Don’t expect any help from the building industry in halting the slide in economic activity in the domestic economy for the next year. And any recovery has now been postponed to 2009-10. The Reserve Bank board will discuss the seemingly remorseless slide in home building activity when it meets tomorrow, along with the continuing weakness in retail sales and consumer confidence, but that won’t be enough to get it to cut interest rates. It will wait for another month at least to see what will happen: this week we get labour force figures for last month, and home price indexes for June and 2007-08 which are likely to further confirm the cooling trend in the economy. But no change is anticipated, although the bank might send a message that the slumping level of local demand is pushing it towards a rate cut in the near future. (There is a small chance of a rate cut tomorrow, but don’t put your house on it). Last week we discovered that June was another miserable year for the Australian home building industry, with another fall in approvals for both private sector houses and non-house building. Building approvals fell by 0.7% in June, short of the 1% rise expected by the market compared to May. Following the very sharp fall in May, approvals are now 7.8% lower over the year – the weakest annual outcome in 2 years. This week we will get further confirmation of the slowdown with the housing finance figures for June.  The credit aggregates for June from the RBA last week showed a further slowing in the growth of housing finance to its lowest pace in more than a decade with finance growing by 0.6% in the month (the lowest since 1996) and 9.9% over the year to June. Nationwide, 158,938 homes were approved last financial year, a 3.6% increase on the previous year but below market estimates of underlying demand at about 180,000 a year. The Federal Treasury has estimated that demand for new homes is expected to rise to more than 200,000 by 2009-10, leaving a shortfall of about 50,000 homes, as only 160,000 homes are built. And in a survey released today, business forecaster, BIS Shrapnel sees no real improvement in the coming 12 months. It expects total Australian building commencements to edge up by just one per cent in 2008/09 as high interest rates keep dwelling construction well below underlying demand. BIS Shrapnel’s latest building activity forecast report, Building in Australia, 2008 to 2023, anticipates a 3% rise in new dwelling construction in 2008/09, offset by a 2% fall in non-dwelling building commencements. “In 2007/08, the value of new dwelling construction remained below the last peak in 2003/04. Housing construction has been weighed down by the strength of business investment.  For the first time ever, the national value of new housing construction in 2007/08 was exceeded by the value of private sector investment in engineering construction projects. This outcome represents a pronounced changing in gears for the Australian economy. “The strength of engineering construction activity, led by the mining sector, has boosted national economic growth and created shortages of skilled labour across many sectors. In response, companies have increasingly drawn on overseas workers to fill job vacancies. “As a result, net overseas migration jumped to an estimated 195,000 persons in 2007/08, and is forecast to reach a new record level of 230,000 persons in 2008/09. “This population boost is creating unprecedented demand for housing. National underlying demand for new dwellings was estimated to be 158,000 per annum over the five years to 2005/06.  “Underlying demand is forecast to average 185,000 new dwellings per annum over the 2008/09 to 2012/13 period,” BIS Shrapnel said. The group said the fact that dwelling construction remains in neutral has begun to affect the rest of the economy. “Australia cannot cope with much more expansion in business investment because the nation is running out of housing to accommodate the additional workers required to undertake this investment. “Housing shortages are leading to strong growth in rentals, which are now a major driver of inflation.  “According to the CPI index measure, national average rental growth was just three per cent in 2005/06, but the rate of growth accelerated to eight per cent in 2007/08. Growth in national average rentals is expected to rise to 10 per cent over the course of 2008/09. “Strong growth in rentals, combined with steady housing interest rates, are expected to support the value of new dwelling commencements in 2008/09. A reduction in housing interest rates is expected to be a trigger for the much needed strong upturn in housing in 2009/10.” BIS Shrapnel said that while residential building has been suppressed by rising interest rates, the level of non-residential building has increased strongly, rising by 54% from 2001/02 to 2007/08. Growth has been led by a boom in office building over the past three years.

 

“Demand for office space has been a corollary to the strength of mining activity, with Queensland and Western Australia enjoying booms in office building.

