e co n o m y
HERE WE ARE IN THE ERA OF‘ THE TRUMP’
HARLEY DALE
Chief Economist HIA Economics &
Australian Construction Insights
For my sins, I have to admit that I love politics as well as economics. Quite sad sounding, I know.
It is a fact that we now have a 45th President of the United States, being one Mr Donald Trump. The person everybody thought wouldn’ t win the White House until last November when he did! A year ago I was in Washington with my wife. All Americans around me were aghast at the prospect of a Trump presidency and nobody thought it would happen. It did!
As I go to‘ press’ a common term to describe President Trump is‘ unpredictable’. In my experience in closely following US politics for over 30 years, I find this description to be very accurate. The infamous Trump- Turnbull phone call has hopefully slipped in visibility by the time you read this. It simply represented one example of a belligerent new President flexing his muscle and deliberately focussing attention on one of the hallmarks that will represent his presidency- unpredictability.
We are one of over 50 nations that will feel the first order consequences of that situation, whatever they may be.
We still seem to have little detail on economic policy from the new President. Lots of talk, but scant detail. Therefore, everybody has an opinion, but nobody knows!
Even as we progress through 2017, it may take some further time before mud becomes something equivalent to baked clay on the economic policy front!
This situation will keep markets nervous and jittery. In isolation, this fact doesn’ t help Australia’ s construction industry. My key‘ take-away’ point is that whatever happens to residential construction activity in Australia in 2017 will have little to do with the Trump.
Looking back, we do know that the US Treasury( bond) market began selling off( i. e. interest rate yields rising) long before the outcome of the 2016 US presidential election became known. Bond yields began rising last August and had increased by more than a full per centage point by the end of last year. The US central bank, the Federal Reserve, increased interest rates at the end of last year and has signalled more hikes to come in 2017. Here at home, two cuts to the Official Cash Rate( OCR) by our central bank, the Reserve Bank of Australia( RBA), in 2016 weren’ t passed on in full by Australia’ s financial institutions and by late 2016, the interest rate cost for many borrowers, notably residential investors, was rising.
Borrowing costs will continue to increase in 2017, but not everywhere. Don’ t look for further rate cuts from the RBA as a partial counter. The RBA will be too concerned about adding fuel to the dwelling price growth fire that represents Sydney( and Melbourne). Remember, though that while these two cities account for 40 per cent of our population, it remains the case that elsewhere in the country, many people don’ t know( and feel) the housing price‘ boom’ that is so evident in Sydney.
How about rate hikes this year from the RBA to mitigate growth in existing property prices in Sydney( and Melbourne)? That seems unlikely, unless they’ re hell-bent on taking Australia to the verge of recession. Sydney and Melbourne may be singing‘ hip, hip, hooray’; but elsewhere economic and housing conditions are reasonably healthy at best, weak in many instances, so states and territories tend to be( rightfully or wrongfully) focussed more on a slow, sad ballad.
Throughout all this music we do know that the Australian new home building sector started over 230,000 new homes last year – more than 20 per cent above the previous peak; and that renovations activity continued to recover. In 2017, we will continue to see historically very healthy levels of new home construction, but less activity than last year, and a further increase in renovations activity. The re-emergence of the knock-down rebuild market as a strong force will also continue in 2017, especially in Sydney. What happens to residential construction in New South Wales in 2017, as I have previously stated, will have little to do with the Trump.
New South Wales will remain top of the pops, with Victoria just behind. The CommSec State of the States Report, the HIA Housing Scorecard and the ACI Construction Monitor reinforce the number one and two spots these two states occupy in terms of overall economic strength, residential construction conditions and non-residential construction activity. In terms of the non-residential arena, the ACI Construction Monitor shows Victoria as number one and New South Wales as number two, rather than the other way around. We expect those positions to flip in 2017.
These two states will remain the lynchpin to Australia’ s economic activity in 2017 and 2017 / 18, led by new home construction, followed by non-residential construction and to a lesser extent renovations activity.
We expect that new home dwelling commencements will moderate in 2017, from their record high. In 2018, we are forecasting a relatively sharp fall in commencements, but that is mainly due to medium / high density dwellings. Meanwhile, renovations activity will continue to grow moderately and the opportunities for non-residential construction – as highlighted in our recent ACI Construction Monitor, will increase. An important addition to this final point is the large public infrastructure investment currently taking off( pardon the pun) given that as the years progress, the Badgerys Creek airport development will become ever more prominent.
Turning back to housing, I haven’ t focussed much on outright housing activity as the latest dwelling commencements forecasts were only released by the ABS in mid- January. Therefore, we are currently reviewing our forecasts, as we do every quarter. We anticipate little change to the current outlook.
Suffice to say, new home construction deserves a quality case of red for the job it has done, and continues to do, in generating economic activity for Australia.
There are wider than usual geographical differences this cycle. That’ s important to note. These will persist in 2017 in terms of economic and housing conditions. Following the mother of all resource-construction booms, why would anybody expect otherwise?
22 Australian Window Association