Pete Wargent blogspot

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

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Thursday, 25 February 2016

Construction declines


Well, there has been a firestorm this week as the mainstream media went property market crazy following the screening of this week's episode of 60 Minutes

A hedgie researcher from the US raised more than a few shackles with his property market predictions and the leaking of a report he'd written for institutional clients.

To be fair, he was only doing his job, and the media pounced on his findings, and in any case much of what he said was accurate, as I'll explore below: stock levels are indeed elevated in Sydney's west and north-west, and many Central and regional Queensland property markets have already been proven to be unsustainable. 

That said, hedgies are macro guys, and it would be a mistake to believe that they have greater insights than local analysts. 

For example, I thought that the outlandish claim that "mortgage debt is something like 3.8 times GDP" must be a straight out misquote, but when quizzed on the erroneous stat by Forager Funds he stood by the figure as one quoted from CoreLogic-RP Data.

It's hard to imagine that a local analyst could make an error of such magnitude - once can only guess this was a botched reference to aggregate residential property values to GDP, but even then this ratio would be dated.

In any event, if there's one thing we did learn again this week, it's that Aussies don't like hearing that their homes are overvalued!

Construction declines 

Yesterday's Construction Work Done figures showed a seasonally adjusted decline of -3.6 per cent to be -4.3 per cent lower over the year. 

The volume of residential building work done has increased very strongly to be up by +11.5 per cent in 2015, but engineering (effectively resources) construction was down by -14.7 per cent. 

Resources construction bust

Total engineering construction has now been declining for three years, and sits 31 per cent below the December 2012 quarterly peak, perhaps implying that there are another couple of years of significant declines in the post. 

Quarterly engineering construction remains very high in Western Australia at more than $9 billion, so the largest percentage declines going forward will be seen here and in the Northern Territory.

In Queensland engineering construction work done has already declined back to 2008 levels at $4.7 billion, some 40 per cent below where it was a year ago and 59 per cent below the peak. 

I have previously noted that this can be a positive for Queensland, given that most the pain is now in the rear view mirror. 

However, this is not to downplay the severe impact that this decline has had on many of Queensland's regions, particularly the impact of coal mining job losses. 

You argue all day long over the use of "bubble" terminology in relation to Central Queensland's property markets and mining towns, but in equities parlance the "P" was no longer supportable by the "E".

Building work thrives

Private sector building work done increased impressively by +11 per cent in 2015, overwhelmingly driven by the residential property sector, and particularly units, townhouses, and apartments.

This has now been an uptrend for three years, helping to some extent to offset the declines in the mining construction sector.

The greaters gains in building work done over the past three years have been in New South Wales (+42 per cent) - in part thanks to an infrastructure and dwelling deficit that is now being well addressed - Victoria (+21 per cent), Queensland (+11 per cent), and Western Australia (+11 per cent).

Construction of units, townhouses and apartments has soared, particularly in the largest three states.

In some sub-regions there is a looming glut of high rise units and apartments, which should in turn lead to cooling rents and prices. 

The quarterly figures show that residential and non-residential construction should make a fair contribution to GDP for the fourth quarter.

The wrap

Overall, another soft set of numbers, largely as expected.

Engineering construction work done is now 31 per cent below its 2012 peak, and there is still a long way to go before the reversion is complete. 

That said, 2016 may be see the worst of the decline wash through. The non-mining economy is growing at about 3 per cent, so the overall economy should look better when mining construction eventually stops falling