VICTORIAN Building and Construction INDUSTRY OUTLOOK
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VICTORIAN Building and Construction INDUSTRY OUTLOOK March 2018 Disclaimer This document is not legal advice. Whilst every care has been taken in preparing this document, no responsibility will be accepted for action taken in reliance upon information contained in this document. 2 C O N T E N T S 1 National Economic Outlook 2 2 Victorian Economic Summary 5 3 Prices in the Building and Construction Industry 7 4 Confidence 9 5 Population 10 6 Labour Market 11 7 Housing Affordability 13 8 Industry Outlook 14 1 National Economic Outlook here has been a lot said about Australia’s – and the global – low inflation environment. Domestically, the latter has Tchallenged wages growth over the past couple of years. But on the other hand it has kept the threat of interest rates at bay – good news for Australia and good news for Victoria. More positive growth and easing inflation are a great combination for Australian businesses. As a result, national income growth – the total value of all new goods and services produced – surged over the past 12 months. Growth in national income is generally a precursor to growth in wages, and coupled with very strong employment growth – of which the majority was in full-time jobs – the underlying drivers point to better news on the wages front in the near future. CHART 1: Australian Annual GDP Growth GDP Growth, (Seasonally Adj. %) 6% GDP Growth 10 Year Average 5% 4% 2.8% 3% 2.7% 2% 1% 0% 1997-98 2001-02 2005-06 2009-10 2013-14 2017-18 Source: ABS, Master Builders Australia 2 1 National Economic Outlook Elsewhere: • The negatives from the big falls in mining investment have largely run their course and should not be as much of a drag on the economy going forward. • The next construction boom is underway and is being under- written by a surge in major transport infrastructure projects. Investment in major transport infrastructure projects is expected to peak in 2019-20 and add around 1% to GDP in each year over the next three years. Australia’s strategy of going from a mining boom, to a housing boom, and now to a transport infrastructure boom, to date at least, looks to be paying off. The latter has not come without costs and has relied somewhat heavily on (1) demand from China, and (2) low interest rates. CHART 2: Australian Quarterly GDP Growth GDP Growth, (Seasonally Adj. %) 1.4% GDP Growth 10 Year Average 1.2% 1.0% 0.8% 0.8% 0.6% 0.7% 0.4% 0.2% 0.0% Dec 1997 Dec 1999 Dec 2001 Dec 2003 Dec 2005 Dec 2007 Dec 2009 Dec 2011 Dec 2013 Dec 2015 Dec 2017 Source: ABS, Master Builders Australia 3 The next phase of growth is set to make a big contribution to pro- ductivity enhancing infrastructure improvements in our major cities. Underwritten by an unprecedented commitment from the States and the Federal Government, this pipeline of infrastructure investment is needed to improve the liveability of our major cities and support Australia’s high population growth. CHART 3: Major Transport Infrastructure Projects - Australia Source: Macromonitor 4 2 Victorian Economic Summary ictoria’s economy continues to be lifted by a number of favourable settings on interest rates and the Australian dol- Vlar. Added to that is population growth which is well ahead of the rest of the country. The demand settings couldn’t be much better for Victoria. As a result, economic growth in Victoria in 2017-18 is expected to be almost a full percentage point higher than the national average (3.7% compared to 2.8%) and 0.6% higher than economic growth in NSW, estimated at 3.1%. Population growth has added around 400 new people per day to Victoria in the last three years – with that rate accelerating over the past year. A number of these new arrivals have come from Perth as mining related construction work has dried up, while an increasing number of new international migrants are choosing Melbourne over Sydney, given the relatively lower living costs – particularly for housing. Key positives include: • Victoria’s large tertiary sector is a big source of international students and international migration. • High population growth in Melbourne has supported a boom in new housing construction and is expected to keep residen- tial construction activity high compared to historical averages. • Business investment is growing for the first time in a while and is showing up as a big lift in commercial construction activ- ity. Non-dwelling construction is up by 21.7% over the year to December 2017. • Tourist numbers are very strong which is good news for the accommodation, retail, recreation and gaming sectors. • Employment growth has been very strong – the highest rate of jobs growth of any state over the past 12 months. • Victoria’s share of the national economy is growing and will likely continue to do so as long as population growth contin- ues to outperform the other states. 