Construction outlook “ringing alarm bells”: MBA

The near-completion of the government’s $16.2 billion Building the Education Revolution (BER) project as well as the imminent end of other stimulus measures have contributed to a dramatic turnaround in sentiment among the building sector.

Peter Jones, chief economist at the Master Builders Australia, says the poor outlook generated from the June quarter survey is “ringing alarm bells”.

The building industry activity index has again fallen below the 50-point ‘neutral’ mark, meaning builders expect the overall industry to be lower over the next six months relative to the past six months.

“The BER was critical in terms of cushioning the industry,” Jones tells Property Observer.

“It has been extraordinarily positive and incredibly beneficial for construction and the wider economy,” he says.

Jones says the expectation has been that as the project neared completion, other sectors would take up the baton, but this has not happened.

“It has been a clunky gear change,” he says.

May ABS figures show new private sector home approvals have plummeted by a seasonally adjusted 7.8%, with NSW recording its second worst May approval figure in statistical history and Queensland’s worst May figure since 1987.

According the MBA, the commercial building outlook is weaker than residential.

The non-residential index measuring current conditions registered 43.3 in the June quarter, up on the previous reading but remaining well below the ‘satisfactory’ 50 level.

Furthermore, expectations about future building activity have fallen back in the June quarter after ticking higher in the previous two quarters. The index remains below the neutral mark and non-residential builders face the prospect of falling activity levels as government stimulus programs come to an end.

For the residential sector, conditions remain unchanged in the June quarter with builders expecting little change in residential building conditions over the next six months. The index fell back to 48.4 in the June quarter from 51.4.

The MBA survey of 470 builders across all sectors of the industry uncovered a concern that private sector demand will not be able to fill the gap left by the BER, social housing and other government stimulus programs.

The Building the Education Revolution project alone has generated 24,000 projects, according to government statistics.

Other stimulus programs that have been culled include the removal of stamp duty concessions for Queensland non-first home buyers (ending on August 1, 2011) and an end to stamp duty concessions for Tasmanian first-home buyers, which were removed on June 17, 2011.

Besides an expected drop in building activity, the survey revealed a host of other factors contributing to what Jones calls a “dramatic turnaround in builder sentiment”.

These include builders reporting a drop in their own-business activity fell in the June quarter (from 56.3 to 55.7 on the index and trending down for the last four quarters) and an overall decline in profitability.

Furthermore, builders do not expect profitability to improve over the remainder of 2011, with the profitability expectations index trending down and returning to a neutral position, following some improvement during the preceding year.

Profitability expectations are now “not far from lows reached during the GFC and well down on the much healthier levels of profitability achieved prior to the global crisis”.