Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

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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Thursday, 27 August 2015

Construction rebounds...for now

Construction rebounds

The ABS released its Construction Work Done figures for the June quarter, which showed total construction for the quarter rebounding by +1.6 per cent to a seasonally adjusted $49.8 billion.

Over the last year total construction remained at historically very high levels at $198 billion, although this is now down from a sky-high annual figure of $211 billion one year ago.


As any good politician would, of course, smiling Treasurer Hockey immediately took to Twitter to claim credit for the rebound.


But in fact public infrastructure work has been very weak. 

Furthermore, against recent trends the rebound in the June quarter was not driven by residential construction either, rather it was a punchy quarter for engineering (i.e. resources) construction works, with expenditure rebounding by +5.6 per cent to a seasonally adjusted $25.6 billion.


Despite this positive blip, engineering construction work done was -8.8 per cent lower than a year ago, and will doubtless resume its downward trajectory in due course, as considered in more detail below.

Mining rebound in WA

The driver of the engineering construction rebound was an increase in spend of nearly +$3 billion in Western Australia to $11.3 billion for the second quarter.


In fact, anyone who was paying very close attention might have anticipated this.

Recall that the so-termed "record trade deficit" in April 2015r actually included an anomalous spike in Western Australian imports from Korea. As I noted at the time:

"No further detail is provided by the ABS, but given that there was a kahuna $1.5 billion spike in merchandise imports in Western Australia, and we can assume that this was probably related to a major mining project.

In all likelihood, one might hazard that this was rail capex for Gina Rinehart's Roy Hill iron ore project (which typically a business would treat as an investment in a fixed asset for the generation of revenue streams, rather than trading expenditure)."

In all probability, therefore, the June quarter rebound was capex driven with a large asset purchase accounting for most of the spike.

Moreover we can expect that the September quarter will see engineering construction work resuming its inevitable decline.

Building by state

At the state level, Victoria has been the king of residential building across recent years.

However New South Wales is now the one state which is benefitting from a material public sector and non-residential building contribution, thereby thrusting total building work done in the Premier State to its highest ever level in the June quarter.


Indeed, the New South Wales economy in generally is in very fine shape at the present time.

Residential building by state

Looking at specifically residential buiding we can see that the +7.4 per cent year-on-year increase has been overwhelmingly a function of "other residential" building - which is to say, the construction of units, townhouses and apartments.

As denoted by the green line below, outside Sydney major renovations activity has been very subdued through this cycle.


Although new house building has responded to low interest rates almost everywhere to a greater or lesser extent, the trend has been looking increasingly peaky over the past four quarters.

Victoria continues to lead the way on the house building front, a state which appears to suffer less from greenfield land supply constraints than other states and territories do.


On the other hand the higher density sector building work continues apace, particularly in Melbourne, Sydney and Brisbane, which is a trend you can see everywhere from West End, South Brisbane, Fortitude Valley and Newstead (Brisbane), to Mascot, Wolli Creek and Zetland (Sydney). 


The latest building approvals figures suggest that the cycle for unit and apartment approvals may also be set to peak in due course, thoughthe duration of higher density projects from approval to completion may run to several years.

Consequently the elevated levels of building activity in this sector may have quite some way to run yet.

The wrap

Overal this was a positive result for construction in the June quarter which masks an ongoing decline in resources construction that is locked and loaded for the next few years. 

Residential building remains strong for the time being, but even here Australia can only build new apartment projects for so long.

Of more significance will be today's capex intentions for the 2015/16 financial year, and specifically whether businesses are becoming more inclined towards investment plans.

If not, in a nutshell, interest rates will have further to fall.