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Borrowing costs hit construction sector

7th April 2008

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Australian construction activity contracted in March, the first fall in seven months, as higher borrowing costs hit housing and commercial building, a private survey showed on Monday.

The Australian Industry Group/Housing Industry Association performance of construction index (PCI) dropped 5.5 points to 48.4 in March, taking it below the 50.0 level separating expansion from contraction.

"While engineering construction is benefiting from an expanding investment pipeline, particularly in infrastructure projects, house building, apartments and commercial construction all fell," said Tony Pensabene, Ai's associate director of economics and research.

"Interest rate hikes, the rise in the cost of funds and falling consumer sentiment are clearly taking their toll on the industry, and with new orders now at their lowest level in 10 months, we are likely to see further weakness ahead," he added.

The Reserve Bank of Australia raised interest rates to a 12-year high of 7.25 percent in March, the second hike in as many months.

The survey of 120 companies showed a sharp 7.9 point drop in the new orders index to 44.4. There was also a hefty 14 point drop in the measure of commercial building, taking it to a lowly 48.2. Likewise, the index for house construction fell 7.7 points to 41.1, while apartments eased 3.4 points to 40.0.

In contrast, engineering showed some strength as the boom in mining drove a 2.8 point rise to 58.3.

The index of employment ticked down to 54.4, from 54.9 in February, while the wage index climbed to a high 78.2.


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