SA Data Wrap – Construction conditions remain healthy despite York Civil’s voluntary administration

The news earlier this week that SA construction company York Civil has gone into voluntary administration came as a surprise, particularly considering that various indicators point to generally healthy conditions in the South Australian construction sector. In our latest Economic Briefing Report, we concluded that activity in the SA construction sector rose strongly over the past year, and that activity should remain at a healthy level in the near term. In this edition of the latest Data Wrap we consider the latest forward indicators for construction activity, and review the latest retail sales data.

Building approvals remain at a robust level
After falling over the summer months, the total value of building approvals for South Australia has trended upward since February, and remains at a buoyant level. ABS data indicates that the total value of approvals rose by 4.1 per cent in June 2018 in trends terms, and were up 19 per cent compared to the same time last year.

A positive sign is that the rise in building approvals over the past year has been broadly based, with there being large increases for both residential building (up 16 per cent) and non-residential building (up 25 per cent).

Of course, approvals may not always translate into actual building projects to the extent that changes in economic circumstances may lead to some projects being cancelled or delayed. Nonetheless, the latest approvals data paint a quite positive picture of likely building activity levels for South Australia in the short term.

Unfortunately there are no approvals data for engineering construction, which has been an important driver of overall construction activity over the past year. However, previous data on ‘work yet to be done’ showed there was a large volume of outstanding work for the sector in the March quarter, indicating that activity should remain at a healthy level in the short term. However, the longer term outlook for engineering construction is less clear. Construction activity on major public transport projects is scheduled to wind down beyond 2019, and it appears there is currently a lack of equivalent sized new projects that are ready to take over.

Home lending activity declines
On a less positive note, ABS data on housing finance commitments shows that home lending activity has moderated in South Australia. The total number of owner occupied housing commitments in June 2018 was down 5.9 per cent compared to a year earlier. A similar decline was recorded nationally over this period (-5.6 per cent).

The decline in home lending activity has been driven primarily by reduced demand for existing housing. The number of lending commitments for established dwellings (excluding refinancing) in the three months to June 2018 was down 6.0 per cent compared to a year earlier. In this light it is not surprising that house prices have been growing at only a moderate pace recently.

Interestingly, the number of loans for owner occupied new home construction was also down over the past year (-3.3 per cent), but the total value of finance commitments for new home construction was up solidly (7.3 per cent).¹ This divergence points to a significant increase in average loan sizes, which may in part reflect compositional changes in new housing stock (e.g. larger homes), at least for owner occupiers.

Retails sales growing at a slower pace
Data released by the ABS last week confirmed that South Australian retails sales lost momentum in the first half of 2018, but continued to expand at a moderate pace. Retails sales in real trend terms grew by 0.4 per cent in the March and June quarters respectively, down from an average quarterly growth rate of 0.9 per cent in 2017. In contrast, growth in retail sales nationally has picked up from 0.5 per cent in the December quarter 2017 to 0.8 per cent in the June quarter.

The slowdown in retails sales momentum for South Australia is not surprising; the rate of growth in 2017 was quite strong by recent historical standards and could not be sustained in the face of ongoing subdued growth in wages and population. Large rises in electricity prices and, more recently, petrol prices, have also weighed on households’ discretionary incomes.

Note: ¹ ‘New home construction’ is composed of construction of dwellings and purchase of new dwellings.

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