Housing and major works drive construction

The national construction industry recorded a 16th consecutive month in positive territory in May 2018, with house building expanding strongly as the Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) eased slightly by 1.4 points to 54.0 (readings above 50 indicate expansion in activity, with the distance from 50 indicating the strength of the increase).

Ai Group Chief Economist, Julie Toth, said: “The construction industry is busier than ever in 2018, with strong demand across most major segments of the market. Residential construction activity remains elevated but it is clearly slowing from recent peaks, with house construction now taking the lead over apartments. Engineering construction continues to expand, as it works its way through a very large pipeline of transport and other major infrastructure projects. Commercial construction growth is evening out, but forward orders and planning approvals suggest a stronger period of activity still lies ahead in this sector,” Ms Toth said.

HIA Senior Economist, Geordan Murray, said: “The June 2018 update to the Australian PCI® continues to highlight how the drivers of growth in construction activity are changing as the economic cycle rolls on. The boom in apartment project commencements occurred back in 2016 and the peak level of construction activity owing to this spike has almost worked its way through the system. The apartment market is now in a contractionary phase but the level of activity remains high in a historic context. Detached house activity has been strong but relatively stable. The pace of expansion in this part of the market has been limited by the capacity to supply new residential lots. Throughout 2016 and 2017 there was a large number of off-the-plan sales in upcoming developments. This pipeline of off-the-plan sales should sustain an elevated level of home building over the year ahead as these developments progress,” Mr Murray said.

Australian PCI® – Key Findings for May 2018:

  • The construction industry’s 16th consecutive month of expansion was supported by continued growth in activity (up 2.6 points to 53.9) and new orders (down 1.6 points to 54.9). This was associated with a stronger increase in deliveries from suppliers (up 3.0 points to 56.7), but employment growth softened from April 2018’s 3½-year high (down 8.0 points to 51.5).
  • Across the four sub-sectors, house building (up 8.3 points to 58.6) and engineering construction (up 2.6 points to 55.8) were the major drivers of growth, while the pace of growth in commercial construction slowed significantly (down 11.4 points 52.6).
  • Apartment building activity declined for the ninth time in the past 10 months, if at a slower rate (up 3.5 points to 46.8), following a cooling in new orders over the second half of 2017.
  • Input price inflation escalated further in May 2018 (up 8.1 points to 82.6) on the back of energy costs and supplier price hikes related to commodity prices, while the pace of wages growth in wages appears to be gaining strength as demand for workers increases (up 3.6 points to 66.9).
  • The selling prices sub-index increased by 2.7 points to 6
  • construction activity
  • 0.4, suggesting that cost pressures are being passed on in part, but still not broadly given strong market competition.

Background: The Ai Group/HIA Australian PCI® is a seasonally adjusted national composite index based on the diffusion indexes for activity, orders/new business, deliveries and employment with varying weights. An Australian PCI® reading above 50 points indicates that construction activity is generally expanding; below 50, that it is declining. The distance from 50 is indicative of the strength of the expansion or decline.

Source: Ai Group