Detached housing construction sector sinks into steepest decline in eight months: AIG/HIA index

Australia’s construction sector notched up three years - 36 consecutive months - of contracting activity in May, according to the latest Australian Industry Group/HIA Australian Performance of Construction Index (Australian PCI). 

The benchmark index remained broadly unchanged in May at 35.3 - readings below 50 indicate a contraction in the industry with the distance from 50 indicative of the strength of the decline.

The last time the sector expanded was in May 2010.

The weakest sub-sector over the month was detached house building, which weakened for a third consecutive month, with activity recording the sharpest rate of contraction in eight months.  

In contrast, commercial construction activity declined at a slower pace while rates of contraction in apartment building and engineering construction were unchanged on the previous month.

Construction activity by sector

Source: AIG/HIA Performance of Construction Index.

Despite the sluggish conditions, input prices (73.4) and wages (55.9) continue to lift.

“A sharper decline in the house building sector, together with a flat result for apartments at a very low index reading, unfortunately confirms the on-going sluggish nature of residential construction activity,” commented HIA chief economist, Harley Dale. 

“Some leading indicators point to a very modest uplift in new home building activity, from a recessionary starting point. 

However, he says the latest indexresults highlight what should be a prominent concern for policy makers – "the lack of a large and sustainable recovery in residential construction at a time when the domestic economy sorely needs such an outcome". 

“The balance of risks points to a modest increase in building activity in 2012/13, followed by a subsequent pull-back next year," says Dale. 

“That’s hardly the desirable result for the tens of thousands of businesses and hundreds of thousands of people who rely on new home building for their livelihood, before one considers the flow-on negative impacts to the wider economy of continued under-performance from this key sector,” 

AIG director Peter Burn says the construction industry “continues to languish due mainly to historically low levels of building activity”.

“This is now being compounded by reductions in engineering activity related to mining-related investment which had been driving the industry (and indeed, the economy) until very recently.

“Successive cuts in interest rates by the Reserve Bank have been welcome, but so far they appear only to have steadied the decline in building activity,” he says.