5 CHART 4: Victorian Annual GDP Growth GDP Growth, (Seasonally Adj. %) 7.0% 6.0% 5.0% 3.7% 4.0% 3.0% 2.0% 2.3% 1.0% 0.0% 1997-98 2001-02 2005-06 2009-10 2013-14 2017-18 GDP Growth 10 Year Average Source: ABS, Master Builders Australia CHART 5: Victorian Quarterly GDP Growth GDP Growth, (Seasonally Adj. %) 7.0% 6.0% 5.0% 4.3% 4.0% 3.0% 2.0% 2.4% 1.0% 0.0% -1.0% Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Dec-17 GDP Growth 10 Year Average Source: ABS, Master Builders Australia 6 3 Prices in the Building and Construction Industry he index for the cost of construction below (blue line) shows the growth in construction costs – measured by the cost of Tbuilding products – has been moderate despite the boom in new housing construction. Consultations with Master Builders members identified emerg- ing shortages in some products. In Victoria, housing business members noted difficulty in sourcing timber products, tiles and cement, with prices rising as a result. The costs of housing measured as growth in the Australian Bureau of Statistics Consumer Price Index for housing rents, continues to grow at a faster rate than construction costs. CHART 6: Australian Housing and Construction Costs Index: 2011/12 = 100 130 Cost of Construction (Products) Cost of Housing (Rents) 120 110 100 90 80 70 60 50 40 Dec-1997 Dec-1999 Dec-2001 Dec-2003 Dec-2005 Dec-2007 Dec-2009 Dec-2011 Dec-2013 Dec-2015 Dec-2017 Note: Using CPI and PPI data, average for eight capital cities Source: ABS, Master Builders Australia 7 In Victoria: • The cost of construction, measured as growth in the Australian Bureau of Statistics Producer Price Index for housing construc- tion materials, has grown by 0.4% in the December quarter 2017, adding to growth of 3.1% over the year. • The cost of housing, measured as growth in the Australian Bureau of Statistics Consumer price Index for housing (rents), has grown by 0.5% in the December quarter 2017, adding to growth of 4.0% over the year. Overall, housing costs continue to rise faster than the costs of con- struction, suggesting there is still some tightness in the market in terms of access to housing. CHART 7: Victorian Housing and Construction Costs Index: 2011/12 = 100 130 Costs of Construction (Products) Cost of Housing (Rents) 120 110 100 90 80 70 60 50 40 Dec-1997 Dec-1999 Dec-2001 Dec-2003 Dec-2005 Dec-2007 Dec-2009 Dec-2011 Dec-2013 Dec-2015 Dec-2017 Note: Using CPI and PPI data for Melbourne Source: ABS, Master Builders Australia 8 4 Confidence usiness confidence improved for the second quarter in a row. The December index is 61.5, up from 58.5 in the September Bquarter. Expectations are for ongoing strength in the resi- dential construction sector as work on the books remains strong, particularly for residential builders in the detached housing and town housing sectors. But there is some emerging concern in the apartments sector so there is a chance that we will see a modera- tion in confidence going forward. The December quarter index score for confidence in the building and construction industry is well over the national index for busi- ness confidence of 55.7. CHART 8: Confidence in the Building and Construction Industry, Australia (December 2017) 65 61.5 60 Positive 55 50 neutral value 45 Negative 40 Mar-14 Dec-14 Sep-15 Jun-16 Mar-17 Dec-17 Source: Master Builders Australia, National Survey of Building and Construction 9 5 Population ictoria is head and shoulders above the other states/terri- tories in terms of its population growth. It is the only state Vin the last 12 months to record population growth above the national average of 1.6%. That is a hefty feat given Victoria only accounts for around 25% of the Australian population. Population growth has added around 400 new arrivals per day to Victoria over the last three years. To keep pace, construction busi- nesses need to complete more than 150 new dwellings per day to provide the extra housing these new residents demand. In the last 12 months Victoria’s population grew by over 145,000 people and has averaged 135,000 new people per year over the last five years. The latter is equivalent to adding another city the size of Geelong – Victoria’s second largest city – every two years. CHART 9: States Population Growth Change in Population (yearly, 000') 160 2.5% 2.1% 140 1.8% 2.0% 2.0% 120 1.8% 100 1.5% 1.4% 1.4% 80 1.0% 60 0.9% 40 0.5% 0.5% 20 0 0.0% NSW VIC QLD SA WA TAS NT ACT 2014 2015 2016 2006-2016 Ave Growth (%) Source: ABS, Master Builders Australia 10 6 Labour Market The chart below shows growth in the Australian labour market and Victoria’s share of employment.