QTPA Member Alert |AiG-Housing recovery continues, non-residential construction stays weak (18/07/14)

AiG-Housing recovery continues, non-residential construction stays weak (18/07/14)

The ABS data for Q1 2014 showed that the total value of building work done (residential and non-residential, but excluding engineering construction) increased by 3.7% q/q in Q1 2014 to be 6.4% higher than a year earlier (seasonally adjusted). This increase was led by growth of 7.6% q/q (and 8.5% p.a.) in the value of work done on new residential buildings.

Reflecting this solid growth in residential approvals over the past year, the number of dwellings commenced nationally increased by 8.7% q/q in Q1 to be 22.2% higher over the year, the strongest annual growth rate since June 2010.

In the private sector, the number of commencements for dwellings increased by 12.9% q/q, pushing annual growth to a four-year high of 23.5% p.a. Commencements of private sector other residential buildings (which include units and apartments) increased by 4.4% q/q to be 26.3% higher over the year, up from 21.4% p.a. in Q4 2013. Around 98% of all dwellings commenced in Australia are in the private sector. This strength in commencements confirms that residential construction will continue to underpin economic activity in the near future. Low interest rates and population growth will remain key supporting influences in the medium to longer term.

There continues to be significant divergences in construction activity across the states. Despite a relatively small rise in the number of dwelling commencements in New South Wales (+2.5% q/q in Q1), the state remains the major driver of national construction activity due to the high volume and value of residential construction work undertaken. The largest rise in commencements in Q1 occurred in Victoria (+15.4% q/q), although the value of residential work done has stabilised in Victoria after running at an elevated level for some time. Increases in the number of commencements were also recorded in Western Australia (+12.1% q/q), Tasmania (+5.3% q/q) and Queensland (+1.3% q/q), while commencements fell by 7.8% q/q in South Australia.

In contrast to the residential sector, the value of non-residential building and commercial construction (including offices, retail buildings, warehouses and industrial premises) recorded a decline of 0.3% q/q in Q1 2014. This reflected patchy investor activity across the major building categories and overall weakness in approvals. The value of work done in this sector is currently 4.0% higher than a year ago, and the same pace of annual growth as in Q4 2013.

Despite relatively subdued non-residential building activity in total, there are a range of major projects in planning or the early stages of construction within this sector. This is likely to lead to firmer construction volumes across various commercial property sub-sectors over the next two years. Health building commencements, for instance, rose by 20.4% p.a. through the year to Q1 2014 , consistent with the solid demand for health and aged care services in recent years. Hospital construction activity remains high across the country.

Despite soft consumer sales growth, retail building commencements have picked up in recent quarters, driven by some large shopping centre expansions and refurbishments. Total retail and wholesale building commencements are currently rising at an annual rate of 17.2% p.a., with activity to be further supported by various proposed new projects. In other sectors, airport redevelopment projects underway in Perth and Melbourne are supporting the industrial building sector, with commencements for transport building rising by 10.9% p.a. in the year to Q1 2014.