Construction boom: Too much work? Tassie consumer confidence at 7-year high

Consumer sentiment; Building activity; China inflation

•  Consumer confidence: The Westpac/Melbourne Institute survey of consumer sentiment index fell by 0.6 per cent to 102.4 points in April, down from 103.0 points in March. The index is above its long-term average of 101.5 points. A reading above 100 points denotes optimism.
• Home building: The number of dwelling starts fell by 5 per cent in the December quarter, dragged lower by a 11.7 per cent fall in apartments. However across Australia, 218,842 homes are being built, down just 2.4 per cent on the 224,314 record set in September quarter 2016.
• China consumer prices: Consumer prices rose by 2.1 per cent in the year to March (forecast 2.6 per cent), down from 2.9 per cent in the year to February. Non-food and food prices were also up 2.1 per cent over the year.
• China business inflation: Producer price inflation fell from 3.7 per cent in the year to February to 3.1 per cent in the year to March (forecast 3.4 per cent).

The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. Building & building material companies are affected by dwelling starts including Boral, James Hardie, Adelaide Brighton, Brickworks, AV Jennings Limited, Devine Limited and Beacon Lighting. The Chinese data have implications for the currency markets and therefore exporters and importers.

What does it all mean?

• The amazing situation faced by builders and construction companies is that there is effectively too much work. The value of work that is still to be completed stands at almost $68 billion. But to that total you need to add $26 billion of projects that are still to be started. The total work of $94 billion that is in the construction pipeline is the highest on record and continues to climb, up almost 13 per cent on the year. The problem for the industry is that workers are hard to find and costs are starting to lift. For the Reserve Bank on inflation watch, here is the place to start watching.
• Its not an illusion. There are lots of cranes over Sydney. In fact, according to the Rider, Levett & Bucknall (RBL) Crane Index for the December quarter, there are currently 350 cranes on the skyline over Sydney. Around 109 Sydney suburbs have residential cranes erected. So its little wonder that apartment construction work in NSW is at a record high.
• Taswegians are a optimistic bunch. Consumer confidence is the best in over seven years. The annual retail spending growth rate of 3.1 per cent (to February 2018) is equal second with NSW across the country.
• A positive wealth effect from surging property prices and strong jobs growth has boosted sentiment. Population growth is lifting as ‘mainlanders’ seek more affordable housing and a less hectic lifestyle.
• Hobart is going gangbusters. The Hobart housing market is the strongest in the country. Annual home price growth is 13 per cent and total returns from residential property are a very healthy 18.7 per cent (to March 2018).
• And Tasmanian dwelling commencements rose by 13.8 per cent in the December quarter – the strongest growth rate of all states and territories across Australia.
• The lower Aussie dollar is supporting the Apple Isle’s agricultural and tourism industries. Spending by international tourists surged by 31 per cent in 2017 and is up 90 per cent over the past three years, according to Australian government data.

What do the figures show?

Consumer confidence

• The Westpac/Melbourne Institute survey of consumer sentiment index fell by 0.6 per cent to 102.4 points in April, down from 103.0 points in March. The index is above its long-term average of 101.5 points. A reading above 100 points denotes optimism.
• The survey was conducted from April 3-8.
• The current conditions index was unchanged at 104.9 points, but the expectations index fell by 1.0 per cent to 100.7 points.
• Three of the five the components of the index increased in April:

• • The estimate of family finances compared with a year ago rose by 2.5 per cent;
  • The estimate of family finances over the next year fell by 5.8 per cent;
  • Economic conditions over the next 12 months rose by 0.6 per cent;
  • Economic conditions over the next 5 years rose by 2.9 per cent;
  • The measure on whether it was a good time to buy a major household item fell by 1.8 per cent.

• Housing outlook: A good time to buy a dwelling? The index fell by 0.5 per cent in April and is up by 8.0 per cent from a year ago. And house price expectations rose by 0.4 per cent, but is down by 14.1 per cent on a year ago.
• Unemployment expectations: Unemployment expectations rose by 3.1 per cent in April, but are down by 10.4 per cent over the year.

