Sluggish conditions continue in construction industry

February was another strong month for the house building sector as its Performance of Construction Index climbed another 1.6 points to 55, hence remaining in expansion and helping lift the overall construction performance index by 1.4 points to 42.7.

The index is adjusted monthly by The Australian Industry (Ai) Group and the Housing Industry Association (HIA).

Readings above 50 indicate expansion in activity while reading below 50 indicate contraction, with the distance from 50 indicating the strength of the increase or decrease.

A slight lift across multiple areas was observed in February, although nowhere near lifting the indices back into the black. The activity index was up 2.8 points to 45.1, new orders up 4.8 points to 45.7 and supplier deliveries up 2.5 points to 41.9.

Persistent soft demand in residential construction has seen the employment index again nosedive further, down 4.8 points to 36.9.

Of the four construction sectors in the Australian PCI, house building was again the best performing sector with activity expanding at its highest rate in almost two years, while apartment building remained firmly in negative territory (down 0.4 points to 35.9).

Across the major project sectors, engineering construction fell for a ninth month but at a slower rate (up 2.5 points to 40.5) while commercial construction contracted at its sharpest rate since mid-2013, notching a 19th consecutive month in negative territory (down 1.4 points to 37.5).

“A further lift in the house building sector during February partially offset sluggish conditions across the rest of the construction sector,” said Ai Group Head of Policy, Peter Burn.

“The return of growth in the house building sector is very welcome in these generally adverse conditions and the further rise in new orders in this part of the market suggests there are likely to be additional gains in the months ahead.”

According to HIA Economist, Angela Lillicrap, the ongoing growth in house prices will continue to boost confidence in the housing market.

“This, along with the current low interest rate environment, will support further growth in new home building,” she said.

“The apartment market continues to contract after a record number of completions. Apartment commencements are likely to pause while those that are currently under construction are completed and occupied.”

Cost pressures remain evident despite the input prices index easing by 4.9 points to 68.2. The selling prices index dropped a further 2.8 points to 43.0, with the wide gap between the price series suggesting profit margins remain tight for construction companies.

Growth in wages also continued in February, but at a slower pace compared to the previous month (down 5.1 points to 53.6).