The pace of home building contracted again in June as construction companies complained about facing increasingly squeezed profit margins, according to a survey of businesses in the industry.
The Australian Industry Group/Housing Industry Association Performance of Construction Index (PCI) report released on Friday said overall activity added 2.6 points on the previous month to 43.0 – a slight gain that leaves the measure below the 50-point mark separating expansion and contraction.
The PCI recorded a 15th month of shrinking apartment building activity and indications that house building contracted for the 11th month in a row.
Construction on commercial projects also retreated amid a further drop-off in demand, the index suggested, while engineering construction – which includes work on roads, bridges and utility supply systems – had a small increase in expansion.
The PCI report added that engineering work activity would likely expand in the near future.
“A solid pipeline of public infrastructure works (including transport and renewable energy projects) and new project additions by governments is likely to underpin more robust conditions for this sector over the months ahead,” it said.
But the survey results pointed to a marginally sharper drop in new orders for both houses and apartments in June, giving little indication of a short-term pick-up in demand or construction.
“It suggests that housing activity will remain subdued in coming months,” the report said.
Many construction companies noted in the poll that their costs remained relatively high while their selling prices continue to fall.
“The ongoing gap between these price series in the Australian PCI demonstrates that profit margins remain tight for many businesses in the construction industry,” the report said.
“Strong competition between builders… is pushing down construction selling prices,” the report noted, adding that there were “reports of a highly competitive quoting and tendering environment”.
“Australian PCI survey respondents continued to indicate significant cost pressures in the delivery of building projects due to elevated energy prices and relatively high prices for commodities and imported construction materials.”
The PCI wages sub-index implied that construction worker salaries edged higher in June although the pace of growth was unchanged from the previous month.
The summary put this down to what it said were widespread reports of companies having “difficulties in filling skilled vacancies,” especially with infrastructure construction-related occupations.
Employment across the sector contracted for the 11th month in a row, pointing to “caution among construction businesses in terms of additional job hiring”.
Ai Group policy head Peter Burn welcomed the slight easing in the rate of overall contraction but said he expected any recovery for the industry to take several months.
“Builders will be hoping the recent cuts to interest rates and the forthcoming reductions in income tax will help turn the market around,” he said.
Some businesses commented that they had noted an improvement in sentiment toward residential building after the May 18 federal election but the report added “there was also wide reporting of subdued market conditions amid the negative influences of tight lending conditions, falling prices and uncertainty surrounding the economic outlook”.
“Tuesday’s additional RBA interest rate cut, together with incoming tax cuts and potential loosening of APRA’s lending restrictions, will assist in stabilising the sharp downturn the market experienced over 2018,” HIA economist Tom Devitt said.