Construction decline moderates as housing industry stabilises

It has been a slow 14 months for Australia’s construction sector, with little to no relief across all sub sectors except the housing sector which is starting to show some signs of life.

The Australian Performance of Construction Index (PCI) compiled by the Australian Industry Group and Housing Industry Association climbed 1.3 points to 43.9 in October, indicating a slight easing in the construction industry’s overall rate of contraction.

Readings below 50 indicate contraction with the distance from 50 indicating the strength of contraction.

Across all four sub sectors, apartment building continue to be the worst performing one – sitting at 37.4 points. Engineering construction continue to slip and at the sharpest rate in six years to sit at 36.6 points. Commercial construction also remained in negative territory for the 15th straight month.

Housing construction was perhaps the only silver lining in the report, climbing 1.8 points to 48.2 in October.

According to the experts, this could be due to interest rate reductions taking effect.

“The improvement in housing markets since mid-year, particularly in Sydney and Melbourne, is beginning to restore confidence," said HIA Senior Economist, Geordan Murray.

“The improvement is clearly evident in the sub-indexes tracking construction activity and new orders for detached houses, but the indicators tracking the apartment sector continue to highlight that a significant contraction is underway.

“It will be some time before the residential building sector is once again expanding; in the meantime low interest rates will provide support.”

Commenting on the decline in engineering and commercial construction, Ai Group Head of Policy, Peter Burn, said urgent action is needed to lift activity in those sectors as well as across the entire industry.

“Commercial construction activity remains subdued and concerns persist among engineering construction businesses about the current lull in infrastructure activity,” he said.

“This highlights the need to shore-up decision making on infrastructure projects to help inject additional stimulus across the wider construction industry.”

Other good news include slight lifts in the new order and employment sub-indices, which rose 1.6 points each to sit at 43.8 and 47.8 points respectively.

The input prices index increased by 0.8 points to 65.8, with elevated energy costs and supplier price rises continuing to exert upward pressure on prices. Growth in wages also continued in October and at a faster pace (up 7.1 points to 62.9), further pointing to difficulty in sourcing skilled labour.

The selling prices index continued to contract in October, albeit at a slower rate (up 3.6 points to 44.6), indicating that rising input prices and other costs are not, on average, being passed on to customers. The ongoing gap between selling and input prices mean profit margins continue to be squeezed for businesses in the construction industry.