Epic Construction Downturn Grips Australia

The bushfires were just the latest problem: The slump started well before them and also affects states unaffected by them.

By Nick Corbishley, for WOLF STREET:

Construction activity in Australia slumped by 3% quarter on quarter in the fourth quarter of 2019, the Australian Bureau of Statistics (ABS) reported this week. Compared to the same quarter of 2018, construction activity fell 7.4%. It was “a weak end to what was a weak year for the construction sector,” said Westpac senior economist Andrew Hanlan. The sector, which accounts for 13% of Australia’s GDP, has been in cyclical decline since mid-2018, as the Australia’s housing bubble began to deflate and feed through into the construction industry.

The residential building segment has borne the brunt of the pain, with a 4.6% drop in the fourth quarter from the third quarter. On a year-over-year basis, residential construction slumped by 12.6%:

Given the scale of the housing bust that has swept through Australia’s core markets from late 2017 through mid-2019, with prices down by as much as 14% in Sydney and 10% in Melbourne, it’s hardly surprising that residential building is in the doldrums. Despite a rebound over the second half of 2019, property values across most regions remain below their previous record highs, set in 2017.

Disruptions from the extensive bushfires that decimated more than a fifth of Australia’s forests also had an impact on construction activity. New South Wales, the worst-hit state, suffered big year-over-year declines in both residential building (-21%) and total building (-11%) in the fourth quarter. Bushfire rebuilding and recovery activity is likely to have a positive impact on construction activity in the coming quarters, ABS says, though stiff regulatory obstacles could make it more difficult to get permits to build in fire-prone areas.

But significant year-on-year falls across all regions, including ones that were either just mildly impacted by the bushfires (Tasmania, south-eastern Queensland and south-western Western Australia) or not impacted at all (Northern Territories), suggest that the problems besetting Australia’s construction industry extend far beyond the disruption caused by the wildfires.

Work on “non-residential buildings” (mainly commercial real estate) decreased by 3.4% in the fourth quarter from the third quarter, although year-on-year it was up just over 3%. BIS Oxford Economics says the recent decline was probably due to patchy quarterly activity since there is a strong pipeline of office, hotel and hospital projects.

Also in the dumps is the “engineering construction” segment — a category that includes the design and delivery of industrial plant, such as the construction of structures for the oil and gas industries, power generation, processing, mining and manufacturing industries, and water and environmental works. According to the ABS data, the volume of engineering construction work performed during the fourth quarter of 2019 dropped by 8% year on year.

The declines affected all of the country’s regions including Western Australia (down 9.8% year on year) whose massive mining boom turned to bust a few years ago, leaving the region’s economy and housing bubble in tatters. Growth in lithium mining initially helped pick up some of the slack for a while but even the lithium mining sector has been in a bear market for a year.

As construction in Australia slows, more and more companies in the sector appear to be engaging in the high-risk supply-chain finance technique of “reverse factoring” to improve the outward appearance of their cash flow situation.

Australia’s largest construction company, CIMIC has made liberal use of “reverse factoring.” Its stock has plunged over 50% since last April, wiping close to AU$8 billion (US$5.3 billion) off its market value. The initial trigger was a report that accused CIMIC of using reverse factoring agreements with financial institutions to create the illusion of cash flow, reduce the appearance of debt, and lower its leverage ratios — a charge the company has since admitted.

“Reverse factoring” was in part responsible for the recent collapse of companies like Spanish energy giant Abengoa and UK outsourcing behemoth Carillion, and is a key issue in the scandal surrounding NMC Health, whose shares were suspended in London today.

CIMIC can’t seem to get a break. In January, CIMIC announced it was abandoning its Middle Eastern operations and booking a AU$1.8 billion ($1.2 billion) charge-off.

Now, it could face a similar problem with a major project in Australia: the construction of the $6.7 billion West Gate Tunnel, which has been brought to a grinding halt following a dispute between the state government, the toll road company, Transurban, and the project’s builders, including CIMIC, over who should pay the extra costs of dealing with large amounts of contaminated soil. As the delays drag on, the likelihood of the construction companies walking away from the project altogether, citing “force majeure”, grows — which could all culminate in costly litigation. And that is the last thing that CIMIC needs right now. By Nick Corbishley, for WOLF STREET.

“Tough Year for the Australian Economy.” Read... Australia’s New-Vehicle Sales Drop to Lowest Since 2011

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  37 comments for “Epic Construction Downturn Grips Australia

  1. Joe says:

    If Australia is like Canada, then the deviation of environmental laws and regulations have made making any profits impossible and investment is staying away. Much easier countries to exploit are still available.

    • Social Nationalist says:

      Right, dude. It wasn’t “environmental laws”. They have had a huge housing bubble since the 90’s. That finally popped with the commodity bust.

