Construction Slump Eased Before Lockdown

Construction lifted slightly in July, as the effects of federal and state government grants started to filter through to homebuilders nationally.

The latest AI Group performance of construction index increased by 7.2 points to 42.7 points last month, as respondents said that while the pace of contraction had eased, little prospect of a recovery in investor demand is expected in the near term.

The index, which was conducted before the latest stage-four restrictions in Victoria, still remains well below the 50-point mark that separates expansion from contraction.

Homebuilders said demand for new houses and renovations is lifting, from close to zero, in response to federal and state government grants, reopening display homes and easing activity restrictions in Australian states other than Victoria.

“The market remains suppressed well below levels experienced prior to Covid-19,” HIA economist Angela Lillicrap said.

“There are over 130,000 multi-unit dwellings under construction and if no new projects enter the pipeline, then once these projects reach completion there will be a significant decline in employment in the sector which will weigh on the wider economy.”

Construction industry output

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House building lifted by 7.4 points to 47.0 points, after falling to a record low in April with builders nationally reporting fewer on-site restrictions causing disruptions over the month. The new orders lifted by 15.7 points to 47.9 points.

The apartment building activity index, which has been in contraction since early 2018, fell by 10.9 points to 33.9 points last month, after recovering to a milder level of contraction in June.

Apartment building approvals recovered by a further 4.5 points to 41.1 points in July despite sharp reductions in demand from international investors, students and migrants predicted to continue through to 2021.

“[The] data shows that confidence in the housing market has improved with the easing of restrictions and the [federal] governments’ Home Builder grant which has led to some new orders for homes,” Lillicrap said.

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Commercial construction activity recovered by a further 15.4 points to 42.0 points over the month, after hitting a record low in April. New orders recovered by 15.2 points to 43.6 points.

The wages index extended a rare foray into negative territory while input prices continued to rise—although at a very modest pace.

The average wages index recovered by 3.1 points and the employment index recovered by a further 1.0 point from recent lows.

The employment index recovered by a further 1.0 point, with respondents highlighting the importance that JobKeeper was playing in slowing the loss of jobs.

Despite this, the Australian Construction Industry forum’s July update has forecast a 12 per cent national decline in construction employment by the end of 2021, equating to a loss of 140,000 jobs, driven by a drop-off in new projects.

Input prices dropped further in July to its lowest monthly result since 2011, reflecting weak demand for building materials and other inputs. Selling prices also dropped after recovering in June from recent lows.

Melbourne's restrictions threaten construction activity

Strict stage-four restrictions announced for Melbourne on Monday to curb the spread of Covid-19 will now limit workers to no more than 25 per cent of their usual total.

AI Group head of policy Peter Burn said the renewed restrictions will have a material impact at a national level in the coming period and will have particularly severe consequences for activity and employment.

“Even before the new restrictions were announced, the immediate outlook for the sector was weak with new orders falling again in July,” Burn said.

“Further policy measures will be required to stem a longer wave of job losses and business closures.”

The restrictions—set for a six-week period—could now potentially unleash a wave of claims between builders asking their clients for extensions of time to complete work as well as developers making liquidated damages claims.

Construction employs 300,000 people—about 8.5 per cent of the Victorian workforce—and represents 13 per cent of the state’s economy.

According to recent FTI forecasts, the fall off in construction jobs in Victoria will see employment in the sector reduced to 275,000 in 2021, down from 337,000 in 2019.

The forecasts also highlighted that job losses will be much more pronounced for tradespeople and low-skilled workers in the construction sector out to 2024 than for highly-skilled workers.