Conditions throughout Australia’s construction sector continue to worsen, with the latest data indicating that the building environment in May deteriorated at its fastest pace in six years.
In a report released last Friday, the Australian Industry Group and Housing Industry Association said that their Performance of Construction Index (Australia PCI®) dropped 2.2 points to 40.4 in May.
This represented the sharpest monthly deterioration in building conditions for six years and sees the index languishing well below the 50.0 level which separates improving conditions from deteriorating conditions.
Conditions deteriorated sharply in home building (34.4) and apartment building (37.7) and also deteriorated modestly in commercial building (44.3).
Engineering (50.3) was the only sector in which conditions improved.
Activity (39.7), employment (39.5) new orders (39.4) and selling prices (36.2) continued to fall whilst input prices (69.3) and wages (60.2) continue to rise but at a more moderate pace compared with averages over the past year.
That combination of falling selling prices and rising input prices implied by the report underscores ongoing profit margin concerns amid a competitive tendering environment and pressures associated with elevated levels of energy costs, relatively high prices for commodities and imported construction materials and widespread reports of challenges in filling skilled vacancies.
That said, the ‘decline’ in selling prices inferred by the report should be viewed with caution.
Numerous reports from quantity surveying firms actually indicate that construction tender prices are rising across most of Australia.
The most recent report from Arcadis, for example, indicates that tender prices throughout 2018 rose by 4.0 percent, 3.6 percent, 1.5 percent and 1.2 percent across Sydney, Melbourne, Brisbane and Perth respectively.
Noting that new orders had dropped at their steepest rate in four years, Ai Group Head of Policy, Peter Burn said the downturn in construction activity will likely continue over coming months notwithstanding encouraging signs planned infrastructure projects move through to construction.
He says the industry and its supply chain hope that lower interest rates will flow through to borrowers and help to address negative marketplace momentum.
HIA Economist Tom Devitt said there had been considerable housing market uncertainty in the lead up to the Federal election.
Whilst sentiment had improved since the election, Devitt says it is too soon as yet for this to translate through to activity on the ground.