Finance Property Construction slowdown worsens as property prices fail to lift industry
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Construction slowdown worsens as property prices fail to lift industry

construction slump june 2019
Australia's construction slowdown has continued unabated – and that spells bad news for the rest of the economy. Photo: Getty
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Soaring property prices have so far failed to revive Australia’s ailing construction industry, with new house and unit orders continuing to fall.

And that means Australia’s economic outlook isn’t great.

According to the Australian Performance of Construction Index (PCI), construction activity fell for the 15th consecutive month in November.

The rate of decline in house building and new house orders eased up slightly. But the downturn in new apartment orders accelerated, and engineering activity fell off a cliff.

That resulted in significant job losses, with the PCI employment sub-index falling 8.4 points over the month.

And it means the sector, which employs 9.1 per cent of the Australian workforce, will continue to weigh on Australia’s weak economic growth.

“It’s pretty much in line with continued weakness in building approvals and residential construction,” AMP Capital senior economist Diana Mousina said of the data.

The persistent weakness in residential construction comes despite a rapid house price rebound that has seen values in Sydney and Melbourne grow at an annualised rate of roughly 25 per cent.

The strength of the house price rebound was one of the reasons why the Reserve Bank (RBA) on Tuesday held the official cash rate at 0.75 per cent.

Governor Philip Lowe said it should “lead to increased spending, including on residential construction”, without further rate cuts.

But while house prices have been rising for five months now, neither consumer spending nor construction activity have picked up.

And that spells bad news for an economy that has little to cheer about.

Why rising property prices aren’t helping the economy

Business investment, credit supply and wages growth are all performing worse than expected at the moment, while retail spending has made no contribution to GDP growth since mid-2018, according to Ms Mousina.

Property prices are the only data set showing sharp increases right now, albeit on low sales volumes.

But record high debt levels and stagnant wages growth mean home owners don’t feel any wealthier, and are consequently keeping their wallets firmly shut, as Wednesday’s GDP figures showed.

“Usually there is some relationship between home prices and consumer spending via the “wealth effect” and as households furnish their new homes,” Ms Mousina wrote in a note.

“But higher home prices this time round may not stimulate consumer spending as much, given the backdrop of poor consumer sentiment, low wages growth, high household debt and a rising unemployment rate.”

In the past, higher house prices have helped fire up the construction cycle, too.

Given the potential for larger profit margins, builders and developers are more inclined to build homes when house prices are rising, meaning construction activity normally moves in step with property values.

But this time it hasn’t.

According to the RBA, that’s partly because Australia has shifted towards building more high-density apartments, with almost as much investment spent on higher-density dwellings as detached houses.

These projects have much longer lead-times, as developers need to sell a high number of units before they can access the finance required to build the towers. And so the construction industry now takes longer to respond to shifts in demand.

Added to this is a whole suite of problems facing Australia’s off-the-plan sector that further delay the impact of rising property prices on construction activity – and on the economy more broadly.

Angie Zigomanis, director of research and strategy at Charter Keck Cramer, said demand from investors had dropped because of changes to foreign investment rules and issues of oversupply in some suburbs.

And he said prospective buyers had been put off by the series of high-profile evacuations and building defect scares.

“A lot of these things are conspiring to keep off-the-plan purchases out on market, and so the apartment industry won’t resolve itself as quickly as the house market will,” Mr Zigomanis told The New Daily.

“And because units are an investor-centric market, you’ll probably need the investor sentiment to turn around a lot more.”

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