Major renovations work continues to flatline: Pete Wargent
Pete WargentDecember 17, 2020
The ABS released its Construction Work Done figures for Q1 2015 which saw total construction work done decline by 2.4% to $48.4 billion.
It's a bit of an awkward data release with a few moving parts, but let's see if I can simplify a few of the key messages here in three short parts.
Part 1 - Total construction slips
As you can see from my chart below, private sector building work is responding rather nicely to low interest rates.
Unfortunately, on the other hand, spend in the public sector is contributing very little to the cause.
Quarterly public sector expenditure fell to below $2.2 billion, which is far below the more stimulatory levels seen through the financial crisis which peaked at more than $5 billion.
The economy could evidently use some infrastructure investment, though I'm not at all sure we'll get it.
Quarterly public sector expenditure fell to below $2.2 billion, which is far below the more stimulatory levels seen through the financial crisis which peaked at more than $5 billion.
The economy could evidently use some infrastructure investment, though I'm not at all sure we'll get it.
Meanwhile engineering construction, largely comprised of resources capital expenditure, continues to capitulate, now more than 20% lower over the past year to $24.8 billion in Q1, from a peak of $33.2 billion in 2012.
The net result is that total construction work done declined further in the first quarter by 2.4% to $48.4 billion.
This is still a very high level of activity in historical terms, but now some 8.8% lower than one year ago.
The one shining light for construction - which you will have seen with your own eyes if you live in one of the major capital cities - is residential construction, which continues to pulse along.
House building work done is picking up sharply, while the value of building work done relating to units and apartments (denoted by the red line below) continues to surge to new record highs through this cycle.
Higher density developments - which tend to be located in cities and come with associated expensive land remediation costs - are contributing a surprisingly high proportion of residential building work done in chain volume measures terms.
Major renovations work, denoted by the green line, continues to flatline, and is basically on life support outside Sydney.
Part 2 - State versus state building
The value of building work done is being driven by activity in Melbourne, Sydney and Brisbane, in that order, which should continue to support construction employment in those cities, combined with the associated multiplier effect.
The building boom is largely bypassing the southern states, and this has been reflected in benign (Hobart) or negative (Adelaide) employment growth in the respective capitals of these states.
Looking at the major component parts, Melbourne continues to be the undisputed king of house building, while Queensland and Western Australia saw a decent lift in activity in the first quarter of this year.
But the real fun and games are taking place in the apartment construction sector.
Sydney and Brisbane may be approaching full capacity in this industry, which a dearth of bricklayers and project managers on the eastern seaboard being reported by the Reserve Bank's liaison, despite the legions of construction workers becoming available for transfer as they are released from resources contracts (more on this below).
Activity in New South Wales pulled back a little in Q1, but Melbourne apartment construction continues to rip to record high levels, with nearly $6.5 billion of work done over the past year in Victoria, and $1.8 billion in the first quarter of 2015 alone.
Heady times.
Heady times.
Clearly this is the macro level data only, but the figures clearly imply a looming oversupply of units and apartments in some locations.
Prospective investors clearly need to understand the property markets at a suburb and micro level in this respect.
Part 3 - The mining cliff
Prospective investors clearly need to understand the property markets at a suburb and micro level in this respect.
Part 3 - The mining cliff
If you were hoping for good news for resources regions from this release, I'm afraid that there is none to report.
Engineering construction work done held up reasonably well in Victoria, but everywhere else of note saw sharp declines, and particularly so the main mining states.
The one exception in recent quarters had been the Northern Territory, with heavy spend related to the $34 billion Ichthys project pushing up engineering construction work done to record highs for the Top End over the preceding two quarters.
However, even the Northern Territory saw engineering construction work done decline from $2.1 billion to $1.7 billion in the first quarter, with some delays to the planned 2017 start-up date having been reported related to Inpex.
The chart above tells its own story, and there is little else but woe ahead for a number of mining town economies.
The ongoing capitulation of house prices in the Pilbara and Moranbah have been well enough documented, but there are many more echo-corrections in the post across regions which have been propped up through the once-in-a-century mining construction boom.
My chart packs have shown here previously that the pipeline for mining capital expenditure is desperately weak, and there will be further data to report on expected capital expenditure declines later this morning.
Capex related to Ichthys still has a way to run, granted, while Adani is hoping to proceed with its $10 billion thermal coal project (despite the minor inconvenience issue that at today's prices the project can barely be viable).
But these monster projects aside, weakening commodity prices will ensure that mining investment is heading all the way back down where whence it came, which is why we call it a commodity cycle.
The wrap
This negative result will breathe very life into the GDP result for the first quarter, while a further decline in Australia's terms of trade will also act as a drag.
Economic growth may not be stone dead flat in Q1, but it seems unlikely to be a great deal better than that, which could drag the annual result down to well below 2% over the first half of this calendar year.
With inflation forecasts having been revised down and further macro-prudential tools now being deployed by lenders, futures markets see every chance that the next move in interest rates will be down again to below 2%.
Perhaps the twist in the tail here is that macro-prudential tools on lending to property investors mean lower interest rates for longer?
PETE WARGENT is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and blogger.
His book 'Four Green Houses and a Red Hotel' is out now.
Pete Wargent
Pete Wargent is the co-founder of BuyersBuyers.com.au, offering affordable homebuying assistance to all Australians, and a best-selling author and blogger.