Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Wednesday, 25 May 2016

Construction work done falls again

Construction flagging

Today's Construction Work Done figures showed a further decline to $47.9 billion in Q1 2016, now well down from the peak of $56 billion in Q4 2012. Thus construction will represent a drag on GDP growth for the March quarter.

The main driver of the downturn has been the ongoing retracement in quarterly engineering construction work done to $23 billion as the mining investment boom continues to fade from a massive $34.7 billion in Q3 2012. 

Engineering construction has now fallen by more than a third over the 42 months to Q1 2016, with activity in Queensland down dramatically by nearly two thirds since September 2013. 

The only potentially positive aspect to this is that engineering construction cannot continue to fall forever. 

Unfortunately Western Australia and the Northern Territory still have a long way to drop until they revert to historical norms, though even here construction work done in the sector has dropped by about a quarter. 

Building boom also peaking

Although not large enough to offset the mining investment collapse completely, building work done has performed strongly through this cycle. 

Here too, though, the peak looks to be imminent, with house building in decline, non-residential building sliding, and major renovations activity flat-lining. 

The greatest beneficiary of the building boom has been the economy of New South Wales, where building activity has ripped 45 per cent higher over the past three years, in part helped by major infrastructure projects.

Residential - houses already in decline

The trend in building approvals and recent restrictions on lending to foreign buyers suggest that the residential construction boom is also at or getting very close to its peak. Indeed detached house building is already falling.

"Other residential building' incorporating townhouses, units and apartments has taken a little longer to reach its peak, in part because of the longer lead times associated with higher density dwellings. 

Activity hit its highest ever level in the three most populous states, but here too the peak is likely to be witnessed withing the next  quarter or two. 

The wrap

Engineering construction work has sunk down another 13.7 per cent year-on-year (and by 16.7 per cent in trend terms), and after 42 months of declines the contraction is gradually moving closer to the nadir. These figures suggest that tomorrow's private new capex figures will probably be quite weak. 

Residential construction activity will probably also peak some time in the next quarter or two.

What does that little lot leave to plug the construction gap? Solely, infrastructure! 

Will 10 year bond yields recently plumbing new depths, it's now or never for the powers that be to get tackling communications infrastructure, road building, rail and light rail projects, ports, water security projects, and other nation building projects. Time to go hard or go home!