Building Industry Expands

September 11th, 2015
The Australian building industry has expanded for the first time in ten months, with strong growth seen in residential construction and increasing demand for industrial assets. While a drop in mining-related investment continued to adversely affect the engineering construction sector, growth in apartment building, house building, and commercial construction were more than enough to make up the difference. With big plans for Sydney over the next decade, this could be the start of better things to come for the construction industry.

The Performance of Construction Index measures short and medium term conditions in the Australian construction market. Released each month by the Australian Industry Group (AIG) and the Housing Industry Association (HIA), the index increased by 6.7 points to 53.8 in August, with readings over 50 points indicating growth. The index is based on 120 interviews, with companies answering questions related to production, employment, prices supplier deliveries, inventories, and new orders.

Most of the growth in the Performance of Construction Index can be attributed to residential building, with apartment building the strongest performer during the month despite being down 3.3 points to 58.7. The house building sector was also strong, with house building rising by 4.4 points to 54.4 after stabilising in July. Despite the residential sector getting most of the attention, commercial construction also rose by a solid 9.4 points to 54.6 after nine months of decline, with engineering construction falling by 2.9 points to 45.9.

According to AIG Head of Policy Peter Burn: "Continued strength in the residential sub-sectors and a lift in conditions in commercial construction underwrote the welcome return to expansion in the national construction sector during August. The positive news from these sub-sectors was sufficiently strong to outweigh the entrenched contraction in engineering construction associated with the winding-down in mining-related projects... Encouragingly, new orders lifted for all four sub-sectors in August."

"Conditions in commercial construction are likely to be critical to the strength of the overall construction industry in coming months, with residential building already at high levels and weakness in engineering construction likely to continue for some time." said Burn. With $20 billion worth of infrastructure already planned by the NSW government as it opens up the south-west of Sydney, the long-term forecast is looking promising. According to Commercial Real Estate Services (CBRE), up to 850,000 square metres, or more than double Sydney's CBD, is earmarked for development from 2017 to 2027.

The importance of the building industry should not be underestimated, especially now as Australia attempts to recover from the mining slump. According to HIA Chief Economist Harley Dale, "The results for both the detached house and apartment sub-sectors reinforce the important contribution that new home construction continues to make to Australia's economic growth... New housing really has been the king-maker of the domestic Australian economy."

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