The value of construction work done fell by 0.3 per cent in the September quarter to be up by 3.5 per cent on a year ago – the strongest annual growth rate in 3½ years. But construction costs rose by 1.9 per cent in the quarter – the most in 13 years. Dwelling investment likely detracted from economic growth (GDP) in the quarter.

The value of construction work done plunged 8.1 per cent in NSW in the quarter – the most in 20½ years.

The value of alterations and additions (renovations) rose by 5.6 per cent in the September quarter to be up 18.8 per cent over the year. The value of renovation work hit a record high $2.91 billion.

What does it mean?

· Residential home building boomed in the first half of 2021. Construction work was supported by the Federal Government’s HomeBuilder grants, record low interest rates, state-based housing grants, first home buyer stamp duty exemptions, rising home prices and heightened connectedness to homes during the pandemic.

· But construction work came to a grinding halt in Australia’s south-east in the September quarter as the NSW and Victorian governments imposed ‘stay-at-home’ orders in Sydney and Melbourne due to Delta virus outbreaks. In fact, Sydney building sites fell silent between July 19 and 31 with strict social distancing measures put in place by the NSW government for workers “in areas of concern.”

· As expected, the fallout from rolling lockdowns was concentrated in the south-eastern corner of Australia with construction work done plunging by 8.1 per cent in NSW in the September quarter – the biggest decline in almost 21 years. And work fell by an even sharper 15.5 per cent in the nation’s capital, ACT – the most in 9 years. But the big surprise was the 5.8 per cent lift in construction work in Victoria (the biggest lift in 3½ years), with hours worked lifting by 0.4 per cent, defying expectations for a sharp decline due to government restrictions in September. And the construction boom continued in Queensland with work done up 5.5 per cent in the quarter – the biggest lift in 8 years.

· Total residential building was broadly flat in the September quarter, but was still up by a strong 7 per cent over the year. That said, new home building work fell by 1 per cent in the quarter to be up 5 per cent over the year. But the renovation frenzy continued during the pandemic with the value of alterations & additions lifting by 5.6 per cent in the quarter to be up by a massive 18.8 per cent on a year ago. In fact, the total value of renovation work hit a record high $2.91 billion!

· But some building projects are likely to have been affected by shortages of materials and lockdowns with commercial (non-residential) building down by 2.2 per cent, public construction work 2.7 per cent lower and engineering construction just 0.4 per cent higher in the September quarter. The disruption to building work from Delta lockdowns was short-lived with on-site building activity resuming quickly once government restrictions eased, supported by in acceleration in Covid-19 vaccination rates. In fact, the main leading indicator of construction activity – the Australian Industry Group (AiGroup) and HIA Australian Performance of Construction Index – recovered in both September and October after sharp contractions in both July and August.

· Home construction activity – especially detached housing commencements – is expected to remain elevated over the next 12-18 months as builders work through an extended backlog of (now delayed) HomeBuilder-related projects with land sales near record highs. And council approvals to build houses are still supportive of the home building pipeline, despite easing from record highs in recent months, reflecting the previous pull-forward of policy stimulus.

· Dwelling commencements could be nearing a peak as the HomeBuilder grant is pared back, property prices moderate and building costs surge. Of course, growing supply chain snarls, elevated freight costs, lower product availability and labour shortages have all combined to constrain output. Supply chain issues and rising labour cost pressures are likely to persist into 2022 until skilled inbound migrant workers return and pandemic demand-supply frictions subside.

· Commonwealth (CBA) Group economists estimate that the number of residential dwelling commencements will ease from 181,400 in 2020 to 178,600 by the end of 2021, before falling to 159,000 in 2022 due to slower population growth and some overbuild supply.

· But while residential building is expected to slow in 2022, CoreLogic and Cordell’s latest construction outlook report suggest there is still a healthy pipeline of infrastructure-related projects. In fact, there were 1,714 new construction projects at the end of October 2021, up 10.7 per cent over the past three months. Projects are valued at $14.7 million with the majority of projects located in Victoria (29.6 per cent) and NSW (25.7 per cent). Projects moving into the construction phase stood at 561 in October with an estimated value of $3.5 billion, dominated by civil engineering projects (28.2 per cent).

· And Macromonitor sees transport infrastructure construction and engineering surging by 32 per cent in financial year 2022, before peaking at $49 billion in 2023/24. The pipeline of major projects include Sydney’s Metro-West rail line and Melbourne’s North-East Link road, and regional works including Inland Rail and upgrades on the Bruce, Pacific, and Princes highways.

· As mentioned above, construction businesses continue to report ongoing supply delays and price hikes for building materials and inputs. Builders are reporting shortages for key materials, such as steel, timber, PVC pipes, electrical equipment, concrete, bricks and tiles – all driving up costs. Tradie shortages have emerged due to border closures with sub-contractor rates lifting, causing some construction delays.

· And today’s ABS data showed that in the September quarter, construction costs grew by 1.9 per cent – the biggest lift in 13 years! And building costs were up 2 per cent (the biggest lift in 17 years) and engineering costs lifted 1.7 per cent (the most in 2½ years).

What do you need to know?

Construction work done – September quarter, 2021

· Construction work done fell by 0.3 per cent in the September quarter with the value of construction work done up by 3.5 per cent on a year ago to $53.9 billion. It was the strongest annual growth rate in 3½ years.

· Private sector construction activity lifted 0.5 per cent in the September quarter and was up 4.2 per cent on a year ago – also the strongest annual pace in 3½ years.

· Public sector construction work dipped 2.7 per cent in the September quarter to be up 1.7 per cent on a year ago.

· Construction work rose in five states/territories in the September quarter: NSW (-8.1 per cent, the biggest fall in 20½ years); Victoria (+5.8 per cent, the most in 3½ years); Queensland (+5.5 per cent – the most in 8 years); South Australia (+0.4 per cent); Western Australia (-3.2 per cent, the biggest fall in 2½ years); Tasmania (+0.4 per cent); Northern Territory (+11.4 per cent); and the ACT (-15.5 per cent, the most in 9 years).

· Engineering work lifted 0.4 per cent in the September quarter to be up 4 per cent over the year.

· Commercial (non-residential) building fell by 2.2 per cent in the quarter to be down 2.4 per cent on the year.

· Total residential building was broadly flat in the quarter, but was up 7 per cent over the year.

· New home building work fell by 1 per cent in the quarter to be up 5 per cent over the year.

· Alterations & additions lifted 5.6 per cent in the September quarter to be up 18.8 per cent on the year. The value of renovation work was a record high $2.91 billion.

· Construction costs rose by 1.9 per cent in the September quarter (the most in 13 years); Building costs were up 2 per cent (the biggest lift in 17 years); and Engineering costs lifted 1.7 per cent (the most in 2½ years). Over the year, construction costs grew 3.9 per cent (12½-year high) with building costs up 4.3 per cent (12½-year high); and engineering costs climbed 3.3 per cent. (2-year high).

Originally published by Ryan Felsman, Senior Economist, CommSec