Construction activity contracts in October 2018

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The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) declined by 2.9 points to 46.4 in October 2018, signaling a second consecutive month of decline after 19 months of growth and the sharpest rate of contraction since October 2016 (readings below 50 indicate contraction in activity, with the distance from 50 indicating the strength of the decrease).

Ai Group Head of Policy, Peter Burn, said: “The decline in overall construction activity gathered momentum in October 2018 as the Australian PCI® dropped to 46.4 with residential and commercial sectors contracting during the month. The longstanding wind-down of boom conditions in apartment building continued and was reinforced by further declines in the volume of work in the house building sector. To date there has been an orderly retreat from boom conditions in the apartment sector but the outlook is now very sensitive to any further increases in borrowing costs and possible changes in tax policy settings. In contrast to conditions in residential and commercial construction, engineering construction grew further and faster (in trend terms) in October 2018, playing an important counter-cyclical role and moderating the pace of job-loss across the broader industry. Looking ahead, conditions look more fragile than they have for some time with new orders declining further into negative territory driven by weakness in the apartment and commercial construction sectors with flat-to-steady pipelines of new work for the rest of the industry,” Dr Burn said.

HIA Acting Principal Economist, Geordan Murray, said: “The Australian PCI® provides further evidence that the residential building cycle is progressing into a mature phase. Based on current indicators, we know there is still a large volume of residential building work underway and in the pipeline. As we work through the existing pipeline there will be less new work coming in behind it. The new orders index for apartments slipped further into contractionary territory in October 2018. New orders for detached houses recovered from September 2018’s contraction but is merely holding ground in October 2018. The tighter lending environment is having a direct impact on activity in the housing market. Home prices in Melbourne and Sydney are easing and we are seeing fewer transactions. This is partly due to APRA’s interventions in the mortgage market and partly due to lenders pre-empting the outcome of the Royal Commission. The economic environment that supported the expansion of residential building over the last few years has passed. The housing market has cooled and activity in the residential building sector is set to contract over the year ahead. At this juncture it will be important for the regulators to monitor the impact of their earlier interventions to ensure policy settings remain appropriate in the new phase of the cycle,” Ms Hopkins said.

Australian PCI® – Key Findings for October 2018:

  • The activity index in the Australian PCI® contracted sharply in October 2018 (down 7.1 points to 44.9) after moving into mild positive territory in September 2018. This was associated with a more pronounced reduction in new orders (down 2.6 points to 44.5) while supplier deliveries fell 1.5 points to a roughly stable 50.9.
  • Employment contracted for a third consecutive month, albeit at a slower rate (up 1.1 points to 48.0).
  • Across the four construction sectors in the Australian PCI®, overall levels of activity were adversely affected by a faster decline in housing building (down 1.6 points to 44.8), commercial construction (down 1.3 points to 45.6) and apartment building (down 1.7 points to 34.4), despite continued expansion in engineering construction (up 1.2 points to 58.8).
  • The input prices index remained elevated in October 2018 (down 3.7 points to 72.4), while growth in wages also continued (down 0.2 points to 60.4).
  • The selling prices index decreased by 6.3 points to 44.3, highlighting the strong competition between builders. The ongoing gap between the input and selling prices indices indicates that profit margins remain tight for businesses in the construction industry.

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