Difficult conditions persist in the Australian residential construction market as activity continues to fall and forecasters remain pessimistic about the outlook.
According to the June edition Performance of Construction Index report, released by Australian Industry Group (AIG) and Housing Industry Association (HIA), conditions in the housing sector declined in June for the thirteenth month in a row.
Worse, the house building activity sub-index fell 5.7 points in May to register just 34.1, meaning that not only are activity levels falling, but the pace of decline is accelerating. (Any figure of less than 50 on the index represents a decline in activity for the month in question.)
That’s not all. The reading for new orders in June plummeted 7.5 points to just 32, meaning that not only is the volume of new orders continuing to decline, but the pace of decline is at its steepest for the last eight months.
Apartment building conditions are no better. Although the apartment building sub-index was 7.9 points higher in June when compared to May, at 33.2, the reading still indicates a substantial decline in activity. Worse still, the reading for new orders plunged to just 23.8 last month, its lowest level in the last two years by a long shot.
Going forward, approval data is far from encouraging. On a seasonally adjusted basis, the total value of all dwellings approved was lower in May was far lower than at any other time over the past year. Worse, at $38.896 billion, the value of approvals in the twelve months to May is far lower than current levels of activity ($48.977), meaning that new work is coming in much slower than existing work is being done.
(Paradoxically, data relating to construction starts is more encouraging. In the September quarter, construction information service provider BCI Australia expects the value of residential construction starts to increase by 27%, according to its latest ‘National Forecaster’ report. Along with retail and health, residential will remain one of the “stand out sectors”, BCI says. Over the twelve months to September, BCI expects starts to be up 23%.)
Not surprisingly then, the near term outlook is bleak. In financial year 2011/12, HIA expects the number of dwelling starts to fall to 143,770 (see chart below). At this level, starts will be down 6% on their expected value in the financial year just past (153,730) and will be at their second lowest level for the past eight years.
Longer term, however, the outlook is more positive, with the economy expected to pick up and new homebuyers expected to return to the market. By financial year 2012/13, HIA expects dwelling starts to rebound back up to 153,790. The Construction Forecasting Council (CFC), too, expects the value of work on dwelling construction and alterations to increase from an estimated $49.590 billion the financial year just passed to $55.854 billion in financial year 2012/13. By 2014/15, the CFC expects activity to have reached almost $65 billion ($64.962 billion).
Victoria leads the fall
Expectations over the next twelve months vary significantly from state to state, with Victoria, South Australia and Western Australia expecting poor conditions whilst New South Wales and Queensland expect moderate increases.
In significant statewide developments, according to HIH forecasts:
• After experiencing strong conditions in recent years due as robust population growth drove housing demand, Victoria is expected to be the worst performer. The number of starts in the state is expected to plummet from an estimated 56,460 in 2010/11 to 46,980 in 2011/12 and then further to 46,100 in 2012/13.
• By contrast, New South Wales, where homebuilding has been constrained by supply side developments in recent years, is expected to be the standout performer, with starts increasing from an estimated 30,900 in 2010/11 to 32,870 in 2012/12 and then surging to 37,240 the following year.
• Queensland, which like New South Wales has experienced weak conditions in recent years, is also expected to hold up well, with start numbers increasing from 26,780 in 2010/11 to 27,130 this year before rising to 29,800 in 2012/13.
• Both South Australia and Western Australia are expecting declines in activity this year before substantial recoveries in 2012/13. The number of starts in South Australia is expected to fall from 10,590 to 10,240 in 2011/12 before rebounding to $11,330 the year after; those in WA are expected to fall from 19,860 to 19,170 before rising back up to 21,670.
• After experiencing strong conditions over recent years, activity is set to plummet in the Australian Capital Territory, with the number of starts falling from 4,750 to 3,440 in 2011/12 and 3,300 in 2012/13.