Construction new orders continue to decline

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AUSTRALIA’S construction sector contracted for a second consecutive month in July, following four months of positive or stable conditions, as the growing interest rate environment caused a drop in new orders.

The latest Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (PCI) fell slightly by 0.9 points to 45.3 in July. Readings below 50 indicate contraction in activity, with lower results indicating a stronger rate of contraction.

Commercial construction (up 4.4, but in contraction territory at 42.9) , house building (down 4.6 to 34.6) and engineering construction (down 11.3 to 45.8) all reported falls in activity. Apartment activity (up 8.3 to 50.0) was stable following a steep fall in June.

The construction sector experienced falling orders – down 2.7 to 43.1 – with the housing sector weighing most heavily.

“Respondents reported that higher interest rates and the expectation of further rises were the major factors behind the reduction in orders,” said Peter Burn, chief policy advisor at the national employer association Ai Group said.

The Reserve Bank raised interest rates again on Tuesday, to 1.85%, and warned there are further hikes ahead, with some economists tipping rates will peak at 3.6%.

Burn said lower new demand was matched with ongoing supply-side constraints as businesses face difficulties filling positions, people away with illness and delays in supplier deliveries.

Seasonally adjusted Index
this month
Change from last month 12- month average Seasonally
Index this month Change from last month 12- month average
Australian PCI® 45.3 -0.9 50.5 House building 34.6 -4.6 44.8
Activity 42.7 -3.5 49.5 Apartments 50.0 8.3 45.3
Employment 53.0 2.2 56.1 Commercial 42.9 4.4 49.3
New Orders 43.1 -2.7 51.7 Engineering 45.8 -11.3 54.5
Supplier Deliveries 42.2 3.2 40.8
Input Prices 93.8 -2.2 95.2
Selling Prices 87.1 4.4 80.9
Average Wages 76.4 -7.3 76.1 Capacity Utilisation (% – seasonally adjusted) 80.6 -1.8 83.3

Results above 50 points indicate expansion. 

Capacity utilisation moderated slightly to 80.6% – the lowest it has been since August last year.

Employment was higher in July and selling prices were higher as builders recovered some of their higher costs in the market.

HIA economist, Thomas Devitt, said confidence in the housing sector has been adversely impacted by rising rates which will compound the rise in the cost of construction.

“This has not yet materialised in slowing sales or approvals of new homes and there is still a large volume of building work in the pipeline to complete. Recent declines in confidence, as shown in this month’s Australian PCI, reflect an anticipation on the part of builders of less new work entering the pipeline in coming months as the RBA’s current tightening cycle will, inevitably, bring an end to the boom.”

This week’s data from the Australian Bureau of Statistics showed total dwelling approvals fell 0.7% over the month of June. Detached home approvals rose 1.2%, while apartments and townhouses fell 5.7%.

Annually, total approvals were down 17.2%, with detached homes down 22% and apartments and townhouses by more than 10%.

The value of total building approved fell 4.7%, following a 10.8% rise in May. Residential building was down 3.7% to just under $7.449 billion, and non-residential building by 6.1% to $5.04 billion.

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