Pete Wargent blogspot

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

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

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he's one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

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"I've been investing for over 40 years & read nearly every investment book ever written, yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data & charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, author of the New York Times bestsellers 'End Game' & 'Code Red'.

"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision - where world class experts share their thoughts on economics & finance - author of Things That Make You Go Hmmm, one of the world's most popular & widely-read financial publications.

"Wargent is a bald-faced realty foghorn" - David Llewellyn-Smith, 'MacroBusiness'.

Thursday, 28 May 2015

Mining construction - off the precipice

Construction slides further

The ABS released its Construction Work Done figures for Q1 2015 which saw total construction work done decline by 2.4 per cent to $48.4 billion.

It's a bit of an awkward data release with a few moving parts, but let's see if I can simplify a few of the key messages here in three short parts.

Part 1 - Total construction slips

As you can see from my chart below, private sector building work is responding rather nicely to low interest rates.

Unfortunately, on the other hand, spend in the public sector is contributing very little to the cause.

Quarterly public sector expenditure fell to below $2.2 billion, which is far below the more stimulatory levels seen through the financial crisis which peaked at more than $5 billion.

The economy could evidently use some infrastructure investment, though I'm not a tall sure we'll get it.

Meanwhile engineering construction, largely comprised of resources capital expenditure, continues to capitulate, now more than 20 per cent lower over the past year to $24.8 billion in Q1, from a peak of $33.2 billion in 2012.


The net result is that total construction work done declined further in the first quarter by 2.4 per cent to $48.4 billion.

This is still a very high level of activity in historical terms, but now some 8.8 per cent lower than one year ago.



The one shining light for construction - which you will have seen with your own eyes if you live in one of the major capital cities - is residential construction, which continues to pulse along.

House building work done is picking up sharply, while the value of building work done relating to units and apartments (denoted by the red line below) continues to surge to new record highs through this cycle.

Higher density developments - which tend to be located in cities and come with associated expensive land remediation costs - are contributing a surprisingly high proportion of residential building work done in chain volume measures terms.


Major renovations work, denoted by the green line, continues to flat-line, and is basically on life support outside Sydney.

Part 2 - State versus state building

The value of building work done is being driven by activity in Melbourne, Sydney and Brisbane, in that order, which should continue to support construction employment in those cities, combined with the associated multiplier effect.

The building boom is largely bypassing the southern states, and this has been reflected in benign (Hobart) or negative (Adelaide) employment growth in the respective capitals of these states. 


Looking at the major component parts, Melbourne continues to be the undisputed king of house building, while Queensland and Western Australia saw a decent lift in activity in the first quarter of this year.


But the real fun and games are taking place in the apartment construction sector.

Sydney and Brisbane may be approaching full capacity in this industry, which a dearth of bricklayers and project managers on the eastern seaboard being reported by the Reserve Bank's liaison, despite the legions of construction workers becoming available for transfer as they are released from resources contracts (more on this below). 

Activity in New South Wales pulled back a little in Q1, but Melbourne apartment construction continues to rip to record high levels, with nearly $6.5 billion of work done over the past year in Victoria, and $1.8 billion in the first quarter of 2015 alone.

Heady times.


Clearly this is the macro level data only, but the figures clearly imply a looming oversupply of units and apartments in some locations.

Prospective investors clearly need to understand the property markets at a suburb and micro level in this respect.

Part 3 - The mining cliff

If you were hoping for good news for resources regions from this release, I'm afraid that there is none to report.

Engineering construction work done held up reasonably well in Victoria, but everywhere else of note saw sharp declines, and particularly so the main mining states.

The one exception in recent quarters had been the Northern Territory, with heavy spend related to the $34 billion Ichthys project pushing up engineering construction work done to record highs for the Top End over the preceding two quarters.

However, even the Northern Territory saw engineering construction work done decline from $2.1 billion to $1.7 billion in the first quarter, with some delays to the planned 2017 start-up date having been reported related to Inpex.


The chart above tells its own story, and there is little else but woe ahead for a number of mining town economies. 

The ongoing capitulation of house prices in the Pilbara and Moranbah have been well enough documented, but there are many more echo-corrections in the post across regions which have been propped up through the once-in-a-century mining construction boom. 

My chart packs have shown here previously that the pipeline for mining capital expenditure is desperately weak, and there will be further data to report on expected capital expenditure declines later this morning.

Capex related to Ichthys still has a way to run, granted, while Adani is hoping to proceed with its $10 billion thermal coal project (despite the minor inconvenience issue that at today's prices the project can barely be viable).

But these monster projects aside, weakening commodity prices will ensure that mining investment is heading all the way back down where whence it came, which is why we call it a commodity cycle.

The wrap

This negative result will breathe very little life into the GDP result for the first quarter, while a further decline in Australia's terms of trade will also act as a drag.

Economic growth may not be stone dead flat in Q1, but it seems unlikely to be a great deal better than that, which could drag the annual result down to well below 2 per cent over the first half of this calendar year.

With inflation forecasts having been revised down and further macro-prudential tools now being deployed by lenders, futures markets see every chance that the next move in interest rates will be down again to below 2 per cent.

Perhaps the twist in the tail here is that macro-prudential tools on lending to property investors mean lower interest rates for longer?