According to the Australian Bureau of Statistics, construction, which includes home building, infrastructure, and commercial construction, is Australia’s second-largest contributor to annual GDP (behind financial services).
In the year to September 2018, building construction alone saw $30.6 billion gross value added to the economy (1.7 per cent of nominal GDP). The years between 2014 and 2018 saw around 19,000 dwellings approved for construction each month across Australia. This figure was approximately 5000 higher than the historical average.
Detached home building was fairly steady, meaning that most of the boom was accounted for by apartment construction.
However, the Sydney and Melbourne housing markets turned, leaving developers with fewer incentives to provide more new dwellings. The decline of such construction has already been felt at the planning stage. ABS figures published this month showed that dwellings approvals fell 9.4 per cent year-on-year in the September quarter across the country. This signified a four-year low in dwelling approvals.
The latest building activity data shows the sharpest quarterly decline in more than five years for the construction stage, as seasonally adjusted value of residential work commenced across Australia dropped 6.4 per cent. The decline in commencement in Victoria accounted for almost 90 per cent of the nationwide decline.
Decline led by Victoria
Significantly, commencements in “dwellings other than houses” declined 28 per cent in seasonally adjust terms, compared with a 5 per cent decline in house commencements. This follows a 24 per cent reduction in approvals for Victorian unit dwellings. Moderation in dwellings supply, particularly for units, could yet mitigate further price declines.
ABS employment data suggests that over the past five years, 19 per cent of new full-time jobs were created in construction. The same data shows a 6 per cent decline in construction jobs in the three months to November 2018, as Melbourne property prices slid downwards.
Slower job creation could slow migration into the state, whilst also limiting income produced from the sector. These are two major factors that support house market price growth.
The downward trend in NSW unit commencements was not as sharp as in Victoria, with a 6 per cent decline. This follows a similar more gradual downward trend since the Sydney dwelling price peak in June of 2017.
ACT and Queensland bucking the trend
Unlike larger states, ACT figures displayed an upswing in commencements, particularly in units. The territory saw approximately 370 houses commenced within the September quarter, with 2500 units commenced. The latter figure represents a 50 per cent increase in units commenced (in seasonally adjust terms).
Queensland unit commencements in the quarter for September were even higher, with approximately 5000 units commenced. These regions seem to counter the wider market performance, as Canberra units declined 3.4 per cent in the September quarter while those in Queensland declined 3 per cent.
Migration to these states could be about to increase, however, with latest data suggesting significant increases for both Queensland and the ACT, particularly from interstate migration from NSW.
Despite some pockets of higher activity, the national decline in dwelling commencements will likely be an early sign of a wider construction sector slowdown. The decline comes after unprecedented levels of unit construction in NSW and VIC, and may see building construction scaled back towards 2014 levels.