Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

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Wednesday, 28 November 2012

Very interesting construction figures from ABS

Confirmation bias

You have to chuckle sometimes. The economic bears try desperately to put a pessimistic twist or spin on every piece of data that is released.

We can all be guilty of it at times, and confirmation bias is one the risks which investors must overcome. There is simply no value on only seeking out information which supports your pre-conceived viewpoints or investment decisions.

As the old saying goes: "there are two sides to every story". But that said, there should only be one way to acknowledge today's construction figures and that is to note that...

Engineering construction is booming!

Fuelled by Australia's mining boom, the ABS has just reported that engineering contruction increased by a phenomenal 14% over the 12 months to September 2012, with a quite incredible $32,241.6 million of engineering construction 'work done' for the quarter.

That is 14% annual growth, by the way!

To put that incomprehensible figure into some kind of perspective, look at the first chart below and see how engineering construction growth in Australia has increased over the past 8 years. That is to say, it's gone through the proverbial roof. Did someone say "Lucky Country"?

Talk about it any way you want: quarterly engineering construction growth of 4% and total annual construction growth of 14% is huge.

Naturally this will contribute to a continued strong GDP growth for Australia which is nothing less than wonderful news for the country.

As other parts of the world lurch from debt crises to recession fears, Australia's immediate future is a very bright one as the mining boom gradually makes its transition from construction to production.

But, look a little more closely...

Unfortunately, there is a downside here, and, let's face it, it's not a particularly surprising one.

In a country where the population is increasing by more than 300,000 people per annum - and where there are already woryingly low residential property vacancy rates in certain landlocked capital city areas (for example, in Perth, in virtually all of Darwin, in certain parts of Sydney...need I continue?) - residential construction has actually declined markedly over the past 2 years.

There are a number of key drivers for this, but not much seems to improve in this regard. It seems to be human nature that we do not respond to problems until they become out-and-out crises.

You can interpret these figures any way you so choose, of course, it's a free country after all, but I know what my approach will be.

The Reserve Bank's plan for other construction to step up and fill the gap which will be left by engineering construction clearly isn't working yet. It will need to address this problem over the next couple of years as mining construction ascends to its expected peak.

Graph: Value of construction work done, Chain volume measures—Trend estimatesGraph: Value of building work done, Chain volume measures—Trend estimates