Following its dubious effort on first home buyers last week, the Housing Industry Association (HIA) has today released a decent research report assessing the role of housing as a leading indicator of the broader non-mining economy, as well as reforms that could be undertaken in order to help the economy transition away from mining-led growth and cope with the ageing population:
New engineering construction (which captures and reflects the most visible element of mining investment) accounted for around half of aggregate GDP growth in 2011 and was the majority share in 2012. In 2013 this share fell to zero. Nevertheless, it did not represent a drag on aggregate growth.
For new home buildings part, this sector bottomed out in 2012 before embarking on a path of recovery.In 2013 the new home building sector made its largest contribution to GDP growth in almost 10 years (0.2 percentage points). This path of recovery appears on track to continue and make stronger contributions to overall economic growth in the near term.
Beyond the direct contribution to GDP, new home building appears to be on track to resuming its role as a leading indicator of broader economic activity, particularly through its lead of other key macroeconomic indicators, most notably household consumption and employment growth…
Housing and consumption expenditure:
While aggregate household consumption expenditure has grown by an average of 2.7 per cent per annum since 2010, the per capita average growth rate has been just 1.1 per cent. In 2013, per capita consumption growth was a barely positive 0.2 per cent. A recovery in new dwelling commencements (housing starts), however, is pointing to potential improvements to come.
The relationship between housing starts and household consumption expenditure is fairly intuitive; with each new home built emerges the requirement for various household goods – ranging from kitchen appliances through to bathroom fittings – that ultimately will be recorded under household consumption expenditure in national accounts.
Furthermore, stronger new home building activity typically occurs during times of dwelling price growth. When home owners see the value of their equity rise, this often leads to a greater propensity to spend on consumption items. Rising starts volumes would therefore also have positive implications for domestic retailers and manufacturers which supply household consumption goods…
Housing and the labour market:
The chart below shows a reasonably strong relationship between employment growth and starts, albeit with the exception of the 2000s. The broad observation is that as housing starts have increased (or declined), the rate of employment growth has increased (or decreased) about six months later…
Notwithstanding these recent encouraging updates, the labour market overall can still be characterised as the Achilles heel to the economy’s non-mining recovery.
Necessary taxation reform and the role of housing:
Reforms to Australia’s taxation must consider the housing sector. New housing is the most heavily and inefficiently taxed sector in the Australian economy. The broader housing sector in Australia contributes nearly $40 billion in taxation revenue to federal, state and local governments in Australia each year – 11 per cent of the total taxation revenue collected by all tiers of government.
Taxes on new housing are not only excessive, but are disproportionate relative to the rate of taxation on other sectors of the economy – the average tax burden on the residential building sector is estimated at around 31 per cent of the value of output, which compares to an economy-wide average of 24.4 per cent. These taxes are also highly inefficient. A prominent example is stamp duty which, as acknowledged by the Henry Tax Review, discourages people from changing their place of residence as their personal circumstances change.
As the population not only ages but also grows, it will become increasingly important that people are free from impediments such as stamp duty, to move to residences they judge most appropriate. The removal of stamp duty is particularly important in the context of an ageing population. As household sizes tend to be smaller amongst the older segment of the population, their use of the housing stock is disproportionately intense. In the context of a rather constrained dwelling stock, removing stamp duty would make it easier for older households to move to smaller dwellings. This would free up larger residences for bigger households, ensuring that the housing stock is used more effectively…
Independent research has shown that reducing tax on the residential construction sector (provided this is funded by a broad-based, more administratively efficient tax), as well as removing planning delays and uncertainties, could increase GDP permanently by 1.91 per cent…
Conclusion:
With the Australian economy still in slowdown mode, the housing sector has the potential to be a key driver of economic growth, particularly given the strong historic linkages between new home building and household spending, employment and consumer confidence.
Notwithstanding this potential, the relatively high taxation burden on housing prevents the sector from making a much fuller contribution to economic activity.
The HIA is correct to identify reforms to taxation and planning impediments as key ingredients for boosting residential construction, although I am surprised that it has not also thrown land supply into the mix [perhaps because releasing more land would harm its land-banking members?].
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As noted on many occasions previously, despite the massive run-up in home prices and falling interest rates, the rate of dwelling construction in Australia has trended down for well over a decade, suggesting the supply system is badly constipated (see next chart).
While dwelling construction has begun to pick-up, the recovery is unlikely to be anywhere as big as it would be under a more flexible supply system. Accordingly, in the absence of fundamental supply-side reform, housing is poorly placed to fill the void left as the mining investment boom unwinds.
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The HIA’s suggestion to remove stamp duty is also sensible, given that it unfairly penalises people that move to homes that better suit their needs and in the process encourages an inefficient use of the housing stock. However, stamp duty is also a major source of revenue for the state governments, so indeed would need to be replaced by “a broad-based, more administratively efficient tax” such as land taxes.
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.
