August 28, 2019 / 2:39 AM / 20 days ago

Australia home building craters, prices promise some relief

SYDNEY (Reuters) - Australian construction spending slid to its lowest in almost three years last quarter as a deepening downturn in home building spread to other sectors and posed a downside risk to growth across the economy.

FILE PHOTO: Cranes can be seen on a construction site at the inner-city suburb of Barangaroo, the site of the Australian casino operator Crown Resorts new Sydney waterfront resort, in Sydney, Australia, August 9, 2018. REUTERS/David Gray

The weakness in housing is also unlikely to turn anytime soon as the industry wrestles with an overabundance of new apartment blocks begun when the market was red-hot.

Wednesday’s figures from the Australian Bureau of Statistics showed inflation-adjusted construction spending fell 3.8% in the June quarter, from the previous quarter, to stand at A$48.8 billion ($32.96 billion). That was the lowest amount since late 2016 and off 11.1% from a year earlier.

The quarterly drop was far steeper than the 1% fall forecast by analysts and suggested gross domestic product (GDP) might also miss estimates, perhaps badly. The data is due on Sept. 4.

“With construction representing around 13% of the economy this result will dent GDP, potentially in the order of 0.4 percentage points,” said Westpac senior economist Andrew Hanlan.

“The housing downturn still has further to go and will weigh on conditions throughout 2019 and into 2020.”

Analysts had thought the economy grew around 0.6% in the quarter, which would be a pick up from a poor first quarter. Yet annual growth would still slow to its lowest in a decade at 1.5%, dragged mainly by dismal consumer spending.

While the country’s resource exporters have been buoyed by strong Chinese demand, consumers have labored with miserly growth in wages and incomes.

The Reserve Bank of Australia (RBA) has already reacted by cutting interest rates to a record low of 1%, and markets are wagering it will have to go all the way to 0.5%.

RBA Deputy Governor Guy Debelle this week confirmed unconventional policies such as buying bonds would be considered if yet further stimulus was then needed.

LESS WORK, LOWER PROFITS

The ongoing slump in home building suggested some sort of action might be necessary. Residential work sank 5.1% in the June quarter to the lowest since 2015, and it’s playing havoc with firms in the sector.

Just this week, shares in Australia’s largest building materials maker Boral Ltd (BLD.AX) suffered their sharpest one-day loss after issuing a stark warning on profits as a drop off in new homes swamped strength in infrastructure.

“Housing moves a lot faster than infrastructure does,” was how chief executive Mike Kane explained the downturn.

Cement maker Adelaide Brighton (ABC.AX) on Wednesday, reported a 35% drop in half-year profit and saw no turnaround in residential construction until 2021.

One potential bright spot is that home prices looked to have turned a corner after two years of decline, helped by lower mortgage rates and an easing in lending rules.

Data from property consultant CoreLogic out on Monday showed home prices across the capital cities had risen 0.7% in August so far, the largest rise since 2017.

FILE PHOTO - Construction workers build a new home in Sydney's Greenhills Beach, Australia, August 31, 2017. REUTERS/Jason Reed

Crucially, values in the largest markets of Sydney and Melbourne were up 1% on the month so far in a major turnaround.

“The consumer is the major domestic source of downside risk in the economy, and the better tone in the housing market is helping,” said CBA chief economist Michael Blythe.

“The drag on consumer spending from a negative ‘wealth effect’ should be receding as a result,” he added. “A turn in the price cycle should also be a positive for consumer confidence.”

Reporting by Wayne Cole; Editing by Sam Holmes

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