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Biggest annual fall in NSW construction work in 19 years

Construction costs hit decade low
Construction work done

Construction activity: Construction work done fell by 1.0 per cent in the March quarter (consensus: -1.5 per cent) – the third fall in four quarters. The value of construction work done is down by 6.5 per cent on a year ago. In NSW, the value of construction work fell by 8.1 per cent in the quarter to be down by 17.3 per cent over the year – the biggest annual decline in almost 19 years.

Construction costs fell by 0.1 per cent in the March quarter, with building costs flat and engineering costs down by 0.2 per cent. Over the year, construction costs rose by 0.9 per cent (equal slowest pace in almost 10 years) with building costs up 0.4 per cent (slowest pace in seven years) and engineering costs up by 1.5 per cent (slowest in 3 years).

The data on construction work is important for builders, building material companies and developers.

What does it all mean?

• While some Aussies have taken advantage of the ‘stay-at-home’ orders during the virus crisis to renovate their homes, it could be an even better time to build or buy your new dream home. And proposals from the Property Council of Australia could mean that buyers of newly-constructed abodes receive $50,000 cash from the Federal government.

• For budding new home owners the timing couldn’t be better as we try to kick-start the economy. In fact, construction costs grew in March by just 0.9 per cent from a year ago – the equal slowest pace since June 2010. And annual building costs were up by just 0.4 per cent – the slowest pace of growth in 7 years.

• Construction work across Australia was easing prior to the virus-driven lockdown with activity weakening over the past two years due to the slowdown in residential home building, moderation in non-mining infrastructure commencements, easing in population growth and bushfire disruptions (especially in NSW). But public transport infrastructure projects, focusing on roads, railways and airports continue to support broader construction activity.

• The construction sector is a vital cog in the Aussie economic recovery. The sector broadly represents about 17 per cent of all Aussie businesses and employs around 1.2 million workers (or 9.1 per cent of the total workforce) – the third largest across all industries – according to the Bureau of Statistics.

• Even though the construction industry wasn’t subject to mandatory shutdown measures at the height of the virus crisis, builders and engineers have reported declines in building activity due to weaker demand. In fact, the AiGroup’s monthly construction survey highlighted the challenges for businesses with major new and existing projects being withdrawn or postponed, enquiries and new orders declining, and contracts cancelled.

• So with residential building likely to remain under pressure due to declining population growth, what can be done to support the construction sector? Well, all layers of governments have already begun fast-tracking infrastructure projects nationwide by peeling back ‘red tape’ around planning legislations, development applications, rezoning and maintenance.

• ‘Shovel ready’ nation building projects are sprouting up everywhere as the economy gradually reopens. Victoria recently announced $2.7 billion worth of spending, including the building and modernising of schools. NSW has fast tracked 24 projects – worth around $7.5 billion – including the $1.5 billion redevelopment of the Mt Druitt CBD in western Sydney. And regional areas haven’t been forgotten with the Palaszczuk Government’s $365 million ‘Building our Regions’ program detailing 48 new council projects in Queensland. In South Australia, the Marshall government is expediting $120 million of funding for regional road projects.

What do the figures show?

Construction work done – March quarter

• Construction work done fell by 1.0 per cent in the March quarter – the third fall in four quarters. The value of construction work done is down by 6.5 per cent on a year ago.

• Public sector construction work fell by 2.5 per cent in the quarter after a 0.4 per cent lift in the December quarter.

• Private sector activity fell by 0.6 per cent in the March quarter – the fifth successive quarterly fall.

• Construction work rose in six states and territories in the March quarter: NSW (down 8.1 per cent); Victoria (up 3.2 per cent); Queensland (up 0.1 per cent); South Australia (up 1.1 per cent); Western Australia (up 4.4 per cent); Tasmania (up 0.5 per cent); Northern Territory (down 18.3 per cent); and the ACT (up 5.3 per cent).

• Engineering work fell by 1.1 per cent in the March quarter – the eighth straight decline. Work done is down by 4.4 per cent over the year.

• Commercial (non-residential) building was broadly flat in the March quarter after falling by 2.1 per cent in the December quarter. Work done is down by 0.3 per cent on the year.

• Residential building fell by 1.6 per cent in the March quarter – the seventh straight decline. Work done is down 12.5 per cent over the year – the equal biggest annual fall in almost 19 years.

• Alterations & additions rose by 1.6 per cent in the quarter to be also be up by 1.6 per cent over the year.

• New residential work fell by 2.1 per cent over the quarter and by 14.4 per cent over the year to March – the biggest annual fall in almost 19 years.

• Construction costs fell by 0.1 per cent in the March quarter, with building costs flat and engineering costs down by 0.2 per cent. Over the year, construction costs rose by 0.9 per cent (equal slowest pace in almost 10 years) with building costs up 0.4 per cent (slowest pace in seven years) and engineering costs up by 1.5 per cent (slowest in 3 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 85 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?

• There a fairly healthy public pipeline of infrastructure projects still in place, but the construction industry and its observers will continue to nervously focus on developments in residential property – it’s a national pastime after all!

• The economic downturn and restrictions on inbound international migration will likely limit growth in residential building construction. In fact, the Australian government recently announced that it expected net overseas migration to fall by around 30 per cent in 2019/20 and by a whopping 85 per cent in 2020/21 should Australia’s borders remain shut. Of course, this will weigh heavily on Aussie residential construction, which Commonwealth Bank (CBA) Group economists expect to fall by around 9 per cent in 2020/21.

• And the ongoing fall in residential work and private sector engineering projects (LNG project delays) means that dwelling investment will again be a modest drag (around 0.1 percentage points) on economic growth in the March quarter. Private non-residential construction will provide a near zero contribution to growth.

• We will get another piece of the ‘GDP puzzle’ tomorrow with business investment data. The data will likely show an easing of building/construction investment by Aussie businesses.

• But it’s not all bad news with all layers of government determined to re-start the economy, led by nation-building initiatives. Outside of public transport, other potential areas of construction growth include social housing and green infrastructure projects focusing on renewable energy. And tourism, water and energy-related projects could also feature prominently.

• Now is the time to build infrastructure with borrowing costs at record low levels and Aussie businesses under pressure. And with Aussie incomes stretched and unemployment rising, the shortage in social housing, in particular, will become more acute. So the onus is on governments to provide funding to support these projects to keep Aussie tradies and builders in jobs, while supporting our most vulnerable.

Published by Ryan Felsman, Senior Economist, CommSec