Australian Construction Remains at Low Ebb 1

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Tuesday, December 2nd, 2014
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If you just focus on housing, you can kid yourself that the building industry is going to boost economic growth in the months ahead.

Not that the housing figures are looking particularly flash.

Yes, there was a bounce back in the number of approvals, a sizeable 11 per cent jump in October according to figures from the Australian Bureau of Statistics on Tuesday, but that just followed a fall of the same size in September.

The trend in the number of approvals is rising, but very slowly, by only 0.6 per cent a month, according to the bureau’s estimates.

That’s extending the gain of just three per cent over the year to October, but the trend has slowed dramatically.

Through the year before, residential approvals surged by 23 per cent, following a 22 per cent jump the year before that.

So growth in demand for new housing activity has hit the wall.

Even then, while the number of homes approved for construction is rising, their total value is falling, most likely because of the increasing importance of cheaper apartments rather than more expensive free-standing houses.

The trend in the value of residential building approvals is heading lower by a little more than one per cent a month.

But that’s only part of the story.

For every seven dollars spent on housing, a further three are spent on other buildings, such as office blocks and shops.

And the non-residential part of the building sector is much more variable than housing.

The value of approvals in that category fell to a six-month low in October.

In trend terms it is as low as it’s been since 2005.

Taken together, approvals for both residential and non-residential buildings are running at about five per cent of gross domestic product.

In normal times, something closer to six per cent would be typical.

So to get back to normal, the value of approvals would have to rise by about 20 per cent.

But, if anything, approvals are falling further from that norm.

When the Reserve Bank of Australia announced it would leave the cash rate at an ultra-low 2.5 per cent on Tuesday, it cited its expectation that economic growth would be “a little below trend for the next several quarters” as part of the background to the decision.

The building sector has a lot to do with that.

 

By Garry Shilson-Josling
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  1. Robert Taylor

    Given that a close crunching of today's numbers on commercial building indicates that the overall value of commercial building approvals over the past six months is down by around 10 percent in seasonally adjusted terms compared with the six months before that, there would certainly be some truth to this and some truth to the idea that commercial building activity has slackened.

    That said, though housing might not have much further room to grow, the 188,020 and 183,860 starts Housing Industry Association expects to take place this year and next still represents two of the strongest years on record in more than 30 years of ABS data. And construction employment levels are at near record highs. Things are not too bad.