economy
New Housing
top of australia ’ s economic perch
Harley Dale
HIA Chief Economist
A
round 195,000 homes were
commenced in Australia last year. It is
likely that an equivalent number will
be commenced this year, with the risk that
this forecast will be inaccurate with another
record being set.
This is an extraordinary outcome, not to
mention a very positive one. However, not
all the impacts and consequences have
followed the historical script written by
previous up-turns. Let’s consider some key
aspects of this record up-cycle in national
new home building activity.
• A new home building recovery
traditionally leads to a broader recovery
in domestic economic activity. Not this
time. New housing is unequivocally the
only strong sector of the Australian
economy. One might argue that the
real estate sector is in a healthy state.
However, that sector is not a tierone driver of economic activity and
the volume of residential property
transactions is lower than in the early
2000’s boom.
• The new housing up-cycle is two and a
half years old, meaning this growth cycle
is the longest experienced in the last 40
years.
• A recovery in renovations activity
normally follows a new housing up-cycle.
Not this time. Investment in renovations
is only 2.5 per cent higher than a decade
low reached in the December 2013
quarter.
• Detached house construction is around
6 per cent higher than its 25 year
average. Construction of semi-detached/
townhouse product is running around 5
8 Australian Window Association Autumn 2015
What we know in early 2015 is that the national new home building sector
is on fire. A record number of new homes were started in 2014, as we
forecast, although the level was even higher than we expected.
per cent above the average. Medium/
high density construction, meanwhile, is
at levels over 130 per cent higher than the
longer term average due to the supercharged growth of this segment over the
last two years.
• Current indications are that medium/high
density construction activity will be the
growth star in 2015.
• ‘Healthy’ building conditions are still only
evident in three out of eight markets –
New South Wales, Victoria and Western
Australia. Recoveries are underway in
Queensland and Tasmania – watch both
of these markets closely.
“this
growth cycle
is the longest
experienced in the
last
40
y e a r s .”
• In the heightened competitive
environment prevailing post the GFC,
profit margins were not rebuilt in the
early stages of this recovery, in contrast
to previous cycles.
• The lack of margin rebuild in 2013 and
2014 sent a signal that the broader
domestic economy was not going to
follow the new housing recovery. It might
this year, though, and we shouldn’t get too
bogged down in all the negative rhetoric
and underestimate the opportunity a
faster than expected economic recovery
would represent.
• The new housing recovery has occurred
with next to no policy reform, although
states like New South Wales and
Queensland have made modest progress.
A record number of new homes reflect
the ‘X-factor’ in this cycle. Super low
borrowing costs and the lagged impact
of historically high net overseas (skilled)
migration are vital, but record foreign
investment has the X and has provided a
big dollop of cream on the top.
• Forget about any debate regarding
current new supply and a contemporary
housing shortage. Look forward. The
ground-breaking research undertaken by
HIA Economics in 2014 highlights that at a
very minimum, Australia needs to average
180,000 new dwellings per annum over
the next 35 years. Even allowing for the
current record boom, the average over
the last 25 years is 152,000. Over the last
ten years it is 158,000.
• That’s a big gap. The task of meeting that
(conservative) forward target of 180,000
won’t be achieved by foreign investment,
but by policy reform.
• The types of homes we build in the future
are obviously a crucial consideration
against the backdrop of the changing
composition of new home building.
We’ve been on that case for some years
now and the latest update will be out in
March.
It’s a ‘simple-stupid’ conclusion. However,
policy makers fail to grasp the vital point that
if they don’t get housing policy reform right
within a wider economic reform framework,
the future growth in our standard of living
will be lower than would otherwise be the
case.
I have three young children, so I’m pretty
keen for them to get it right.