Health of construction industry to depend on consumer confidence: BIS Shrapnel

Creation Date: Tue, 09 Aug 2011 GMT

Health of construction industry to depend on consumer confidence

The impact of worldwide market turmoil on the Australian building and construction sector will depend on how consumer confidence is affected, although a modest recovery is still expected in the near-term, forecaster BIS Shrapnel has predicted.

The comments come as markets worldwide have plunged following the downgrade of the United States' credit rating late last week. The Australian sharemarket has already fallen over 2% this morning as a result.

"On the residential front, the critical question is how severe will confidence be hit," says BIS Shrapnel managing director Robert Mellor told SmartCompany this morning.

"I would actually argue that if there were to be a negative impact over the next two months, it may increase the probability of an interest rate decline. That would provide a stimulus to residential construction in terms of increased turnover."

Both Westpac and ANZ are now factoring in a rate decline for the second half of the year, and property experts expect that if this were to occur, the industry would receive a boost in spending. Mellor agrees.

"If that decrease in rates were to occur, that would at least place a floor on the fall of the industry. But the fundamentals are still good for most parts of Australia."

While Mellor says that an impact on confidence from the current turmoil could mean the market remains flat for a longer-than-expected period, this would eventuate in lower interest rates and create more prospects for a recovery in 2012.

The comments come as BIS Shrapnel has released a new report in which it says the building and construction industry has stumbled in 2010-11 due to the ending of the Building Education Revolution program, and predicts that residential building growth will be minimal in 2011-12.

The industry is set to grow in 2011-12 due to strength in the resources market, with a recovery in building starts forecasted for 2012-13. The biggest gains will be seen in Queensland, Western Australia and New South Wales.

However, BIS warns the industry will see another decline in 2013-14, with rising wages and immigration levels to force the RBA to increase rates in order to curb inflation.

The forecaster predicts building commencements to grow 8% in 2011-12, but by only 1% in 2012-13. However, new home building will grow 1% in 2011-12, followed by 12% growth in 2012-13, while new medium and high density dwellings will grow 2% in 2011-12, followed by 8% in 2012-13.

The value of new residential building is set to grow 10% in 2012-13.

"The non-residential building sector will do a little better in 2011-12, driven by commercial and industrial building."

However, this recovery is set to be short-lived. BIS Shrapnel expects the RBA to take more aggressive action on interest rates through 2013, with the variable rate to peak at 9.4% in the second half of that year.

"The ensuing economic downturn will result in the value of residential building starts declining by 15% over 2013/14 and 2014/15," it says.

However, given the current economic circumstances, Muller says "a lot of things could happen between now and then".

"When we prepared those numbers, it was six weeks ago. The expectation was there might be a rate rise this year, and we've been hoping that decision will be delayed."

"If the RBA went the other way and put rates down, it would push things back slightly. But the reality is, we'd see stronger economic activity because of interest rates."

Forecasts by state:

New South Wales

Commencements to grow 15% in 2011-12, by 14% in 2012-13, along with rises in commercial and industrial building.

Victoria

Residential dwelling starts to fall over the next two years as demand pressures ease and interest rates impact on affordability.

Queensland

Buildings starts to rise 1% in 2011-13, and by 16% in 2012-13. Non-residential projects set to fall as spending on education and health projects is curbed.

South Australia

Rise of 45% in total building commencements in 2011-12, followed by a 32% fall in 2013-13. The large increase is due to increased health spending. Residential building spending to fall.

Western Australia

Total building construction forecast to rise 28% in 2011-12, followed by 5% decline in 2012-13. Driven by the non-residential sector.

Tasmania

Construction to fall 4% in 2011-12, and by 23% in 2012-13, with residential and non-residential both to blame. Residential construction set to fall after recent highs.