  2. MC01 says:

    From reading and listening to people talk it seems real estate is Australia’s official religion. They should really set up small shrines at the side of the road so people can stop and pray for real estate prices to increase at a steady 7%/year for all eternity. ;-)

    I remember when Nick reported how Canberra got really cold feet when a special commission started looking into the assorted shenanigans that had been used to jawbone real estate prices higher, and how that same pusillanimous government quickly backtracked once the speculators of all stripes started complaining. Yes, giving in without even the pretense of fighting will show everybody how bad and tough we are, matey.

    This downturn is the perfect occasion for burying those damning reports and forget about them. Perhaps loosening lending standards to the construction and real estate sector (again) will help us make amends? Not enough? Perhaps letting rather shady people in without even asking them where they got all that cash they are now using to buy real estate?

    Now if you’ll excuse me since China Incorporated is apparently open for business again (and the most basic sanitary measures be damned) I am going to see if they can supply a few containers full of those wayside real estate shrines real cheap and real quickly. G’day matey.

    • Ben says:

      Yes, it is indeed a religion. And those of us who have been waiting a LONG time for sanity and affordability to return have seen several likely triggers come and go with minimal impact. But this virus could really be the one. Yet, you wouldn’t know it seeing that Australian property prices are still rising fast, and not too far from their peak of a couple of years ago (a very lofty peak). The wake-up call is going to be EPIC.
      I spent $500 at Costco and Chemist Warehouse yesterday on supplies, so I feel like I am reasonably well prepared. I am also debt free with cash in the bank. Just need to get the garden back in order and plant some veges!

      • Iamafan says:

        Re: I spent $500 at Costco and Chemist Warehouse yesterday on supplies.

        I still have most of my supplies (less the food) hoarded from the SARS scare.
        I have boxes of Tamiflu (sourced overseas). I’m staring at the boxes of surgical masks, N95 and N100s I still have.

        The World did not end.

        • Prof. Emeritus says:

          Tamiflu? Hah, wise old sailors still suggest quinine! With rum, vodka or other alcohol of taste.

    • Auld Kodjer says:

      If real estate is the religion, then national hardware chain Bunnings is the church.

      At a crude guess, 95% of Bunning’s shelves are filled with hardware supplies manufactured in China.

      When the shelves start emptying, the worshippers will enter the five stages of shock, starting with denial then anger.

      Here endeth the lesson of Australian real estate exceptionalism.

      • MC01 says:

        There are plenty of countries around the world where “real estate exceptionalism” is the norm: China, Greece, Italy, Spain… slower but far more insidious than Covid-19 the contagion has spread to previously unaffected areas such as Germany and Turkey. India is also rumored to have experienced an outbreak, but we are waiting for more reliable news.
        To quote a famous song “It’s a disease/it’s an epidemic/I am afraid there ain’t a cure”.

        When this disease is in its most advanced and pernicious stage it ill cause the following issues: booming unsold stock, dwindling sales and skyrocketing prices.
        Real estate exceptionalism will particularly afflict the political class, causing a condition in which, after lecturing people at length about the needs to preserve the environment, often threatening to ban this and regulate that, these pusillanimous creatures will immediately authorize cutting down trees, plowing over heaths etc to build those horrifying little concrete cubes (cheap to build, expensive to buy and live with) so fashionable nowadays.

        No country has so far been cured of this disease, and the OMS (WHO to you Anglophones) warns things will get a whole lot worse before getting better.

        • Lisa_Hooker says:

          “And they’re all made out of ticky-tacky
          And they all look just the same.”

    • WES says:

      MC01:. Back in 1981/2, when I was driving around in my Holden car, the front nicely adorned with “good for one kangaroo” plastic roo bars, real estate was Aussie’s one and only religion!

      At the time resources were booming due to Japanese investments. The communist controlled unions were always going on strike for one reason or another!

      Yeah, it was a absolutely crazy time! Real estate was the talk of the town!

      The unions were issuing all kinds of different bans on employers! There were “green”, “brown”, “maintenance” bans, beside the dreaded “black” ban!

      I was working in a coal mine near Singleton. There were over 20 different unions involved in mining, transporting, and loading coal onto the coal ships in Newcastle.

      Each union would go on strike separately, while the rest kept working. Even if some workers couldn’t work, their employer had to continue to pay them because they were not on strike! It was incredibly insane!

      Since then, it looks like with help from China, and a little seasoning from central banker’s ZIRP, real estate religion in Aussie land has only grown even more insane!

      To the land down under where the toilet flushes down the drain in the wrong direction!

      The famous Aussie “fly walking on your face” salute!

