Biggest Annual Fall in Home Construction Recorded in 19 Years, Anticipating Further Decline

May 31, 2020 Updated: May 31, 2020

Residential construction across the nation contracted for a seventh straight time during the March quarter, with a 12.5 percent drop from the last year—the biggest annual fall in almost 19 years—according to the latest data released by Australian Bureau of Statistics (ABS) on May 27.

However, results were divergent among sectors.

Residential construction represented the main drag. The total value of completed residential construction for the quarter stood at $17.25 billion (US$11.49 billion).

By contrast, the non-residential sector remained relatively robust, driven by ongoing major infrastructure projects, remaining steady for the quarter and contracting only 0.3 percent from last year.

Slowdown in Home Building

Commsec senior economist Ryan Felsman said the data is an important indicator, given that the construction sector represents about 17 percent of all Aussie businesses and employs around 1.2 million workers or 9.1 percent of the total workforce—the third largest across all industries.

He observed that although transport infrastructure projects have remained stable, construction activity has been weakening over the last two years—even prior to the lockdown induced by the CCP (Chinese Communist Party ) virus—as a result of “slowdown in residential home building, moderation in non-mining infrastructure commencements, easing in population growth, and bushfire disruptions.”

The industry has now also been heavily hit by the pandemic despite not being subject to a mandatory shutdown.

“Builders and engineers have reported declines in building activity due to weaker demand,” Felsman said in an analysis statement.

“In fact, the AiGroup’s monthly construction survey highlighted the challenges for businesses, with major new and existing projects being withdrawn or postponed, enquiries and new orders declining, and contracts cancelled.”

Housing Industry Association (HIA) chief economist Tim Reardon expressed the same concern, saying the shrink in the residential building sector will weigh heavily on the overall economy. He expects construction figure for the June quarter to decline further.

“Today’s data confirms that the decline in home building will detract from GDP growth in the March quarter of this year,” he said in a statement.

“Leading indicators of the home building deteriorated markedly in April and May which paves the way for the activity to fall further as the year progresses.”

Stimulus Scheme on Agenda

The data release comes the day after Prime Minister Scott Morrison outlined the government’s new JobMaker program, which listed boosting training for trades and skilled labour on its reform agenda.

Prime Minister also confirmed on May 26 that Treasurer Josh Frydenberg and Assistant Treasurer Michael Sukkar are developing a multibillion-dollar scheme to support the residential housing sector as new demand slumps deeply due largely to the fall in overseas migration.

“It’s an issue that has been a key topic of discussion amongst the premiers and chief ministers and myself,” he said at the national press conference. “If you’ve got a job in the residential construction industry, Michael Sukkar here and Josh [Frydenberg] has been working on plans. ”

The stark decline in net overseas migration is set to severely disrupt residential construction.

The government is expecting a 30 percent fall in net overseas migration this financial year, a 85 percent drop by next year should Australia’s borders remain shut. But Morrison said Australia is facing “a big gap” to the “figure of between about 160,000 and 210,000,” which “the great Professor [Peter] McDonald” set as Australia’s benchmark to maintain a GDP per capita growth.

The Reserve Bank of Australia (RBA) expects that sluggish population growth will affect demand for housing for an extended period.

“Lower incomes and confidence, as well as lower expected population growth, were expected to affect demand for new housing for an extended period,” RBA board agreed on its monthly meeting on May 5.

The Master Builders Association proposed to the government a $13.2 billion (US$8.79 billion) building and construction stimulus action on May 25, with 5.2 billion going to $40,000 (US$26,644) new home grants.

The modelling by Ernst & Young shows that the scheme will create over $30 billion (US$20 billion) in GDP and create more than 100,000 new jobs.

Denita Wawn, CEO of Master Builders, warned about a looming of “valley of death” facing the industry in an interview with ABC, saying the industry would shrink by 30-40 percent and lose one-third of the jobs without urgent government stimulus.

“We want to see a dedicated building and construction industry taskforce established to oversee the implementation of the stimulus action plan,” she urged in a statement. “For stimulus to occur, building activity needs to commence.”

In a similar move, the Property Council of Australia proposed a seven-point plan to stimulate construction, including a $50,000 (US$33,309) grant to 50,000 purchasers of new homes and a “welcome to Australia” migration plan.