The decline in Australian apartment construction is gathering pace

Photo: William West/AFP/Getty Images

Activity levels across Australia’s construction sector continued to improve in March, although at a slower pace than in February.

The Ai Group’s Performance of Construction Index (PCI) came in at 51.2, a decrease of 1.9 points on a month earlier.

Source: Ai Group

The PCI measures changes in activity levels across Australia’s construction sector from one month to the next, ranging from a score of 0 to 100.

A reading of 50 indicates that activity levels were unchanged from the previous month. Anything above this level points to an improvement in activity levels while anything below suggests that they declined. The distance away from 50 indicates how quickly activity levels improved or declined from a month earlier.

That means that 51.2, while activity levels improved in March, they did so at a slower pace than February.

And that improvement was entirely driven by detached housing construction, with all other components — including apartment construction — recording a drop in activity levels from a month earlier.

This table from the Ai Group shows how individual construction sectors fared in March.

Source: Ai Group

“House building activity continued to expand solidly in March with the sector’s activity subindex edging higher by 0.4 points to 61.3 points,” said the Ai Group.

“It marked the third consecutive month of growth in the house building sector, in line with a strong increase in new orders over much of this period.”

However, while activity in home building improved at a decent clip, the same can’t be said for other sectors of the construction industry.

Apartment, commercial and engineering construction all saw activity levels decline, and, in the case of apartment construction, at a faster pace than February.

While the slowdown in apartment construction is not all that unexpected given recent declines in building approvals and concern about overbuilding in some inner-city areas of Melbourne and Brisbane, the steep contraction in engineering construction — the fifth in the past six months — is slightly disappointing given hopes that public sector infrastructure investment would be able to offset continued weakness in mining sector investment.

“Despite reports of higher infrastructure activity, this is not offsetting the impact of the continued wind-down in major mining and heavy industry investment,” the Ai Group said.

And, if the new orders gauge is anything to go by, it looks like activity levels across Australia broader construction sector will likely slow further in the months ahead.

It fell by 3.7 points to 47.5, indicating that not only did new orders decline in March, but at the fastest pace in five months.

“New orders returned to negative territory in the engineering construction sector in March, and dropped at a steeper pace in apartment and commercial building sectors,” the Ai Group said.

The only sector to record an increase in new orders was housing construction, and that was a slower pace than February.

New orders for apartment and commercial construction have now fallen for seven and eight months respectively.

Despite the moderation in activity levels in March and decline in new orders, hiring across the sector actually accelerated, rising 1.7 points to 55.2.

That was the highest reading in six months.

That’s a good sign for employment growth in the official ABS figures in the months ahead, even if there are concerns over whether it can be sustained given weakening activity levels.

On the outlook for residential construction, Geordan Murray, an economist at the HIA who co-produces the PCI report, said that he anticipates “that this new phase of the cycle will be characterised by a marked contraction in apartment building, while an easing in detached house building is likely to be far more measured”.

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