Construction Index Falls Despite Apartment Surge 1

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Friday, June 6th, 2014
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Conditions in the building and construction industry within Australia deteriorated in May despite a healthy lift in readings for the apartment sector and continued strength in house building activity, the latest report suggests.

In May, the Australian Industry Group (Ai Group)-Housing Industry Association (HIA) Performance of Construction Index (Australian PCI®) came in at 46.7 – up 0.8 points from the previous reading in April but still below the 50.0 mark separating improving conditions from deteriorating conditions.

But whilst the reading marked the fifth consecutive month in which the index has been in negative territory overall – a reflection of the impact of the slowdown in mining – there were encouraging signs in some sectors, with house building recording its ninth consecutive month of growth and the reading for apartment building activity surging to its second highest level in more than four years (see chart).

Whilst the numbers are statistically volatile and caution should be observed in reading too much into singular monthly results, broader data suggests apartment building conditions have been improving since late last year: even after accounting for seasonal factors, the number of new multi-residential units approved for construction throughout the nation in the eight months to April (58,586) was up by more than a quarter compared with the eight months prior to that, building approval figures from the ABS show.

Ai Group Director – Public Policy Peter Burn welcomed the latest results, albeit noting that flat readings in the commercial sector were disappointing and the drop in mining activity was leaving capacity for expansion of other infrastructure activity.

“The rebalancing of the construction sector is gathering pace with a further decline in engineering construction in May partially offset by healthy expansions in house and apartment building, “Burn said”.

“Encouragingly, new orders in these residential sub-sectors are also on the rise although the easing of residential building approvals in recent months may temper medium-term expectations.”

HIA Chief Economist Harley Dale added that the fall back in the civil sector was not unexpected, but said the industry could ‘take some heart’ from the latest results in light of the strong reading in multi-residential and continued expansion of house building as well as the fact that the commercial sector – though flat – was close to expansion mode.

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Key points:

  • The Australian PCI® rose 0.8 points in May to come in at 46.7 – the fifth month on end the index has registered below the 50.0 mark separating improving conditions from deteriorating conditions
  • Whilst engineering (34.8) is dropping back, the sub index for house building (54.5) recorded its ninth consecutive month of expansion whilst apartment building  surged 7.0 points to 64.9 and commercial (49.7) remained virtually unchanged.
  • New orders (45.9 – down 0.7) contracted for a fifth consecutive month
  • Employment (47.1) contracted for a sixth consecutive month whilst wages (59.1 – up 2.2) continued to rise
  • Profit margins remain under pressure as selling prices (48.3) contracted notwithstanding the fact that input costs (66.1) continue to rise.
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  1. David Chandler OAM

    It is really time that the Australian Industry Group (Ai Group)-Housing Industry Association (HIA) Performance of Construction Index (Australian PCI®) was used to provide more insight into what's happening with Construction (including engineering and housing) in the Australian economy. While the major industry associations use this data to press governments to lower interest rates, open up more fringe urban land and ramp up infrastructure spend as a means of stimulating the domestic economy, the data does not track how much of this money now goes off-shore to import construction materials and in expatriated profits by Australia's increasingly foreign owned major contractors. Not good stimulating other economies unwittingly.