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Building activity continues to decline: bottoming 2019-20

New building activity continued to decline in 2018-19, falling an estimated 12% to around $110 billion, according to BIS Oxford Economics. The underlying data series appear to support the commentary and expectations that the aggregate building market – residential and non-residential – will bottom out in the current financial year, before improvements commence.

In the March quarter of 2019, total building activity in Australia declined 6.6% on a trend basis, recording the fourth successive aggregate quarterly decline, as the chart below shows. The chart also shows that the contribution of the non-residential sector (-5.2% in the March quarter) resulted in declines for five quarters, but the residential sector (-6.7% in the March quarter) has recorded three successive declines.

That is, to date, the decline in housing related building activity has been shorter, but sharper, than that recorded for the non-housing sector.

fig5

To go straight to the dashboard and take a closer look at the data, click here.

To examine the all-important residential sector in more detail, we need to see the next chart over a longer timeframe. The chart below shows housing activity (by number of dwellings) over the last twenty years.

The chart shows house commencements (the blue area) and gives some sense of the lag to completion (the red line). This is more important than the ‘picture’ shown in the chart might suggest. 

fig6

To go straight to the dashboard and take a closer look at the data, click here.

The chart demonstrates that all periods involving a spike in commencements include a longer lag to completion, followed by a fall in commencements. That makes sense because the capacity of the building supply-chain to deliver finished houses must necessarily impact the ability to commence new activity, unless there is an endless supply of resources (including labour). There is not an endless supply of materials and people and so new commencements are curtailed until completions occur.

The black line on the chart shows the total number of houses that are under construction hit an all-time peak in the June quarter of 2018 and has subsequently fallen back. However, we need to examine the next chart to get a sense of the real impact of that decline.

In the March quarter of 2019, the pipeline of work for new houses fell 6.7%, but it also shows that the annualised value of that work declined just 0.7% compared with the December quarter of 2018, when the all-time peak of $61.655 billion was recorded.

So, the immediate decline has been quite steep, but the absolute value of housing work still in the construction pipeline is very close to its peak. It might therefore be the case that building activity in the residential sector is more or less at its capacity, with little room to take on new commitments until the pipeline begins to clear.

fig7

To go straight to the dashboard and take a closer look at the data, click here.

It is vital to consider the construction sector – and therefore building activity – as a whole, as well as in its constituent elements. After all, resources swing from the residential (such as multi-residential) to the non-residential sector reasonably seamlessly. So, in the next chart, we can see the non-residential sector’s quarterly growth over the last decade.

Leaving aside the heady GFC era boom and bust cycle, it begins to be observable that by around the beginning of 2017, there was a gradual turndown in non-residential building activity. The December quarter of 2018 was an exception, but the March quarter of 2019 accentuated the trend.

We can see that commercial building activity (blue bar) declined 39.5% on the December quarter and industrial buildings (red bar) were down 26.0%, with an unnoticeable +0.6% in activity for the other non-residential category. Total non-residential building activity was down 20.9% in the March quarter.

fig8

To go straight to the dashboard and take a closer look at the data, click here.

We can observe more or less the same data in actual value terms, in the chart below. It is observable that the most significant movements, period-to-period are for Commercial buildings – essentially private sector activity for offices and retail activities. It is noticeable that the majority of the other categories are more likely to be subject to government expenditure. 

fig9

To go straight to the dashboard and take a closer look at the data, click here.

It is useful to examine the non-residential building sector’s activity over the last two years, in the table below.

$’000 YE Mar ’18 YE Mar ’19 % Change
Commercial Buildings 16,950,216  16,253,385 -4.1%
Industrial Buildings 6,080,829 6,515,340 +7.1%
Other Non-res; Education Buildings 7,662,053  6,272,138 -18.1%
Other Non-res; Health Buildings 2,785,630  2,132,248 -23.5%
Other Non-res; Short Term Accom 3,700,724  3,583,059 -3.2%
Total Non-residential 46,220,233  43,290,113 -6.3%

This data shows where the non-residential activity is and which sectors have led the aggregate 6.3% decline over the last year. Activity in the largest sector – Commercial buildings – is down 4.1%, but their productive counterpart, industrial buildings show a 7.1% rise. That may bode well for the future of the productive economy.

Notably, the largest falls are for those sectors where government investment (education and health) is the most prominent driver. Any reinvigoration of government investment in these areas will quickly turn the non-residential sector’s fortunes around.

Overall, the latest data and analysis, including new information available on the FWPA Data Dashboards, points directly to the continuing slowdown in building activity. However, as this analysis demonstrates, it is not clear that the slowdown will continue for much longer than the current financial year.

In part that is because over the longer term, as BIS Oxford Economics pointed out, the prospects for total building activity remain strong:

“Total building activity is anticipated to climb near its previous peak over the coming five years.”

As BIS and other commentators have discussed in recent months, the mix of solid population growth and a housing supply gap are expected to drive building activity through the next half decade and longer. That is most relevant in the residential sector, and will likely flow on to the non-residential sector over time.

Posted Date: August 8, 2019

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