Rising prices and capacity squeeze slow construction growth

After hitting historic highs in March this year, the construction sector’s growth trajectory is starting to slow and stabilise, largely due to pricing and capacity constraints, according to the Australian Industry (Ai) Group and the Housing Industry Association (HIA).

The groups’ latest Australian Performance of Construction Index (Australian PCI®) fell by 2.8 points to 55.5 in June, with readings above 50 indicating expansion.

"Australia's construction industry continued its run of strong growth in June but the pace of expansion is slipping as it faces capacity constraints and rising input prices,” said Ai Group Head of Policy, Peter Burn.

“Input prices and wages are rising at well above their average pace and strong demand is pushing selling prices up too.”

The indices for input prices and selling prices both hit new record highs in June, increasing by 2.5 points to 98.3 and 7.0 points to 85.2 respectively. Reports of price increases from suppliers of materials and components have been consistent across the country, leaving builders with no choice but to pass on these cost increases to their customers, the latest report said.

Construction capacity utilisation also rose to a new record high of 85.4 per cent, a 2.9 per cent increase from the previous month. The new orders index increased by 0.9 points to 56.1.

“New orders were at very healthy levels indicating further expansion in the months ahead,” Dr Burn said.

“However, lag times are extending with capacity already stretched. It will be critical for governments, their agencies, and industry to work together to ensure that sufficient labour is available to deliver on the full range of infrastructure projects in the pipeline."

Across the four sub sectors, housing (down 2.3 points to 59.6), engineering (down 1.0 point to 58.4),  and commercial construction (up 1.4 points to 56.8) maintained strong growth in June.

However, apartment construction slid back into mild contractionary phase (down 1.3 points to 48.9) following several months of growth.

“This sector has been central to economic activity in Sydney and Melbourne for much of the past decade,” said HIA Economist, Tom Devitt.

“Constraints on the supply of building materials are flowing through as higher prices especially for detached housing.

“The pressure on materials prices and availability will ease as building product manufacturers continue to increase output of key materials including timber.”

In other indices, supplier deliveries were stable (down 8.5 points to 50.9), but builders across all sectors continue to report delivery delays and elevated freight pricing.

The employment index slowed from its record high in May but remained elevated (down 6.1 points to 58.3) as reports of skill shortages become more widespread across construction occupations and locations.

The wages index rose by 5.4 points to 70.4 in June, continuing to climb well above the long-term average for this index series, which sits at 59.6 points.