Construction work

Construction softens: Construction work fell by 0.2 per cent in the June quarter.

Construction details: Commercial building work done fell by 1.2 per cent in the June quarter with residential work down 2.4 per cent while engineering work rose by 0.9 per cent.

Apartments in vogue. The majority of residential work to be done (54 per cent) is apartments, as opposed to free-standing houses.

Economic growth implications: The drop in residential construction will reduce economic growth in the June quarter by around 0.1 percentage point.

What does it all mean?

There were few surprises in the latest construction data. There is still a healthy amount of work yet to be done, or in the pipeline. But while the amount of work being done in engineering is healthy, the residential sector is weak and commercial construction is patchy.

Residential building work has now fallen for five straight quarters with both new projects and renovation work lower. Commercial building has fallen in five of the past six quarters. So clearly life is tough for builders and trades servicing the traditional building sector.

The only joy is to be found in engineering work, like roads, bridges and dams. Engineering work done in the latest quarter was over 30 per cent higher than a year ago. While some mining companies are assessing the viability of future projects, engineering work looks set to remain strong at least in the short term.

It was a case of reversal of fortunes when looking at the latest state and territory figures on construction. In the June quarter, work in high-flying Western Australia actually eased by over nine per cent whereas construction work in the beleaguered Tasmanian economy rose by 23 per cent.

The Reserve Bank has few worries when it comes to cost pressures in the construction sector. Building costs are growing at the slowest pace in over two years. And while engineering costs are up 2.3 per cent on a year ago, this is well below both 10-year and 20-year averages.

Apartments are clearly are in vogue across Australia. More than half of all residential work to be done is in new apartment buildings. Around a decade ago, only a third of work in the residential sector was accounted for by apartments.

What do the figures show?

Construction Work
Construction work done fell by 0.2 per cent in real (inflation-adjusted) terms in the June quarter, the second fall in three quarters. But work done is still up 14.6 per cent on a year ago. Public sector construction work rose by 1.6 per cent while private sector activity fell by 0.7 per cent.

Only three of the states and territories recorded weaker output in the June quarter: Western Australia (down 9.3 per cent); South Australia (down 6.0 per cent); and Victoria (down 2.8 per cent). Construction work rose most in Northern Territory (up 30.4 per cent) followed by Tasmania (up 22.9 per cent), ACT (up 12.8 per cent), Queensland (up 6.3 per cent) and NSW (up 4.0 per cent).

Engineering work rose by 0.9 per cent in the June quarter after soaring 15.1 per cent in the March quarter. Private sector activity was down 0.7 per cent but public sector work rose by 5.3 per cent. Engineering construction is up 31.4 per cent on a year ago.

Commercial (non-residential) building fell by 1.2 per cent in the June quarter – the third straight decline. Private sector work was up 1.2 per cent.

Residential building fell by 2.4 per cent in the June quarter – the fifth straight decline. Private sector work was down by 1.7 per cent.
Alterations & additions fell by 2.3 per cent while new residential work fell by 2.5 per cent.

The value of building work yet to be done (excludes engineering) fell by 1.3 per cent to $41.8 billion in the June quarter. The value of building work yet to be done is still up 1.4 per cent on a year ago.

Building that has been approved but not commenced rose by 4.2 per cent in the June quarter and was up 6.3 per cent on a year ago.

Work in the pipeline eased by just 0.1 per cent in the June quarter.

The measure of inflation in the construction sector (deflator) rose by 0.7 per cent in the June quarter – the strongest gain in a year. But the annual rate of construction inflation is low at 1.5 per cent. Engineering prices rose by 1.0 per cent in the quarter (2.3 per cent annual) while building prices rose 0.2 per cent in the quarter (0.3 per cent annual – the slowest growth in two years).

What is the importance of the economic data?

The Bureau of Statistics releases quarterly estimates of Construction work done. The estimates are based on a survey and cover around 80 per cent of the construction work done in the period. Revised estimates will be released in coming months. The data is useful largely for historical purposes but the work yet to be done estimates provide an early warning signal of future activity. The residential work figures give a good early guide to the strength of residential investment in the national accounts.

What are the implications for interest rates and investors?

Building work is falling, not rising. So as a consequence the engineering sector is forced to prop up work levels in the broader construction sector. Add in the fact that construction costs are tame and the pipeline of work has potential to reduce, especially as companies scrutinise new projects, and it is clear why rate cuts must stay on the Reserve Bank’s agenda.

It is certainly not all doom and gloom. Looking at construction more broadly, the amount of real work done in the past quarter was only a smidgen below record highs. And the pipeline of activity in the building sector is still relatively healthy. The problem is that the work being completed in the building sector is consistently lower than the previous quarter, and that’s hardly good news for construction trades.

The ongoing shift to apartments and the trend towards greater utilisation of homes are two factors serving to restrain new construction. These developments have implications for residential construction builders and developers, potentially restraining activity over the medium-term rather than just the next few quarters.