Biggest lift in home building in 6 years

Record renovations
Construction work done

What happened? Construction work done rose by 2.4 per cent in the March quarter – the most in 3½ years. Home building rose by 5.1 per cent in the quarter – the biggest lift in 6 years – with alterations and additions (renovations) up by 10.8 per cent to record highs.

Implications: Shares of building materials companies and property developers continue to perform well due to strong building and renovation activity, boosting earnings growth. At the timing of writing, the S&P/ASX200 materials index is up 7 per cent year-to-date. The index is 70.6 per cent higher since the March 23, 2020 pandemic low with Boral (+277.7 per cent) among the strongest performers in the sector.

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

What does it all mean?

• Australia’s home building sector is booming, courtesy of record low interest rates and the HomeBuilder and state-based schemes. From the depths of the pandemic shock last year, home building has been super-charged by policy stimulus and homebuyer demand – especially for detached houses. In fact, the value of home construction work done surged 5.1 per cent in the March quarter – the biggest lift in 6 years – and new home building work rose by 4.1 per cent – the biggest lift in 5 years. Home construction surged 14.4 per cent in Western Australia and 10.2 per cent in Queensland in the quarter.

• Aussies have been busily upgrading their abodes after spending more time at home due to government-directed virus restrictions. The value of renovations construction work surged by 10.8 per cent in the March quarter – the most since June 2000 – to a record high $2.84 billion.

• Public construction work (up 4.3 per cent) and engineering construction (up 2.2 per cent) picked up at the beginning of 2021 as the federal and state governments swung into action, committing to new road, rail and other infrastructure projects, including utilities and school upgrades.

• Home construction activity – especially for detached houses – is expected to remain elevated over the remainder of 2021. While record council approvals to build houses are still-supportive of the home building pipeline, dwelling commencements could be near a peak as the HomeBuilder grant is pared back, and property prices and building costs surge.

• Builders are reporting shortages for key materials, such as steel, timber, concrete, bricks and tiles – driving up costs. Tradie shortages are emerging with sub-contractor rates lifting, causing some construction delays. Over the year to March, construction costs rose by just 0.5 per cent with building costs up 0.8 per cent. But expect these annual growth rates to jump in the coming quarters.

• So what does this mean for investors? In the Federal Budget, the government extended the construction commencement requirement period for the HomeBuilder support package from 6 months to 18 months for all applications. Policy stimulus, record low borrowing costs and strong demand for new houses and renovations continue to support the earnings of Aussie building materials companies and property developers.

• Construction companies are also likely to benefit from the federal government’s additional $15.2 billion spend on infrastructure projects, also announced in the Budget. Big builders, developers and engineering services companies could see an uplift in earnings on project wins amid an upswing in infrastructure work yet to be done. Adbri and Boral are most exposed to the lucrative Aussie metropolitan markets with vertically integrated footprints on the East Coast.

What do you need to know?

• Construction work done rose by 2.4 per cent in the March quarter – the most in 3½ years. But the value of construction work done is still down by 1.1 per cent on a year ago to $51.98 billion after hitting decade lows of $50.78 billion in the December quarter, 2020.

• Public sector construction work lifted 4.3 per cent – the most in 3 years – in the quarter. And private sector activity increased 1.7 per cent in the March quarter.

• Construction work rose in four states/territories in the March quarter: NSW (+3.6 per cent); Victoria (-3.7 per cent); Queensland (-1.7 per cent); South Australia (+9 per cent – the most in 3 years); Western Australia (+9.8 per cent – the most in 3½ years); Tasmania (-6.2 per cent); Northern Territory (-16.4 per cent); and the ACT (+3.6 per cent).

• Engineering work lifted 2.2 per cent in the March quarter to be down by just 0.3 per cent over the year.

• Commercial (non-residential) building fell by 1.6 per cent in the quarter to be down 10.4 per cent on the year – the biggest annual decline in 9½ years.

• Home building rose by 5.1 per cent in the quarter – the biggest lift in 6 years – to be up 4.2 per cent over the year.

• Alterations & additions climbed by 10.8 per cent in the March quarter – the most in almost 21 years – to record highs of $2.84 billion.

• New home building work rose by 4.1 per cent in the quarter – the biggest lift in 5 years.

• Construction costs rose by 0.2 per cent in the March quarter, with building costs up 0.4 per cent and engineering costs down by 0.1 per cent. Over the year, construction costs rose by 0.5 per cent with building costs up 0.8 per cent and engineering costs broadly flat.