The Master Builders Association (MBA) has released its Builder Sentiment Survey for the March quarter of 2013, which revealed an improvement in sentiment over the medium-term, but ongoing subdued levels of activity in the short-term:
Pick up in builders’ expectations for industry
The index measuring expectations for building industry activity picked up sharply in the March quarter, from 41.9 to 47.3, not far from the neutral 50 mark. The result indicates that lower interest rates may be finally working to improve the outlook. After seven quarters during which builders have expected overall industry activity to be lower over the following six months relative to the preceding six months, builders now expect conditions to remain essentially unchanged.
Own business conditions turning around
The index measuring builders’ current level of own business activity rose appreciably in the March quarter, from 45.2 to 51.3, above the neutral 50 mark indicating a return to more satisfactory business conditions. Following a trend decline in the index over the past two years to levels below that recorded during the global financial crisis, the index may have troughed.
Own business prospects improve
The index measuring builders’ views on their own future business conditions rose in the March quarter, reversing a trend decline seen in the previous 18 months. The improvement is another indication that Reserve Bank cuts to interest rates are finally working to improve sentiment. At 53.9, the index is above the neutral 50 mark indicating that builders believe own business activity will improve over the next six months.
Profitability remains poor, outlook brighter
In the March quarter the index measuring own business profitability rose slightly, from 38.0 to 41.3. The index remains well below the neutral 50 mark, so a phase of improved profitability is still some time away. In terms of builders’ expectations regarding future profits, the index picked up in the March quarter, from 44.1 to 50.5. The recovery in the index means that rather than any further expected deterioration in profits over the next six months, builders expect no change.
Sales continue to disappoint:
The index measuring sales contracts in the past six months compared to what builders had expected, remained essentially unchanged in the March quarter, remaining firmly in the ‘much lower’ category. An improvement in this key indicator is needed to ensure a recovery in business conditions and profitability.
Weak employment outlook:
Builders are asked about their intentions regarding the likely level of employees and subcontractors for the next six months relative to now. In the March quarter, the index rose to 43.4, but remains below the 50 mark indicating that builders still expect to cut back on employment in the period ahead.
Display centre traffic/enquiries recover
The index for display centre traffic/enquiries rose markedly from 38.2 to 46.7 in the March quarter. Although remaining slightly below the neutral 50 mark, the index is now above the survey’s average reading recorded over the past nine years (43.5). As a key forward indicator, the improvement in display centre traffic/enquiries may be another sign that the market is finally responding to lower interest rates and that the worst may soon be behind the building industry.
Backlog of work
Builders’ work-in-hand dipped fractionally in the March quarter. The index appears to be trending at a lower level with high quarterly volatility. For a stronger backlog of work to come through, the industry needs improved traffic and enquiries to translate into stronger sales which, in turn, will flow into builders’ order books.
Input costs
Respondents are asked whether they expect input cost increases (labour/materials) to be higher or lower over the next six months, compared to the past six months. The index rose to 64.2 in the March quarter (from 61.8), to be slightly higher than the average reading of the past three years. The slight drift higher in the face of weaker conditions is disappointing. The index peaked at 75 in June quarter 2008, before the G.F.C. and economic downturn saw the index fall away sharply.
Non-residential building – small improvement but remains well below par
Builders with significant operations in both residential and non-residential sectors are asked a series of questions relating to the respective sectors—‘how would you describe current conditions’ and ‘where do you believe activity is headed’. In the non-residential sector, the index measuring current conditions rose to 33.7 (previous quarter reading 31.0), remaining markedly below the ‘satisfactory’ 50 level. The index measuring expectations about future activity improved appreciably from 38.0 to 42.8 in the March quarter, an indication that non-residential builders are becoming less pessimistic about prospects. The reality, however, is one of poor conditions with little in the pipeline to replace building-related stimulus programs.
Residential – conditions becoming less dire, improvement expected
For the residential sector, the index for current conditions rose to 41.7 (from 35.9), but remains below the neutral 50 mark. In terms of where the residential sector is headed, as the chart shows, the index was unchanged in the March quarter (at 52.0), above the neutral 50 mark and indicating that builders expect residential building conditions to improve slightly over the next six months.
Credit squeeze to cruel recovery?
Financial constraints for builders fell back in the March quarter. However 29.9 per cent of respondents were still concerned that as a constraint, availability of finance was having a major/large effect on their business. This proportion is similar to average levels recorded during the (almost) five years since the onset of the G.F.C. Builders continue to see interest rates as a negative in terms of impacting on forward orders/enquiry rates/new contracts. It would appear that for builders to switch from reporting a negative to a positive impact from interest rates on forward orders, further cuts in official interest rates are required.
National economic conditions
With regard to the national economy, the index measuring perceptions about current national business conditions remains well below the ‘satisfactory’ mark. Indeed, at 35.4, it is currently well below levels reached during the G.F.C. and 2000/01 related downturns. However, expectations regarding the outlook for national business conditions rose sharply in the March quarter (from 37.0 to 46.9), with the index approaching the 50 or ‘no change’ mark last recorded in the middle of 2011.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
