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Tuesday 11

December, 2018 3:39 PM



Construction at record highs in three states

Construction at record highs in three states

Construction work done fell by 2.8 per cent in the September quarter ? only the second decline in the past two years.

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28.11.2018 04:01 PM

Construction at record highs in three states
Construction work done

Construction activity: Construction work done fell by 2.8 per cent in the September quarter – only the second decline in the past two years. However, in the year to September, construction work done was at record highs in NSW, Victoria and South Australia.

Construction inflation: Construction costs rose by 0.9 per cent in the September quarter with building costs up 1.2 per cent. On the year, construction costs were up 3.1 per cent (decade average +2.2 per cent) – down from the 9-year high of 3.5 per cent in the June quarter.

Engineering inflation: Engineering costs rose by 0.6 per cent in the September quarter. Over the year, engineering costs rose by 3.5 per cent (decade average +2.4 per cent). 

What does it all mean?

Construction work ebbs and flows from quarter to quarter. After rising by 4.4 per cent in the first half of 2017, construction work eased by 2.8 per cent in the September quarter. Still, overall the amount of work remains high. In fact in trend terms, construction work is at 3-year highs and just down from the mining boom highs over the period 2012--2015.

While construction work in the mining states has softened, in NSW construction work done hit record highs in the September quarter, just short of $17 billion. In fact, construction work over the past year was at record highs in NSW, with Victoria and South Australia also completing the most construction work for a 12-month period.

With so much work, construction costs are understandably rising at a reasonable clip. For the past 18 months, construction costs have been rising at an annual rate greater than 3 per cent. With more talk that skilled workers are hard to find, construction sector inflation will be watched carefully in coming months.

What do the figures show?

Construction work done fell by 2.8 per cent in real (inflation-adjusted) terms in the September quarter – only the second decline in the past two years. Work done is down by 16.9 per cent on a year ago.

Public sector construction work fell by 1.0 per cent in the quarter and private sector activity fell by 3.4 per cent.

Construction work fell in five of the states and territories in the September quarter. Leading the falls was Northern Territory (down 33.6 per cent); followed by South Australia (down by 8.6 per cent); Queensland (down by 6.4 per cent); Western Australia (down by 3.6 per cent); and Victoria (down by 2.3 per cent).

Construction rose in the ACT (up by 13.3 per cent); Tasmania (up by 4.4 per cent); and NSW (up by 2.2 per cent – to record highs).

Engineering work fell by 4.5 per cent in the September quarter, and is down 34.4 per cent over the year.

Commercial (non-residential) building fell by 2.4 per cent in the September quarter but was still up by 2.3 per cent on the year.

Residential building fell by 1.0 per cent in the September quarter but was up by 5.4 per cent over the year. Alterations & additions rose by 4.7 per cent in the quarter, while new residential work fell by 1.8 per cent.

Construction costs rose by 0.9 per cent in the September quarter, with building costs up 1.2 per cent. On the year, construction costs were up 3.1 per cent (decade average +2.2 per cent), down from 3.5 per cent in the June quarter and 3.0 per cent in the March quarter. Building inflation was 2.8 per cent and engineering inflation was 3.5 per cent.

What is the importance of the economic data?

The Bureau of Statistics releases quarterly estimates of Construction work done. The estimates are based on a survey and cover around 85 per cent of the construction work done in the period. Revised estimates will be released in coming months. The data is useful largely for historical purposes but the work yet to be done estimates provide an early warning signal of future activity. The residential work figures give a good early guide to the strength of residential investment in the national accounts.

What are the implications for interest rates and investors?

Buoyant activity levels exist in the construction sector. In fact activity is a little too frothy in some areas with workers in big demand and cranes dominating skylines across a number of capital cities. In fact Brickworks noted yesterday the ‘unprecedented’ demand for bricks in Victoria. Activity levels may ease in residential building over the coming year but there remains a healthy amount of social and economic infrastructure activity.

CommSec expects official interest rates to remain stable until later in 2019. But cost pressures in the construction sector and upward pressure on wages need to be watched closely.

Published by Craig James, Chief Economist, CommSec
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