Construction drops again in November 2018 on weaker housing

housing stock image

The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) declined by 1.9 points to 44.5 in November 2018, signaling a third consecutive month of decline and the sharpest rate of contraction since February 2015 (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: “A further lift in infrastructure activity was not able to offset steeper falls in residential construction sub-sectors in November 2018. Across the construction sector as a whole, activity, employment and new orders all fell in the month which was the third consecutive month of contraction in this important part of the economy. The apartment building sub-sector has only expanded in three of the past 16 months as it unwinds from historical highs. While there are clear positives in the sector – particularly in infrastructure – the industry and the broader economy has become more vulnerable to a broader slowdown. In this environment, the potential impacts of adverse tax changes on residential building need to be considered very carefully in the lead-up to the federal election,” Dr Burn said.

HIA Acting Principal Economist, Geordan Murray, said: “The tightening in credit conditions initially hit the housing market back in 2017. The number of transactions started to ease and then prices began to fall. We are now clearly seeing the impact in construction activity. The index of the Australian PCI® tracking house building activity has now been contracting for five consecutive months while the index tracking apartment building activity has been contracting for eight consecutive months. The softening in new home building activity only had a small role to play in this disappointing GDP result. The contraction in new orders suggests that the drag on economic growth from falling levels of home building could become more significant over the year ahead,” Mr Murray said.

Australian PCI® – Key Findings for November 2018:

  • The activity index in the Australian PCI® contracted for a second month and at its sharpest rate in five and a half years (down 3.3 points to 41.6). This was associated with a continued drop in new orders (up 1.3 points to 45.8) while supplier deliveries fell into negative territory for the first time in 22 months (down 3.0 points to 47.9).
  • Construction employment continued to decline in November 2018 and at a faster rate, with the employment index dropping 3.7 points to 44.3.
  • Across the four construction sectors in the Australian PCI® in November 2018: despite continued growth in engineering construction activity (down 1.2 points to 54.0), overall levels of activity were weighed down by sharper falls in housing (down 2.6 points to 40.1) and apartment building work (down 2.3 points to 31.0) and a continued decline in commercial construction activity (down 0.1 points to 47.0).
  • The input prices index remained elevated in November 2018 (up 0.7 points to 73.1), amid robust demand for construction materials, elevated energy input costs and supplier price hikes related to strength in commodity prices.
  • Growth in wages also continued and at a faster rate (up 1.2 points to 61.6), with an elevated level of publicly-funded projects increasing skill shortages in occupations central to infrastructure activity.
  • The selling prices index continued to contract, albeit at a slower rate (up 2.8 points to 47.1), with the ongoing gap between the input and selling prices indices indicating that profit margins remain tight amid strong competition in securing work.

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