“However, growth in employment and retail sales are forecast to slow in 2008/09, under the weight of higher interest rates. In this environment, commercial building commencements are forecast to weaken, leading to falls in non-residential building commencements in 2008/09 (-2 per cent) and 2009/10 (-6 per cent).

“The downturn in commercial building will be an important factor in the overall building cycle in a number of cities.

“Due to shortages of skilled labour, it would be difficult for the industry to cope with a rise in apartment construction unless there is a substantial decline in office building.

“This change in sectoral drivers is expected to develop from 2009/10, and means that national total building commencements are likely to show only modest growth over the next five years”.

 

Here’s BIS Shrapnel’s outlook for building activity by state:

New South Wales

Building activity in New South Wales has been close to flat for almost a decade, and is due for an upturn. Building commencements are forecast to rise by 10 per cent in 2008/09, followed by an eight per cent increase in 2009/10. 

Expansion should be led by residential building, which has been running at very low levels for the past three years. Population growth has recovered, and housing supply is well below underlying demand, so the tight rental market will persist for the remainder of this decade.

Victoria

Building activity in Victoria has enjoyed a sustained upturn, rising by 25 per cent over the three years to 2007/08. Activity has been stimulated by Melbourne’s solid population growth. 

Total building commencements are forecast to decrease by five per cent in 2008/09, led by the beginning of a sharp downturn in commercial building commencements. Residential building is forecast to continue to expand, however, as the undersupply of housing remains widespread.

Queensland

Building activity in Queensland has been very strong, rising by 36 per cent over the five years to 2007/08. Housing starts and renovations recovered in 2006/07 and 2007/08, as the residential property market performed strongly in 2007. 

Demand for new dwellings is expected to slow in 2008/09, but the value of non-residential building commencements is expected to rebound due to a number of office and retail projects. Overall building activity will remain solid, so the outlook for industry employment remains very bright.

South Australia

In South Australia, building commencements showed the strongest growth of any state in 2007/08 (+14 per cent). Activity is being supported by strong population growth, primarily from net overseas migration. Total building is expected to rise by a further six per cent in 2008/09.

Western Australia

Western Australia has enjoyed seven consecutive years of expansion, which has seen a doubling in building activity, culminating in a nine per cent rise in 2007/08. 

However, housing starts are in decline, falling by an estimated 11 per cent in 2007/08 and expected to drop a further three per cent in 2008/09, due to poor housing affordability. While the level of non-residential building commencements has been extremely strong, this sector is forecast to decline by 15 per cent in 2008/09. 

Rising building costs are eroding the profitability of commercial building for some developers, which is expected to dampen the pipeline of new retail and warehouse buildings.

Tasmania

Building activity grew by an estimated 11 per cent in Tasmania in 2007/08, reaching a record high. The growth in 2007/08 was led by non-residential building commencements. 

Total building commencements are forecast to recede by 10 per cent in 2007/08, although this would still be a very high level of activity by historical standards.

Northern Territory

In the Northern Territory, building commencements increased by five per cent in 2007/08. The growth in 2007/08 was led by a 33 per cent surge in non-residential building commencements, which offset a downturn in residential building (-13 per cent). 

Total building commencements are expected to be volatile in 2008/09 and 2009/10, due to the incidence of major projects.

Australian Capital Territory

Building commencements in the Australian Capital Territory declined by 12 per cent in 2007/08, with a similar rate of decrease for residential and non-residential building. 

A recovery is forecast for 2008/09 (+11 per cent), before a further decline in 2009/10 (-14 per cent). The fluctuation in total building commencements is due to the incidence of office projects.

 

 

The big question this week is whether oil continues to ease as it did for most of the past week.

Oil fell for a fourth day on Friday in the largest weekly decline for more than three years.

Prices dropped 11% over the week on reduced tension between the US and Iran, falling US industrial activity and gas demand and easing growth in China. A strike in Brazil seems to have been settled, but there could be more unrest in Nigeria in the coming week.

August crude oil fell 41c a barrel on Friday to $US128.88 a barrel on the New York Mercantile Exchange, the lowest close since June 5. (Futures reached a record of $US147.27 on July 11.)

