New home sales tank

The mining sector is about to get a whole new batch of construction workers to choose from if the HIA new home sale report for June  is any guide. The index collapsed to GFC levels. The HIA has this to say:

New home sales suffered their heaviest monthly decline in five years in June 2011, providing further evidence of the need to keep interest rates on hold, said the Housing Industry Association, the voice of Australia’s residential building industry.

The latest HIA – JELD-WEN New Home Sales Report, a survey of Australia’s major residential builders, showed that the number of new homes sold in June 2011 dropped by 8.7 per cent, the sharpest monthly decline since May 2006.

“There has been widespread anecdotal evidence for some time that new home demand hit a wall in mid-2011 and today’s new home sales figures unfortunately confirm that situation,” said HIA

Chief Economist, Dr Harley Dale. “Evidence is mounting that weakness in the new home sector is accelerating even with interest rates on hold.”

“Amidst the roller coaster of interest rate sentiment that has unnecessarily become the norm in 2011, the idea that an imminent rate hike is now unavoidable is misplaced,” said Harley Dale.

In the month of June 2011, detached house sales fell by 8.8 per cent, the second consecutive fall.

The volatile units sector fell by 8.1 per cent in June following a jump of 23.3 per cent in May.

“In terms of government action, reducing the excessive costs of new housing is an important area of the domestic economy to focus on. The upcoming Tax Forum in early October offers a golden opportunity to reduce the high and inefficient taxation of a basic necessity, shelter, and therefore boost new housing supply,” Harley Dale added.

In June 2011 the HIA – JELD-WEN New Home Sales Report found that detached new house sales
fell by 1.8 per cent in New South Wales, 10 per cent in Victoria, 17.1 per cent in Queensland, and 6.3 per cent in Western Australia. Sales were flat in South Australia.

Comments

  1. AV Jennings has 3 bed room houses starting at $120K

    http://www.sekisuihouse.com.au/house-designs/house-designs-nsw

    Convert $150K of State/Local development levies into a 30 year quarterly payment on the block to the State Govt and suddenly a new house need not cost $300- $400K upfront. The levy continues even the property is sold.

    As these houses have a higher quarterly payment than houses that were built with the existing upfront levies – the price of existing houses would not be undercut directly.

    Naturally the increase in supply would soften prices for existing houses but that would be a small price to pay for a more responsive housing market and a lot of busy tradies.

  2. Meh, a new estate up the road from me has three bedroom houses starting at “only” $545K. Similar ten year-old places around the corner are going for $390-$430K, in fact there are four of them in a row for sale! So is it worth taking on another $150K worth of mortgage just to get a brand new place when slightly used one can be purchased for $150K less? Ditto for new townhouses, the developers dropped asking prices from $375K to $340K negotiable yet 5-10 year-old ones across the road are (not)selling in the low $300K zone. Once again, why?

    • Hush, if there were no first hand purchases how will people like me go looking for depreciated second hand houses. I can make a home out of anything, as long as it is sturdy

      • Asides from the newness factor and getting this decade’s angular, bolted together kitsch as opposed to the greco kitsch of 2000 I can’t see any advantage to getting one of these brand new homes. None at all.

        • @Torchwood, you appear to have missed the gift of the “Great Aussie Ego”…Perhaps your parents neglected to explain to you that you should always think of yourself as being defined by:

          What I have,
          What I do,
          Which groups I belong to, and
          What others think of me.

          Unfortunately, as a result, you may just have to suffer under a more balanced perspective and largely independent thinking…

    • Yes – same for ‘new’ houses near me. Crazy stuff and no wonder they having trouble shifting units at a time when even the ‘paper boy’ is having doubts about property.

      But still can’t blame the developers as I am sure they are not trying to go broke.

      $150K State/Local Levies.
      $100K for the land

      = $250K plus the house say $150 – $250 K

      Equals pretty close to $400K – $500K with a bit of margin for some new white shoes.

      Convert the $150K State/Local upfront levies into a higher quarterly rate figure and you could sell new free standing houses at $250 – $300K. Same price as your 5-10 year old townhouses.

      Completely agree about the market turning etc but it would be a shame for this necessary correction (return to the ‘old’ normal) to be used as an excuse not to do anything about some of the things that got us here in the first place.

      It may sound odd to argue in a soft market that there is plenty of potential to build new lower cost houses but keep in mind these new houses will be coming on to the market at the price the current stock should be selling it at (ie a substantial discount)

      • And herein lies the dilemma – we can’t produce land cheap enough for it to be worth anyone’s while unless the RE market is sky high. Developers cop lots of flack but last time I checked their margins weren’t exactly massive. Rather the problem lies with state and local governments who have a monopoly over these charges, which they squeeze for every cent they can.

