Builders’ hopes rise

Construction activity has fallen for the 38th straight month, but it’s not all bad news, with the pace of decline moderating.

The Australian Industry Group -Housing Industry Association (AIG/HIA) Australian Performance of Construction Index (PCI) rose 4.6 points to 44.1 in July. A reading below 50 indicates decline, while a reading above indicates expansion.

July saw solid improvements in house building and engineering construction with both sectors declining at their slowest rate in five months, suggesting the building industry has put the worst behind it. By contrast, steeper contractions were recorded in apartment and commercial construction.

AIG/HIA says there were encouraging reports from house builders indicating an improvement in customer enquiries and a pick-up in new work in July. Yesterday’s rate cut by the RBA should also see a further improvement, with the official cash rate at a record low of 2.5%.

The results should be a shot in the arm for home builders like Australand Holdings (ASX:ALZ), Stockland (ASX:SGP), AV Jennings (ASX:AVJ) and Peet Limited (ASX:PPC). The RBA will also be pleased with signs that a slew of interest rate cuts since November 2011 are finally having an impact, albeit limited, on the construction and building sector.

They still have to overcome subdued consumer sentiment, a lack of public sector building activity as governments tighten the reins and tight credit conditions. Those factors are still inhibiting Australia’s move from mining-related construction, which is coming off the boil, into other sectors of the economy.

Foolish takeaway

At least the latest update is in the right direction and we could see signs of expansion over the next couple of months, which will be a welcome relief for the building sector that has seen the worst conditions in decades.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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