Record home building with bevy of work ahead

Consumer sentiment; Building activity

• Record home building: In real trend terms, a record $19.8 billion of work was done in building new homes in the September quarter.
• New starts: The number of dwelling starts fell by 5.7 per cent in the September quarter after falling 4.7 per cent in the June quarter and rising 11.7 per cent in the March quarter. Currently, 227,186 homes are being built.
• Near-record building: In the September quarter $75.1 billion of residential and commercial building work was yet to be done (completed), down from the record high of $76.4 billion in the June quarter.
• Consumer confidence: The Westpac/Melbourne Institute survey of consumer sentiment index fell by 4.7 per cent to a 16-month low of 99.6 in January. A reading above 100 denotes optimism.

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.

What does it all mean?

• Think that the building boom is over? A record amount of work was done in building new homes in the September quarter. And the value of outstanding home building and commercial work stands at $74 billion with the value of projects to be completed just off record high. Notably that total includes almost 230,000 homes that are currently in various stages of construction.
• In short, there is plenty of building work to be done. Add to the value of home and commercial building, around $62 billion of engineering construction work is to be done, up 26.2 per cent on a year ago.
• The stock of homes being built will understandably ease over the next year as supply starts to match underlying demand. But Australia’s growing population needs more roads, schools and hospitals, so the bevy of infrastructure projects mean strong demand for labour and resources.
• As supply of homes matches demand, both upward and downward pressures of home prices will ease. Home prices will flatten out across many regions.
• The latest weekly survey shows above-average consumer sentiment while the monthly survey shows a more pessimistic reading. The monthly data has been superseded by a more optimistic reading in the weekly series. Bottom line is that consumer confidence is good, not great.

What do the figures show?

Dwelling starts & work done

• The number of dwelling starts (commencements) fell by 5.7 per cent in the September quarter after falling 4.7 per cent in the June quarter and rising 11.7 per cent in the March quarter.
• House starts fell by 4.5 per cent in the quarter while apartment starts fell by 7.3 per cent.
• Work started on 228,179 new dwellings over the 12 months to September, up 3.8 per cent on the year but down from the record high of 234,179 dwellings in the year to December 2016.
• Across Australia, starts in the September quarter fell in five states/territories: NSW (down by 5.5 per cent); Victoria (down by 16.0 per cent); Queensland (up by 8.3 per cent); South Australia (down by 18.6 per cent); Western Australia (up by 2.9 per cent); Tasmania (down by 6.0 per cent); Northern Territory (down by 2.9 per cent); and the ACT (up by 41.5 per cent).
• In the full 12-months to September, dwelling starts were higher than the decade average in all of the states & territories except for the Northern Territory (down 51.1 per cent), and Western Australia (down 23.3 per cent). Starts in NSW were 49.8 per cent above the decade average. Next highest was the ACT where starts were up by 32.3 above the decade average with Victoria up 27.9 per cent; Queensland up 16.7 per cent; Tasmania up 12.1 per cent; and South Australia up 7.9 per cent.
• In the September quarter $75.1 billion of residential and commercial building work was yet to be done (completed), up 9.7 per cent on a year ago.
• The value of residential and commercial building work in the pipeline stood at $96.6 billion at the end of September, up 7.8 per cent on a year ago but down from a record $99 billion at the end of June.
• Across Australia, 227,186 homes are being built, down from a record 230,573 homes in March.

Consumer confidence

• The Westpac/Melbourne Institute survey of consumer sentiment index fell by 4.7 per cent to 99.6 in January. The sentiment index is now below its long-term average of 101.3. A reading above 100 denotes optimism. The survey of 1,200 people was conducted from January 7-11.
• The current conditions index fell by 3.3 per cent and the expectations index fell by 5.6 per cent.
• All of the five of the components of the index fell in January:
  • The estimate of family finances compared with a year ago fell by 5.9 per cent;
  • The estimate of family finances over the next year fell by 3.1 per cent;
  • Economic conditions over the next 12 months fell by 7.8 per cent;
  • Economic conditions over the next 5 years fell by 5.9 per cent;
  • The measure on whether it was a good time to buy a major household item fell by 1.3 per cent.
• Housing outlook: A good time to buy a dwelling? The index rose by 4.1 per cent to be up 7.7 per cent on the year. House price expectations fell by 4.1 per cent to be down by 25.7 per cent on a year ago.
• Unemployment expectations: Unemployment expectations rose by 2.2 per cent in January to be up 0.7 per cent over the year.

What is the importance of the economic data?

What are the implications for interest rates and investors?

• Council approvals to build new homes, offices and shops
  have eased from record levels, but it is clear that there is plenty of work to be done over the next year or two. And added to the near record amount of building there are the growing number of infrastructure projects. There is a growing risk of price and wage pressures to emerge in the construction sector.
• Prospects currently remain bright for building material companies. But forward-looking investors would envisage slowing demand for materials in a year’s time – in home building rather than commercial or engineering sectors.
• CommSec doesn’t expect a change in interest rates until later in 2019 at the earliest.