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Record commercial building work to be done

Building activity; Engineering construction

New starts: The number of dwelling starts fell by 11.7 per cent in the September quarter after rising 1.5 per cent in the June quarter.

Work yet to be done: Total building and construction work yet to be done stood at $144 billion at the end of September, just off 4½-year highs but up 3.9 per cent on the year. Commercial building work yet to be done stands at record highs.

Building & building material companies are affected by dwelling starts including Boral, James Hardie, Adelaide Brighton, Lend Lease, CIMIC, Dulux and Brickworks.

What does it all mean?

• Fewer homes will be built over the coming year. And that is to be expected following the frenetic pace of building over 2014-2018. But there will be no shortage of work for the broader building and construction sectors. Over $140 billion of work is yet to be done. Commercial building work to be completed is at record highs with engineering work near 4-year highs. And that doesn’t include the raft of new infrastructure planned by state and territory governments. Rebuilding after the horrific bushfires will add to the work total as well in coming years.

• While off the absolute peak levels in 2012 – a total driven by mining activity – work yet to be done on building and construction projects is up almost 4 per cent over the year and near the highest levels in 4½ years.

• There is a perception that the economy is listing. But building and construction remains a bevy of activity and there is plenty of work to support building material providers, builders, tradespeople and professional services like architects. Outside the resources sector, a record amount of engineering work remains to be done.

What do the figures show?

Dwelling starts & work done

• The number of dwelling starts fell by 11.7 per cent in the September quarter after rising 1.5 per cent in the June quarter.

• House starts fell by 4.8 per cent in the September quarter after a 9.4 per cent fall in the June quarter. Apartment starts fell by 21.9 per cent in the September quarter after a 20.3 per cent increase in the June quarter.

• Work started on 180,972 new dwellings over the 12 months to September, down by 21.5 per cent on the year. Starts fell from the record high of 234,186 dwellings in the year to December 2016.

• Across Australia, starts in the September quarter fell in six states/territories: NSW (down by 19.5 per cent); Victoria (down by 9.7 per cent); Queensland (up by 3.0 per cent); South Australia (up by 1.9 per cent); Western Australia (down by 14.8 per cent); Tasmania (down by 4.6 per cent); Northern Territory (down by 18.5 per cent); and the ACT (down by 3.1 per cent).

• In the year to September, dwelling starts were higher than the decade average in only two of the states and territories: NSW (up 7.6 per cent) and Tasmania (up 17.0 per cent). Starts were below the decade average in: Victoria (down 0.2 per cent); Queensland (down 13.6 per cent); South Australia (down by 9.1 per cent); Western Australia (down by 35.4 per cent); Northern Territory (down 60.9 per cent); the ACT (down 7.6 per cent); and total Australia (down 5.9 per cent).

• In the September quarter residential and commercial building work done fell by 0.5 per cent. New residential work fell 3.4 per cent with alterations & additions down 0.3 per cent but commercial building rose by 3.8 per cent and engineering work rose by 0.5 per cent.

• The value of residential and commercial building work in the pipeline stood at $89.6 billion at the end of September, down by 7.1 per cent on a year ago and below the record-high of $99.2 billion at the end of June 2018.

• Across Australia, 201,317 homes are currently being built, down from a record 231,416 homes in March 2018.

• In the September quarter residential and commercial building work yet to be done (completed), stood at $69.8 billion, down 7.9 per cent on a year ago. Engineering work to be done stood at $74.1 billion, up 18.1 per cent on a year ago. Total building and construction work to be done stood at $144 billion at the end of September, just off 4½-year highs but up 3.9 per cent on the year.

What is the importance of the economic data?

• The Australian Bureau of Statistics releases data on dwelling commencements (starts) each quarter. The figures provide guidance on future construction activity. If construction begins on new houses or apartments, it signifies work for building trades.

What are the implications for interest rates and investors?

• Building and construction sectors face mixed prospects. Work to be done on commercial projects stands at record highs. Engineering work is near 5-year highs but dwelling construction is easing from unsustainable highs.

• When the word ‘decline’ or ‘fall’ is used, the perception is negative. But always the base needs to be considered as well as history. While some construction work levels have eased, in many sectors the decline is from super-normal or unsustainable levels. In NSW at the peak more than 70,000 apartments were being built. Prior to the last five years, a number of 25,000 apartments being built was considered a high level of building.

• The healthy levels of construction work to be done provides further complications for the Reserve Bank in its thinking about rates at the February 2020 Board meeting. The next two key events are the December job figures on January 23 and the Consumer Price Index (inflation) on January 29.

Craig James, Chief Economist, CommSec