      • MC01 says:

        Rio Tinto has AHS and AutoHaul in “limited service” right now, just a friendly reminder to unions not to try anything funny. Some corporations have long memories, not just deep pockets.

        Of course it remains to be seen for how long China will be able to fuel Australia’s mining boom: the first and foremost use of all that coal, iron ore, pyrolusite etc is to fuel China’s epic real estate boom.
        Already now the bulk of real estate purchases in China are made for purely speculative purposes: all those “ghost cities” belong to somebody who is 100% sure he/she will be able to sell them down the road at a huge markup. The official version is that all those poor peasants in the countryside will move to the cities (even fourth tier ones nobody has ever heard of) armed with cardboard suitcases filled to the brim with yuan to buy real estate, but everybody thinks the government will somehow fill in, while somehow performing a delicate balancing act to avoid consumer inflation from heating up.

        While this may sound delusional is surely much more grounded in reality than believing more liquidity and lower interest rates will somehow stop a virus from spreading.

  3. timbers says:

    The internets are saying the world needs the Fed to cut rates now mabye more than any time ever in all history, to cure the flu.

    Maybe that will help Australia construction business.

    I got a mild pulled muscle in my back because my dog is very strong and he pulled on his lease when he saw a cat sneaking in the bushes.

    Maybe a Fed rate cute will help that, too?

    • Frederick says:

      Maybe you could get Janet Yellen to massage it for you Or better yet Christine La Guarde

      • IdahoPotato says:

        Maybe you could ask your Y chromosome why Jerome and Ben are incapable of giving massages.

        • NBay says:

          Because happy ending would send him to the lake of fire, or even worse, he might like it ?

    • Thomas Roberts says:


      On every single day that the fed lowers rates, there are people spread across the world, who recover from incurable cancer and other diseases.

      Proof of the power of the free markets and “The Great Chain”? I think so.

    • VeryAmused says:

      They can cut the rates all they want it will not help.

      They know it will not help so I believe they will not cut. But hey, stupidity sometimes knows no bounds.

      This is it.

      Look out below.

    • Trinacria says:

      “we” pay less interest now in a “great” economy that we did in the 1930’s at the height of the great depression; plus, the dollar was not as debased then as the FED has not been in existence as long compared to now – which makes for an even higher real interest rate in the 1930’s compared to today. I have been saying it over and over again….this situation requires the “big bath” and it needs to happens as things really smell badly and the big bath that “economic mother nature” is calling for is… AUSTERITY….the only cure….with unfortunately lots of pain. This phony situation was simply pushed and pushed too far.

      • Social Nationalist says:

        I don’t think the Fed matters in that way. “debasement” is trying to keep the party going and generated at a different level of government. At some point, capitalism can’t make it without investment vehicles to continue the ponzi scheme. You can continue to worship the myth of “free markets”, but they don’t exist. They are debt driven cons that the banks used to manipulate the monarchies at the depths of the black death for a quick rebound. I will give them credit. They have kept it going for 700 years.

    • sc7 says:

      Rate cuts will be ineffective against the impacts of a business shutdown.

  4. nicko2 says:

    Runaway climate change is quickly making Australia uninhabitable.

    • Les Francis says:

      Australia’s east coast is near 5000 kilometres north south and ranges from tropical not far from the equator to Tasmania where it has just snowed in Summer.

      Contrary to beliefs there are no virgin rainforests left in Australia. All marketable wood was cut down in the 19th and early 20th century. Australia’s forests are regrowth.

      There is plenty of water in the East coast. Political and environmental regulations prevent the efficient use of this water.

      The recent bushfires were not the worst Australia has ever seen. It’s political and MSM license to strategy this.
      The AGM crowd are in overdrive distorting historical records to their own agenda.

  5. Unamused says:

    Extensive fires are often a prelude to desertification. Australia already has enough deserts. If they don’t want more they have their work cut out for them, but it’s not profitable so it will probably be left to the aborigines and unfunded volunteers who will be begging me for money until I unsubscribe.

    I don’t expect the world to get around to accounting for environmental assets until it goes it goes bankrupt. At least then it could write down all the losses until they’re gone in case somebody wants to do an audit someday.

    Desertification doesn’t come up on people’s radar very often because it’s usually crowded out by fossil fuel pollution and global warming, ocean plastics, coral die-offs, contaminated water, the occasional global pandemic, the ongoing sixth extinction, and other features of modern human existence. Dealing with those isn’t profitable either and there’s a shortage of aborigines besides.

    I’m in no position to solve any of them, but the least I can do is deplore them in comments posted from my comfortable limestone tower. It’s a nice view.

    • Xabier says:

      Like Montaigne.

    • Auld Kodjer says:

      There is no shortage of Indigenous / First Nations peoples in Australia. There is a shortage of funding to employ them as carers of the land.

