The first Tuesday in May was something of a ‘Super Tuesday’ for economists, with an update on residential building approvals appearing in the morning, the RBA decision on interest rates in the afternoon and the Federal Budget for 2016/17 being unveiled in the evening.
The news on building approvals was positive, with the total number of new homes approved increasing by 3.7 per cent in March. Both detached houses and multi-units saw approvals increase, by 5.1 per cent and 2.4 per cent respectively during the month.
However, the underlying trend is for new dwelling approvals to ease back from the record levels reached during 2015. The pipeline of outstanding work still suggests that the amount of activity on the ground will remain elevated until much later in 2016 and there are increasing levels of multi-unit projects with building approvals waiting in the wings to commence.
The picture on residential approvals varies considerably between the states with New South Wales, Victoria and Queensland leading the way. Western Australia is six months into a slowdown.
The approvals for non-residential building were less positive, showing that the commercial and industrial building sectors are yet to recover, being down 23 per cent and 20 per cent respectively on 2015 levels. ACI forecasts are calling for improving prospects in the order of two to four per cent for the next few years.
The latest analysis of construction activity around the states and territories highlights that Victoria has taken over the top spot on the league table, while New South Wales has dropped from first to fifth. Another development in the latest Construction Monitor is that Queensland and Western Australia have dropped to the bottom of the league table. A resources boom hangover is never pretty. Despite difficulties in the natural resources sector, the Northern Territory still managed to grab second place in the rankings. Other placings included the ACT in third, Tasmania in fourth and South Australia in fifth place.
Super Tuesday also saw the RBA take advantage of the remarkably serene inflation conditions by reducing the official cash rate by 25 basis points to an all-time low of just 1.75 per cent. Speculation about an impending RBA rate cut soared after ABS data revealed that Australia’s annual rate of inflation fell to 1.3 per cent during the March 2016 quarter, with the overall price level actually falling during the quarter for the first time since the early days of the GFC. The talk of Australia being ‘in deflation’ is a bit overplayed; some of the price reductions over recent months are due to one-off factors such as oil price weaknesses.
The RBA was at pains to describe this decision as a reaction to the low inflation environment, but many commentators interpreted it as a sign that the economy was tanking. Most of the broader indicators of the economy’s health don’t support this view, but we are in an election period.
Perhaps due to concerns about poor press recently, unlike on previous occasions, the major banks were speedy in passing on the reduction to their mortgage borrowers. This was a positive development for homeowners and prospective homeowners, providing a modest boost to affordability conditions.
The fall in the Australian dollar since Super Tuesday will no doubt be one of the outcomes the RBA was seeking as it will improve our international competitiveness and add a little to inflationary pressures.
Hours after the RBA rate cut came the Treasurer’s Budget speech, the third element in the Super Tuesday trifecta. By most standards, it was a steady-as-she-goes budget. On the plus side, it was sweetened by a raft of measures affecting small businesses, including significantly widening the eligibility thresholds for the reduced company tax rate and extending the instant tax write off for equipment purchases. The commitment to maintaining the current capital gains and negative gearing regime was also welcome news for the property sector. Even the much-discussed changes to superannuation could have a silver lining by encouraging more direct investment in property outside of the super system for those about the $1.6 million cap.
The Budget’s commitment to significant infrastructure investment will also add a little gloss to some sectors of non-residential construction. The latest edition of the Construction Monitor discusses the difficulties affecting the non-res sector, particularly those related to mining activity, and provides detailed forecasts by subsector.
Overall, the combination of the Super Tuesday events will have a positive impact on the outlook for building. The outcome of the July Federal Election could of course see some change of direction on the policy front.