Construction shrinks for third consecutive month

The Australian Industry (Ai) Group/Housing Industry Association (HIA) Australian Performance of Construction Index (Australian PCI®) lifted by 2.6 points to 47.9 in August, indicating a slight easing of the contraction that is now in its third month.

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

While most sub indices are still in contraction, engineering construction and new orders have bucked the trend to record much stronger results than previous months, hence lifting the overall index slightly from July’s.

“Builders and constructors link much of the fall in activity to rises in interest rates in recent months,” said Ai Group Chief Policy Advisor, Peter Burn.

“There was a further fall in new orders in the house building segment in August. However, for the construction industry as a whole, new orders bucked the recent trend and were slightly up on the levels reported in July.

“Softer demand was also reflected in the steep fall in the selling price index even though input prices and wage increases remain elevated. While respondents reported ongoing difficulties in securing inputs, there are signs these constraints may ease over coming months.”

Across the sub sectors, only engineering construction recorded strong growth to sit in the expansion phase, while the rest remained sluggish and in contraction. The engineering construction index jumped 13.3 points to 56.8. The worst performer was apartment building, dropping a whopping 12.5 points to 37.5 in August. House construction also continued to contract amid rising interest rates, falling a further 1.3 points to 33.3.

"The RBA's cash rate increases have brought an end to the housing boom,” said HIA Economist, Thomas Devitt.

“Climbing borrowing costs are compounding the costs of construction that have surged on the back of land, labour and materials shortages. Fewer people are visiting display villages, sales volumes have dropped, and there is less lending for the purchase of new and existing homes.

“There is a risk that the enormous pipeline of work still to complete will obscure the impact of rising rates on the broader economy, resulting in unnecessary rate hikes from the RBA.”

The new orders index lifted 7.9 points to 52.9, although new orders for houses specifically have dropped.  Employment has dropped 5.3 points to 47.7, while selling prices have plunged 18.6 points to 68.5.

Input prices remain elevated at 92.6.

Capacity utilisation rose slightly to 82.6 per cent and remains elevated as it has been since the start of 2021.