Residential construction in deep contraction

September’s Australian Performance of Construction Index (Australian PCI®) fell a further 1.4 points to 46.5, indicating a fourth consecutive month of contraction across the construction sector.

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

According to Australian Industry (Ai) Group and Housing Industry Association (HIA), who adjust the index on a monthly basis, the latest drop was due to further contraction in the residential construction sub sector, with both house building and apartments dropping sharply into the 20s. Only commercial construction showed expansion, rising 13.3 points to 59.1 in September.

Engineering construction, who had a good month in August, dropped by almost 10 points to sit at 50.

Construction shrinks for third consecutive month

Mixed forecast for local construction industry

The new order index fell eight points to 43 in September, indicating slowing demand for new houses or buildings.

“Higher interest rates are clearly having a negative impact on the residential sectors and the lagged impact of recent increases is likely to drag these sectors lower over coming months as suggested by the sharp fall in new orders in these sectors,” said Ai Group Chief Policy Advisor, Peter Burn.

“Against this background, the Reserve Bank’s decision to slow the pace of its normalisation of interest rates will be of some comfort to house and apartment builders.”

HIA Senior Economist, Nicholas Ward, said while recent interest rate rises has slowed demand, it will take some time for builders to start feeling the pinch.

“Because builders built up a large pipeline of work during the pandemic, it will take a significant period of time for weaker demand to translate into weaker activity on the ground,” he said.

“Capacity utilisation amongst builders remains at very elevated levels, as they work through the pipeline."

Input prices, selling prices and wages continue to remain at elevated levels albeit slightly lower than their peaks a few months ago.

Supply side constraints continue to inhibit growth, but there are early signs of supply chain pressures easing, the report stated. Construction employment also improved, with the index rising 7.2 points to 54.9.

Capacity utilisation rose slightly to 83.2 per cent.