Interest rate rises affecting construction growth

The Australian Industry (Ai) Group/Housing Industry Association (HIA) Australian Performance of Construction Index (Australian PCI) fell again albeit slightly by 0.9 points to 45.3 in July, indicating contraction in activity across the construction sector for a second month.

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

The latest results follow four months of positive conditions, with respondents across all sectors citing rising interest rates as the main concern moving forward.

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Housing and engineering construction fell by 4.6 and 11.3 index points respectively to sit in contraction territory, with house building recording the lowest index points out of the four sub sectors at 34.6.

“Confidence in the housing sector has been adversely impacted by rising rates which will compound the rise in the cost of construction,” said HIA Economist, Thomas Devitt.

“This has not yet materialised in slowing sales or approvals of new homes and there is still a large volume of building work in the pipeline to complete.”

However, Devitt added it’s only a matter of time that the sector will start to slow down as less new orders enter the pipeline.

“Recent declines in confidence, as shown in this month's Australian PCI®, reflect an anticipation on the part of builders of less new work entering the pipeline in coming months as the RBA's current tightening cycle will, inevitably, bring an end to the boom," he said.

Ai Group Chief Policy Advisor, Peter Burn, said higher interest rates and the expectation of further rises were the major factors behind the reduction in orders.

“Lower new demand was matched with ongoing supply-side constraints as businesses face difficulties filling positions, people away with illness and delays in supplier deliveries,” he said.

Apartment construction recorded an 8.3 point increase to sit at 50, with the sector not growing nor contracting.

Conditions for commercial construction also improved slightly, up 4.4 points to 42.9 but still in contraction.

New orders, activity and supplier deliveries are all in contraction as the construction sector faces multiple challenges including material and labour shortage and ongoing interest rate rises.

The employment index improved slightly to sit at 53.0, up 2.2 from last month; while the wages index moderated from last month’s figures, down 7.3 points to 76.4.

Selling prices and input prices are both still at elevated levels, recording 87.1 and 93.8 points respectively. While the input prices index fell slightly from last month, the selling prices index has increased by 4.4 from June’s figures, indicating that builders are passing price hikes and higher costs on to customers.

Capacity utilisation moderated slightly to 80.6 per cent– the lowest it has been since August 2021.