Construction Activity Decline Eases Pressure on House Prices

After a topsy-turvy year for the property market, 2016 could bring much needed relief for homeowners.

Investors and owner occupiers would have been looking at next year with more than a little anxiety. They’ve seen dwelling price growth slow these past three months. They’ve read about growing fears of housing oversupply. And they know all too well that tighter lending practices are crimping demand.

None of these concerns have disappeared. And they’ll remain ongoing issues for the foreseeable future. But at least there’s some good news on the supply front. There are emerging signs that construction is peaking. And that it could help in offsetting slowing demand across the market.

New figures from the Australia Industry Group (AIG) showed construction activity slowing in November. The Performance of Construction Index (PCI) dipped 1.4 to 50.7 points. Anything above 50 indicates expanding activity.

At 50.7, construction still expanded in November. And it’s managed this for the past four months in a row. But it’s expanding at a slower pace, which is the key.

Behind this slowdown in construction was weak house and commercial building. Housing construction fell to 48 points. As did commercial construction, down 2.7 points to 46.3. Both housing and commercial sub sectors contracted last month. Were it not for apartment construction, the entire sector would have weakened.

At the same time, new construction orders fell too. The PCI showed that new orders dropped below 50, to 49.8 points. This was in contrast to the previous three months, where new orders were up.

What this tells you is that construction activity is likely to slow in the coming months. That’s important for house prices. It should lessen the pressure, from the supply side, on prices in Q1 2016.

While housing construction is slowing, the same can’t be said for apartments. Unit construction remained strong in November, with a PCI reading of 69 points.

What can we make of this in light of the difference in activity between housing and units? Here’s how AIG’s policy chief Peter Burn sees the market unfolding in 2016 (emphasis mine):

Both current activity and new orders in the apartment building sub-sector rose in contrast to the other three sub-sectors, in which activity and new orders fell.

The apartment component of the residential sector has some further momentum to it, while detached house building is holding up very well, yet doesn’t look to have any further growth to it.

The story for 2016 really is, as the PCI has been signalling, persistently strong rather than growing construction activity in the residential sector, but no compelling evidence of an emerging recovery in non-residential construction.

We need to be seeing evidence of a rebound in non-residential sectors sooner, rather than later and government could perhaps give some further thought as to how they might assist with that transition.

With new housing approvals having fallen in recent months and with mining and energy-related engineering construction on the decline, the overall health of the construction sector in coming months is likely to depend on whether there is a lift in commercial construction.

In this context the decline in new orders in November is somewhat sobering.

All this could be either good or bad news, depending on which side of the fence you sit. If you’re a homeowner, weaker construction activity should offset slowing demand. Which should also help keep house prices from declining too much. But if you’re an aspiring homeowner, you’d probably want construction to expand instead. Either way, weaker housing supply should help alleviate concerns of slowing demand.

Morgan Stanley even recently forecast a 7% contraction in property prices next year. It based this assessment on weaker demand, coupled with housing oversupply. But that might be overblown, with PCI figures showing construction is easing. On top of this, new orders are down too, which is important in measuring future activity.

Nonetheless, unit prices are set to drive the property market next year. For now, activity and new orders in apartment construction remains high. But it’ll be interesting to see if this too slides in the coming months.

And, just on this, we also know that unit construction is typically limited to urban centres. That’s less likely to affect house prices in more suburban areas. And it could mean we see a growing disconnect between dwelling price growth based on postal codes.

At the same time, homeowners should be careful in wishing for apartment activity to slow further. Property prices don’t rise and fall in isolation from everything else. Declines across the construction sector also means there’s less people working in the industry. Fewer workers means higher unemployment…and all the effects this has on the economy. These aren’t things any homeowner should hope for. If economic conditions worsen then house prices are likely to fall as well.

So it’s not a clear cut case of lower housing supply being a good thing for everyone. In the short term it might help homeowners boost, or just maintain, the value of their homes. But that only works up to a point. If construction levels contract on the whole, then the net outcome could be detrimental to price growth.

In any case, homeowners are likely to welcome some easing in construction activity. They got that in November, and signs are that this trend will continue. If nothing else, it should help with concerns of oversupply in the market. And that could mean that house price pessimists, myself included, have less to moan about in the coming months.

Mat Spasic,

Junior Analyst, Markets and Money

PS: Markets and Money’s property expert, Phillip J. Anderson, remains bullish on the market. He maintain that house prices are yet to hit their peak. And he thinks we’re at the edge of another boom that could last a decade.

Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is, and where it’s going. He predicted a housing market crash in 2008. He also went against the mainstream in 2009, saying house prices would go on to boom this decade.

He was right on both accounts.

In a free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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