      The First Nations people’s have also been burning the land for thousands of years. It is referred to as cool temperature burning or “cultural burning” – essentially repeated small area burnings.

      This has a regenerative effect on many species of Australian flora – not a desertification effect.

      Non-indigenous Australians employed by or volunteering with the Fire Services are also taught that burning of vegetation as a preventative measure for uncontrolled bushfires should also be cool temperature burns with the fire “never above your shoulders”.

      Australia’s recent extensive bushfires have been influenced by both climate change (longer, hotter summers) and by a shortfall of funds to the Fire Services to undertake controlled burns.

      Of the things that Australia shares with the US, is commonality of the swamp people who make our political decisions.

      There is political pressure to (a) increase funding to Fire Services, and (b) use some of that funding to employ First Nations people as carers (and “cultural burners”) of the land. That would be a good outcome by all measures.

      As for desertification of Australia, there are many more factors that have a greater influence than fires. These include climate change, some (not all) poor farming practices, wind erosion, introduced vermin and feral animals, and water mismanagement by stupid and / or corrupt politicians in the Murray-Darling Basin.

      It is also noted that the rate of land degradation in Australia is much lower than that in China or Africa – but little comfort is taken in being “third last”.

      • Lisa_Hooker says:

        Politicians will take advantage of this to save money by cutting the Fire Services – “we won’t need them for a while because it’s all burned out now.”

    • Lisa_Hooker says:

      Unamused – the man in the high castle?

  6. David Hall says:

    Sydney was once on a list of the world’s greatest housing bubbles. San Francisco was there too.

    Canada is rated speculative.

    Some recessions affected both stocks and real estate markets. Forbes reported the coronavirus fatality rate in China has risen to 3.5%.

  7. DR DOOM says:

    Good post. I followed Harry Dent on the Aussie market off an on for a year and then got distracted with gold miner juniors. This post stitched it up proper.

    • Julian says:

      Not sure it takes a genius to suggest a global pandemic would be negative for house prices!

      Harry Debt has been wrong about Australian house prices for years and years and years.

      • char says:

        It kills old people so young people will get their inheritance sooner with less eaten by the medical industry. Could be negative but could also be positive for house prices.

  8. Unamused says:

    As construction in Australia slows, more and more companies in the sector appear to be engaging in the high-risk supply-chain finance technique of “reverse factoring” to improve the outward appearance of their cash flow situation.

    Which is to say, they’re being deceptive. In other words, they’re lying.

    Publicly traded companies should be required to issue financial statements conforming to strict accounting standards so investors can screw themselves rather than relying solely on their investments to do it for them. I suppose people just accept it because of the convenience.

    If people want to put their money into dogs, unicorns, or tribbles, more power to them. But they should at least have that choice and it should not so easy for firms to weasel them into risking their money on a con. Allowing such casual dishonesty sets a bad example for society in general, but that sort of thing seems to have gotten into everything these days.

    I’m already the suspicious sort and don’t need encouragement. Besides, it might be nice to have somebody around who is trustworthy besides WR.

    Maybe I should write a book on the prevalence and consequences of public dishonesty. There’s certainly plenty of material. I could start at the top and work down.

    When there is a lack of honor in government, the morals of the whole people are poisoned.

    – Herbert Hoover

    I’ve found an interesting title online:

    How to Stop Being Cynical: 11 Proven Strategies

    I’m going to read it, but I really think I need a twelve-step program.

    • NBay says:

      This one is my favorite;

      “….where free unions and collective bargaining are forbidden, freedom is lost”

      -Ronald Reagan 1980 Labor Day speech

  9. KeithfromAshford says:

    Why don’t you wreck your economy with a real estate boom and bust?
    World leaders can’t resist it.
    1990s – UK, US (S&L), Canada (Toronto), Scandinavia, Japan, Philippines, Thailand
    2000s – Iceland, Dubai, US (2008), Vietnam
    2010s – Ireland, Spain, Greece, India
    Get ready to put Australia, Canada, Norway, Sweden and Hong Kong on the list.

    What’s that noise?
    Zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz ……………………………………..
    Our guardian of financial stability, in independent central banks, are fast asleep and haven’t noticed the dangers of real estate booms and busts to financial stability.

  10. Ishkabibble says:

    I no longer surprised that population trends are not mentioned when they should be. What’s happening to the population of Australia?

    To keep the present whatever-you-want-to-call-it, growth-is-God “system” going, Australia and a number of other first-world countries are going to have to import a lot more people to keep the housing industry, etc. growing. And Growth IS what “we” want, right? Can’t have profit without growth. Mother Earth just loves perpetual human “growth”; that’s what She has been telling us, right?

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