Why housing can’t fill the mining void

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By Leith van Onselen

The AFR’s David Bassanese has written a useful note describing why he does not believe that the anticipated pick-up in residential building activity will be anywhere near enough to offset the hit to growth and employment as the once-in-a-century mining investment boom unwinds – something we have obviously been vocal about on MacroBusiness:

…dig a little deeper [into the dwelling construction data] and it’s clear the upturn has been quite modest to date, and a much stronger uplift will be needed to make up for the looming mining investment downturn.

…just because approvals to build new homes have increased, we can no longer simply presume this will translate into actual building activity. The exact reasons for this breakdown between approvals and building remains a puzzle, but could reflect more speculative procurement of building approvals and greater supply inflexibility.

A second issue is that alternations and additions – which account for 40 per cent of dwelling investment – are not recorded within closely watched monthly building approval numbers. Instead, approvals for this activity are only recorded in value terms – real and nominal – quarterly. And, unlike the lift in approvals for new dwellings, both in numbers and values, the real value of approvals for alterations and additions is still broadly trending down.

…the fact remains that cycles in dwelling investment have been especially muted over the past decade or so – even when cycles in building approvals have been large – with maximum contribution or detraction from annual economic growth little more than half a percentage point.

It suggests we can’t rely on the housing sector doing all the work required to insulate us from the mining investment downturn.

That is, unless we’re prepared to better unshackle the apparent new constraints on housing supply flexibility.

Bassanese is correct to identify reforms to land supply and planning as an essential ingredient in boosting residential construction. As noted on many occasions previously, despite the massive run-up in home prices and lower interest rates, the rate of dwelling construction in Australia has trended down for well over a decade, suggesting the supply system in Australia is constipated (see next chart).

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That said, even in the unlikely event that Australia did embark on root-and-branch reform of the housing supply system, the prospect of rising housing construction offsetting declining mining investment seems highly improbable. As shown in the next chart, mining investment (represented below as engineering construction) is roughly 2.5 times as large as residential building construction, meaning that for every 10% decline in mining investment, dwelling investment would need to increase by around 25% for growth to remain unchanged (other things equal).

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Australia would need to experience an epic dwelling investment boom the likes of which we have never before seen, and even then it may still not be enough. But can anyone honestly see such a boom happening while the mantra of urban consolidation dominates Australia’s state and local governments?

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.