeline of publicly funded investment in major infrastructure works.”

While those business-linked sectors saw activity levels continue to improve, there was a noticeable slowdown in housing construction, mirroring a steel drop in housing approvals in May.

“There was a near stabilisation of activity in the house building sector following a solid upturn in May and 12 months of generally moderately expanding conditions,” the Ai Group said.

According to data released by the ABS, building approvals for new houses slumped 8.6% in May to 9,545, leaving annual growth for detached dwelling approvals down 1.2%.

Fitting with prior weakness in apartment approvals, activity in that sector also declined for a fourth consecutive month.

“House building respondents cited support from a solid backlog of work, although there were reports of a softening in new orders, weaker new house sales and a more cautious approach by prospective buyers,” the Ai Group said.

“Apartment builders again pointed to the constraining influences on activity from a reduction in investor activity and project completions.”

The mixed performance across the construction industry was mirrored by the surveys activity subindexes with new orders and employment both falling modestly from May.

Construction, along with healthcare and retail, is one of Australia’s largest employing sectors.

For new orders — a lead indicator on activity levels in the months ahead — new orders for housing construction slowed to the lowest level in 13 months.

Similar outcomes were also seen in commercial and engineering sectors where order growth was marginal. Apartment orders fell sharply, albeit at a slightly slower pace than May.

Elsewhere, readings on wage growth, deliveries, along with input and selling prices, all grew at a slower pace than May.

Despite the moderation in price pressures, input prices continued to grow substantially faster than selling pressures, pointing to continued margin pressures for firms.

Capacity utilisation across the sector also slipped, falling 4.2 percentage points to 71.3%.

Ai Group

Shane Garrett, Senior Economist at Australia’s Housing Industry Association (HIA), put the slowdown in residential construction down to regulator and government policies.

“Apartment building activity is particularly sensitive to the restrictions on foreign investors which were tightened in recent state budgets in addition to more onerous APRA regulations with regard to interest-only loans,” he said.

“Such interventions risk undermining the capacity of rental markets in key growth areas and could slow down the pace of job creation and economic expansion.”

Despite those risks, neither APRA or state governments appear likely to water-down those restrictions in the period ahead.

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