Supply issues and high input costs hamper construction growth

The rising costs of material and labour, combined with supply issues continue to put pressure on the construction industry as activity continues to fall across the sector, according to the Australian Industry (Ai) Group and Housing Industry Association (HIA) Australian Performance of Construction Index (Australian PCI®) for May 2022.

Out of four sub sectors, three went into contraction, with engineering construction staying in mildly positive territory at 51.8. Readings above 50 indicate expansion with the distance from 50 indicating the strength of expansion.

Housing, apartment and commercial construction fell sharply from April numbers, with commercial suffering the biggest drop of 11.4 points to sit at 46.9. House building also fell sharply by 9.9 points to 43.5.

“Construction industry activity fell in May in the face of ongoing disruptions to the supply of inputs; difficulties filling positions; and the solid pace of cost increases,” said Ai Group Chief Policy Advisor, Peter Burn.

“These forces are pushing out project completion times.

“Selling prices also continue to rise as constructors and builders recover some of their higher costs in the market although the inability of some to pass on costs that were not anticipated when contracts were put in place is testing the viability of some industry members.”

According to HIA Economist, Tom Devitt, builders continue to be stretched by overwhelming demand and a strong pipeline but with limited material and increased costs.

“These supply and demand factors will keep Australia’s already-stretched builders busy, with the volume of homes under construction remaining very elevated into 2024,” he said.

“Affordability constraints and the return of overseas migrants, students and tourists will also further support multi-unit construction.

“While this will delay the adverse impact of rising rates on the industry, and therefore the wider economy, it will also ensure that the shortage of building materials and labour will continue to be the main pinch point for the industry.”

In the face of elevated costs, supply constraints and interest rate rises, new orders fell by 5.3 points in May but still sitting in expansion.

The input and selling prices indices didn’t stray much from April numbers but remain extremely elevated at 91.2 and 80.4 respectively, reflecting the cost pressures builders face and the cost they need to pass on to customers.

Capacity utilisation moderated slightly to 85.6 per cent but remains elevated as it has been for much of 2021 and 2022.