  3. “Amidst the roller coaster of interest rate sentiment that has unnecessarily become the norm in 2011, the idea that an imminent rate hike is now unavoidable is misplaced,” said Harley Dale.

    … I thought the RBA was only supposed to focus on inflation, not housing.

  4. Before any suggestion to annualise $150K of state/local levies, can someone justify this number. It seems absurd that such a figure could be the cost of initial infrastructure??? Annual rates are enough of a tax rort for very average services, so how can the upfront be so much.

    • This is what happens under Australia’s restrictive urban planning system. Implementing urban growth boundaries (UGBs), up-front impact charges, excessive planning approval processes, etc restricts the amount of land available for development, increasing its cost. This reduction in available land for development also reduces competition and contestibility in the land market, encouraging pre-existing land holders within the UGB to raise their prices and enabling developers to land bank and drip feed supply.

      • Therefore annualising the upfronts will do nothing for affordability.

        The system seems to be broken with the new home sales figues

        How will the state and local authorities fight back when their revenues are severely effected by a reduction in income from this source?

        • Agree. Annualising costs instead of upfront does nothing to change the cost/affordability of housing.

          Regarding the government infrastructure costs etc for now residential lots (attached and land), in QLD the average was about $20,000. The State has now interevened and capped this at $25,000 per lot.

          Given the average price of a home in Brisbane is about $450,000, thats about 5% in upfront charges.

          • Yes but you have conveniently left out the scarcity value embedded in land values due to the restriction of the amount of land available for development (due to UGBs, restrictive zoning, etc).

            Compare fringe land costs inside QLD’s UGB with those outside of it and you will discover massive price differentials that would not exist under freer zoning and no UGB.

          • I have now doubt that the $150K involves some sweet shakedown ‘tariffs’ by council friendly ditch diggers and service supplier but only yesterday a senior PS confirmed the figure as the ‘cost’ of supply a new block.

            Annualising will not reduce that shakedown but it will fund it at the govt bond rate rather than the private mortgage rate. Needless to say I would support competitive tendering for the supply of any new block services to reduce the cost – upfront or not.

            Also agree that the price of land (without services) is cranked up by growth boundaries – random planning concepts etc.

            A lot of the dysfunction arises from the Federal Govt pumping up migration/population numbers and leaving it to the State/Local government to sort out the mess. Needless to say unless the States/Local govts can make more cash from their residents they will adopt the sort of policies we have seen for the last 30 years.

            PS: Now that the new levies have been capped the councils are cranking up the rates – much to the horror of their residents. It would be better that new block services are user pays but with a more sensible approach to funding those services (ie annualising)

          • Thanks for the link. Yes – Houston Texas does sound like my kind of town! (Which I do find more than a little disturbing)

            By the way – this super blog deserves a massive ‘Tip of the Hat’ Superb work by all concerned. Particularly, the generally civil tone in the comments. Economics is rarely cut and dried and everyone learns from having their positions challenged and questioned.

            Australia benefited greatly from the broad rational economic debate in the 1980’s (when we thought the place was going down the tubes) and it is critical that the debate continues in these more challenging times when good policy will depend on an informed public giving their support.

            Macrobusiness is an excellent forum for advancing a thoughtful and engaging debate.

            Well done!

          • Agreeed PFH007. Imagine what civilised discourse could do in politics… Hasn’t really happened recently.

            I’ll resist the urge to rant about two party systems (which I now simply call ‘footy politics’). :/

        • Answer: they have no fear of being thrown in jail when they are caught! (And no fear of being thrown out at the next election either, given voter apathy)

      • ceteris paribus

        Land regulation actually increases contestability- at least for our fauna and flora and for our own sense of green well-being.

        Make regulation efficient- sure- but don’t throw the baby out with the bath water.

  5. ceteris paribus

    OK. I am willing to believe Dr Dale’s figures. Whoever he is, he is probably a nice enough guy.

    But the HIA are stakeholders. Another argument for more comprehensive, independent data collection and analysis on the multi-trillion dollar housing market.

  6. I work as a surveyor and the average cost to develop a block of land is around $40,000, so they are making plenty of money when they sell.

  7. That $40,000 excludes up front statutory headworks charges, the initial cost of the land and interest on the original purchase, development and selling costs over part of the development/selling period, Beef Supreme. These costs make $40,000 look chickenfeed.

    And annualising the current up front development charges, esp. via rates or land tax as they used to be – and as PFH007 has suggested here – does reduce the cost of a block of land. e.g. Would you still pay $300,000 for a block with a rates liability of $1000 if instead it now has an annual rates liability of $4000 to $5000? Not likely!

    Once the price of a block of land is seen as the capitalisation of that part of its annual rent that hasn’t been captured for public finance, we may understand why clever money set its cap over the period of this bubble for privatising publicly-generated economic rent. We became experts whilst productivity floundered.