Pete Wargent blogspot

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

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Friday, 22 January 2016

Interest rates still to fall?

Construction activity down to $49 billion

We saw earlier in the week how a building boom has helped to generate significant economic activity this year, particularly in Sydney, Melbourne, and to some extent, Brisbane.

Why, then, are markets still pricing in lower interest rates in the guise of one or possibly even two further interest rate cuts in this cycle?

One of the key reasons is to be found in the Construction Activity figures which were released on Wednesday this week. 

While quarterly residential building activity has picked up strongly by +11.9 per cent over the year to September 2015 to $15.5 billion, ultimately there is a limit to how far this boom can run.

What is more, non-residential building has declined by -3.7 per cent to $8.6 billion, while engineering construction - essentially mining and resources works - is set to decline considerably from here. 

Engineering construction declined by -9.9 per cent over the year, and has pulled back considerably from a quarterly peak of more than $33 billion to $25.3 billion in Q3 2015.

Construction in this sector declined by -6.3 per cent in the most recent quarter alone, yet activity levels are still tracking at about triple the levels we saw around the time of the Sydney Olympics.

In other words, as a number of resources mega-projects transition into their less labour-intensive production phase, construction activity still has quite some way to fall yet before it returns anywhere close to a historical average.

Thus either significant public sector funded building projects or other infrastructure works will need to kick off over the year ahead, else further interest rate cuts may be required.

Or perhaps all of the above!