Omicron drives construction activity down

The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) fell by 11.1 points to 45.9 in December 2021 and January 2022, indicating a reversal of November’s recovery and the index’s weakest result since August 2021. (Readings below 50 indicate contraction in activity, with lower results indicating a faster contraction.)

According to industry experts, the latest slump in construction activity was driven by labour and material supply disruptions as well as a drop in overall confidence associated with the rapid spread of the COVID-19 Omicron strain.

The last times a major slump into contraction happened was when COVID-19 first struck in early 2020, and again in the second half of 2021 when the Delta strain caused major havoc and lockdowns across the country.

Out of the four sub sectors, apartment and commercial construction experienced the steepest fall with apartment building recording a whopping 34.9 points drop in its activity index to sit at 21.4 for December 2021 and January 2022.

Commercial construction’s index fell by 29.3 points to 39.5, while housing construction fared only slightly better (down 6.6 points to 40.0).

Finally, engineering construction managed to stay in the neutral zone at 50.0 (no expansion nor contraction), albeit recording a big drop of 16.7 points from November 2021 readings.

The indexes for activity, new orders and supplier deliveries were all significantly down from November and in the contraction phase, recording 41.1, 47.7 and 34.4 respectively. Queensland was the only state to report activity growth across the period.

The index for input prices remained strong at 96.0 in December and January as demand for building materials and house-building supplies remained high. The selling prices index rose 3.4 points to 81.4 and has been elevated for the past year, indicating builders continue to pass on their cost increases.

The average wages index nudged up 2.7 points to 76.0 while the employment index eased but remained expansionary (down 2.5 points to 56.5), marking 16 months of employment growth and recovery from the lows of 2020.

Capacity utilisation decelerated but remained elevated at 82.3 per cent of available capacity being utilised across the construction industry.

“Builders and constructors are hoping the reductions in COVID-19 infections evident over the past couple of weeks will ease some of the extra constraints evident over the past couple of months but they, like everyone else, are geared for further uncertainty and volatility," said Ai Group Chief Policy Advisor, Peter Burn.

Following an extraordinary period of growth in the housing sector in the past year or so, thanks mainly to the Government’s HomeBuilder incentive, the end of the current boom is nigh due to imminent interest rate rises, according to HIA Economist, Tom Devitt.

“At their meeting this week, the RBA reinforced its willingness to be patient for supply chain issues to resolve themselves before raising their cash rate,” he said.

“The RBA's first cash rate increase is expected to officially mark the end of the current boom.”

In addition, the issue of demand outstripping supply continues to put pressure on builders to deliver projects on schedule despite labour and supply shortages.

“Home builders are still limited by the availability of land, labour and materials,” he said.

“The HomeBuilder pipeline has only recently started reaching completion, with many more completions to come.

“Ongoing demand as part of the shift in homebuyer preferences towards more space and greater amenity will continue to keep builders busy into 2023.”