Last week’s decline was the biggest in percentage terms since December 2004, when oil closed at $US42.54 a barrel that week. Last week’s $US16.20 a-barrel fall was the largest weekly drop in dollar terms since the futures began trading in 1983.

Helping was a report showing that high oil prices are having an impact on US consumption. It fell 3% in the first half of 2008, the biggest decline for the period in 17 years, according to the American Petroleum Institute in a monthly update.

“While U.S. refiners churned out record and near-record amounts of oil products, imports – especially product imports — fell substantially,” the API report said.

“Deliveries of all oil products – a measure of demand – fell 3.0 percent compared with the same first-half-year period in 2007, with gasoline deliveries slipping 1.7 percent.  

“For the preceding three years, oil demand had essentially held steady. 

“API statistics manager Ron Planting said, “At 20.08 million barrels per day, total demand was the lowest in five years.  And the decline in gasoline demand was the first significant one recorded in 17 years. 

“Higher pump prices and a slowing economy were undoubtedly factors.

“At 2.0 percent, the second-quarter decline in demand for gasoline was even greater than for the first six months.  

“However, the 1.8 percent decline for all products for the last three months, compared with the same period a year ago, was less in part because of a 2.1 percent increase in demand for distillates, which includes diesel fuels and home heating oil.”

In London September Brent crude oil fell 88 USc to $US130.19 a barrel on London’s ICE Futures Europe exchange, the lowest close since June 5. 

 

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Gold and silver fell Friday after the three day share rally cut demand for the precious metals as an alternative investment.

Not even the surge in US producer and consumer inflation in June (to 9.2% and 5% annual rate respectively) saw any real upsurge in demand or talk about a hedge against inflation. 

Comex August gold futures fell $US12.70 to $US958 an ounce on the New York Mercantile Exchange after hitting a low of $US950.20.

Gold dropped 0.3% over the week while September silver futures fell 2.9% to $US18.20 an ounce. Silver is still up 22% so far this year and gold, 14%.

 

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Corn also fell, ending the biggest weekly drop in 12 years, after Argentina revoked controversial escalating taxes on some grain exports. That ended a fight with farmers that had disrupted shipments of grain from the country for much of this year and saw a significant rise in social and political tensions in the country. The weakness spread to soybeans and wheat which also dropped as traders realised that Argentina should be able to step up exports of both of those products without too much hindrance.

Argentine President, Cristina Fernandez de Kirchner withdrew the tax proposals after failing to win support on her tax plan from Congress.

Farmers had threatened to resume a four-month protest unless the decree on taxes was revoked. The country is the world’s second-largest corn exporter, the third major soybean exporter and a top five wheat shipper.

December corn futures fell 21.5 USc, or 3.3% on Friday to $US6.285 a bushel on the Chicago Board of Trade. That took the week’s fall to 11%, the largest drop since 1996.

November soybean futures fell 50c, or 3.3%, to $US14.48 a bushel, down a total of 9.3% and the biggest drop for four months.

But the price is still up 70% in the past year after reaching an all-time high of $US16.3675 at the start of this month.

September wheat futures fell 5.5 USc, to $US8.04 a bushel; a fall of  3.2% over the week.The price is still up 29% in the past year, reaching a record $US13.495 in late February.

 

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And copper, the other significant indicator of industrial demand, fell, posting a second straight weekly decline as supplies rose and economic growth slowed in China, the world’s largest consumer of the metal.

Stocks rose 13% last week to 42,935 tonnes, the highest since late May. 

Chinese production in the six months to June rose 19% compared to the first half of 2007, but China’s imports of copper and alloys dropped 19% last month from June 2007, a good indicator of current demand levels in the country where a power shortage is curtailing output of aluminium, lead, zinc and perhaps now copper.

Comex September copper futures fell 4.6 USc to $US3.669 a pound on the New York Mercantile Exchange. The price fell 1.9% over the week after dropping 5.3% the week before.

The price of the September most-active futures contract has dropped 14% from a record $US4.2605 a pound set May 5 on concern that slowing global economic growth and declining consumption in China will lower demand. .