The Construction Industry in Australia is Dangerously Close to a Crisis

The Construction Industry in Australia is Dangerously Close to a Crisis

Earlier in the start of the year, as the April school holidays came to an end, my kids and I found ourselves wandering the banks of the Yarra River in Melbourne late one sunny afternoon.

Then, as we headed back to catch the train home, my son tried to count all the cranes in the sky.

There’s too many to count,’ he said.

I looked up.

There were too many to count.

Which was really odd.

Because I know for a fact the Aussie construction sector has fallen on hard times…

Peak cranes

The kid was right.

There are a record number of cranes in Melbourne right now.

According to the RLB Crane Index, Melbourne surpassed 200 cranes for the first time ever at the start of this year.

When the kids and I were wandering around the city in April, there was grand total of 222 cranes peppered along the city skyline.

In the past five months, it hasn’t fallen that much either. There’s still 213 across the Melbourne skyline. In fact there’s so many cranes in the Melbourne sky, that fellow Daily Reckoning Australia Jim Rickards has often joked with me that the crane is Australia’s national bird.

None the less, a whopping 66.7% of those were dedicated to residential use. Another 12.2% for commercial, says the index.1

But here’s the thing. Cranes in the sky surely mean a building boom is underway, doesn’t it?

That perhaps all the doomers and gloomers got it wrong?

Well…no.

In fact, peak cranes now really means the worst is yet to come.

 

Why 10% matters

Construction in Australia contributes almost 10% of GDP. Well above the 8% that mining does.

As the demand for housing, apartments and commercial buildings grew over the past 15 years, so did the workforce.

In fact, the construction workforce has nearly doubled in size in that time.

This one sector now employs 1.1 million people Australia wide. That’s a little over 10% of the entire Aussie workforce in one sector.

Construction has been a vital contributor to the Aussie economy for two decades.

It’s given us places to live and work. And as a direct result of the high wages it pays, it has contributed to high consumption rates.

The problem is, the construction industry isn’t healthy right now.

Don’t let all the cranes in the sky fool you.

One whole sector is failing

Since mid-2017, Australian property prices have been falling.

Given the persistent coverage of this topic in the mainstream press, you’d have to be living under a rock not to know that.

At the same time, the value of housing finance has fallen.

And with it, the number of new construction approvals.

And all of this is beginning to weigh on construction sector data.

One of my economic ‘health check’ tools is the Australian Performance of Construction Index (PCI).

Given Australia’s reliance on building things — and how large the employment sector is — knowing where the construction industry sits gives you a good insight into what’s to come.

My friend, things are starting to look bleak…

Australian Performance of Construction Index

In April, the Australian PCI dropped three points to 42.6, well below the critical level of 50.

The April fall caps off 12 months of decline, too.

Take a look…

Australian PCI

Source: Australian Performance of Construction Index2

The more you dig through the data, the gloomier the picture gets.

New orders dropped to 42.4, while employment in the sector has slightly increased in the past couple of months, to sit at 46.2. None the less employment sitting under 50 means the sector is still ‘contracting’.

This means less product is being ordered and fewer people are working in the industry.

Take new apartment approvals, for example. Australia wide, they’ve been falling for 26 months now…and the index sits at 33.0 points.

The entire construction industry in Australia is dangerously close to entering a financial crisis-type slide.

But we haven’t seen the worst of it yet.

One million jobs on the line

All the cranes in the sky aren’t showing a booming sector.

Those cranes are linked to an economy that was booming two years ago.

The approval to get out of the ground process takes a minimum of two years. Even a five-year turnaround isn’t unheard of.

Until we see construction figures turn around, those cranes are just evidence that things are going to get worse.

What could be worse?

Empty office buildings. Apartments not being sold. Developers going broke and taking the early investors with them.

And ultimately, large amounts of people unemployed…or underemployed.

People who made loan commitments when they were earning six-figure salaries suddenly find themselves as Uber drivers to get by.

The cranes aren’t the sign of a boom. They are the sign of decisions made when things were good.

This could get ugly.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

1 ‘https://s28259.pcdn.co/wp-content/uploads/2019/10/RLB-AUS-Crane-Index_Q3_2019.pdf’
2 ‘https://cdn.aigroup.com.au/Economic_Indicators/PCI/2019/PCI_Sep_2019_07029