Construction falls into contraction

Following months of growth and stability, Australia's construction sector has dipped into contraction territory, with the Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) recording 46.2 points in June.

Readings below 50 indicate contraction in activity, with lower results indicating a stronger rate of contraction.

Three of the four construction sectors - housing, apartments and commercial – were in contraction last month with activity across the board falling significantly from the previous month.

Engineering construction was the only sub sector to hold strong and record an expansion in activity, climbing 5.3 points to 54.0.

House builders are facing the double whammy of supply issues and interest rate increases affecting the home buying market.

“Supply constraints for staff and materials are continuing to grow, with input prices setting a record in June,” said Ai Group Director of Research & Economics, Jeffrey Wilson.

“The effect of rising interest rates was evident across house building and apartments as builders reported a drop in enquiries and new orders," he said.

Detached houses seem to be the choice for a big chunk of the home buyers market, according to HIA Senior Economist, Nicholas Ward.

“There is a record volume of detached houses under construction, with more work entering the pipeline each month,” he said.

“With this large volume of work to be done, builders can expect to be at capacity in 2022 and 2023.”

Across the board, most indexes recorded big drops including new orders, supplier deliveries and employment. Input prices and selling prices have both went up further to sit at a sky high 95.5 and 80.4 points, indicating that builders are copping price hikes due to supply constraints, and have no choice but to pass on some of the cost to customers.  

Capacity utilisation moderated slightly to 82.4 per cent but remains elevated as it has been for much of 2021 and 2022.