Dwelling starts

• Dwelling starts (commencements) fell by 5.0 per cent in the December quarter after a 1.8 per cent lift in the September quarter (previously reported as a 0.7 per cent increase).
• House starts rose by 0.7 per cent while apartments fell by 11.7 per cent. Work started on 214,984 new dwellings over calendar 2017, down 8 per cent from the record high of 233,616 dwellings in the year to March 2016.
• Across Australia, starts in the December quarter fell in six states/territories: NSW (down by 1.9 per cent); Victoria (down by 6.7 per cent); Queensland (down by 1.2 per cent); South Australia (down by 26.3 per cent); Western Australia (up by 10.7 per cent); Tasmania (up by 13.8 per cent); Northern Territory (down by 51.9 per cent); and the ACT (down 51.9 per cent).
• In the year to December, dwelling starts were higher than the decade average in all the states & territories except for the Northern Territory (down 35.5 per cent), Tasmania (down 4.1 per cent), and Western Australia (down 16.7 per cent). Starts in NSW (68,033) were 51.7 per cent above the decade average. Victorian starts were 21.1 per cent above the decade average with Queensland up 9.2 per cent, South Australia up 7.2 per cent and ACT up 6.0 per cent.
• A record 68,032 apartments are currently being built in NSW, from a record total of 88,624 homes being built.
• In the December quarter $67.9 billion of residential and commercial building work is yet to be done (completed), up 11.6 per cent on a year ago.
• The value of residential and commercial building work in the pipeline stood at a record $94.2 billion at the end of December, up 12.8 per cent on a year ago.
• Across Australia, 218,842 homes are being built, down just 2.4 per cent on the 224,314 record set in September quarter 2016.

China inflation:

• Chinese consumer prices rose by 2.1 per cent in the year to March (forecast 2.6 per cent), down from 2.9 per cent in the year to February. Non-food and food prices were both up 2.1 per cent over the year.
• Consumer prices fell for seasonal reasons in March. Consumer prices fell 1.1 per cent with food prices down 4.2 per cent and non-food down 0.4 per cent.
• Over the year, food and tobacco prices rose 2.0 per cent; clothing rose 0.6 per cent; living costs rose 2.0 per cent; home appliances and services rose 1.6 per cent; transport and communications rose 0.3 per cent; education & entertainment rose 2.2 per cent; medical care rose 5.7 per cent; and other supplies were up 1.2 per cent.
• Chinese producer price inflation fell from 3.7 per cent in the year to February to 3.1 in the year to March (forecast 3.4 per cent). Over the year, the prices of raw materials were up by 5.1 per cent with the cost of processing up 3.7 per cent. But prices of consumer durables fell 0.3 per cent over the year with “daily use” goods up 0.9 per cent and clothing up just 0.3 per cent.

What is the importance of the economic data?

• Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.
• The Australian Bureau of Statistics releases data on dwelling commencements (starts) each quarter. The figures provide guidance on future construction activity. If construction begins on new houses or apartments, it signifies work for building trades.
• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 19th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th of each month. China is Australia’s largest trading partner and changes in the Chinese economy have major implications for the Aussie economy.

What are the implications for interest rates and investors?

• The pipeline of residential and construction work yet to be done across Australia is elevated. But there appears to be a growing backlog of work as a potential shortage of labour means that council approvals are yet to be converted into actual dwelling commencements.
• China recently set its consumer prices target at “around 3 per cent” for 2018. Prices accelerated to within touching distance of this in February due to cold weather and the “Festival Factor”. So its no surprise that demand and prices eased in March from a 4-year high.
• Chinese producer prices have decelerated to a 17-month low in March. But will tariffs, if implemented, result in a lift in factory input prices?
• CommSec doesn’t expect a change in interest rates until at least the December quarter.

By Ryan Felsman, Senior Economist