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Australia construction spending at 3-year low

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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.

Sydney

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.

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 per cent in the June quarter, from the previous quarter, to stand at A$48.8 billion (S$45.75 billion). That was the lowest amount since late 2016 and off 11.1 per cent from a year earlier.

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The quarterly drop was far steeper than the 1 per cent 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 per cent 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 per cent 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 per cent, dragged mainly by dismal consumer spending.

While the country's resource exporters have been buoyed by strong Chinese demand, consumers have laboured 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 per cent, and markets are wagering it will have to go all the way to 0.5 per cent.

RBA deputy governor Guy Debelle this week confirmed unconventional policies such as buying bonds would be considered if further stimulus was needed.

The ongoing slump in home building suggested some sort of action might be necessary. Residential work sank 5.1 per cent 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 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 on Wednesday reported a 35 per cent 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 per cent in August so far, the largest rise since 2017.

Crucially, values in the largest markets of Sydney and Melbourne were up 1 per cent 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." REUTERS