The Housing Industry Association (HIA) has come out today lamenting the weak recovery in dwelling construction and urging Australia’s authorities to provide greater assistance to the home building industry. From the Media Release:
The ABS today released GDP figures for the June 2013 quarter which show that residential construction activity continues to struggle, said the Housing Industry Association, the voice of Australia’s residential building industry.
“GDP grew by 0.6 per cent in the second quarter of 2013. This means that economic output is 2.6 per cent higher than in the same period of last year,” said HIA Senior Economist, Shane Garrett. “This growth rate is a little below trend. The performance of new home building was particularly disappointing with a decline of 2.1 per cent during the quarter. This means that the volume of new home building is down by 8.5 per cent over the last twelve months from already low levels,” added Shane Garrett.
“More encouragingly, home renovations activity was up by 1.9 per cent in the second quarter of 2013. However, activity in this segment of the market is still lower than it was twelve months ago,” noted Shane Garrett.
“The combination of weakening residential construction activity and below trend GDP growth means that strong intervention from policy makers is vital in order to guide the economy back to the right path,” cautioned Shane Garrett. “There are firm indications that the RBA’s rate cuts over the past two years have helped to lift residential construction off rock bottom levels. Today’s figures however indicate that more rate reductions are needed in order to prevent this recovery from faltering,” urged Shane Garrett.
“Today’s figures also indicate that government investment has plunged over the past quarter. The weakening of household spending is not unrelated to this. Government needs to lead the way in these uncertain times. Targeted incentives for investment in productive infrastructure like housing will be of significant benefit, both in the short term and over the longer run,” concluded Shane Garrett.
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Let’s assess the situation. Nominal mortgage rates have been cut to near record lows. Nearly all state governments have significantly boosted subsidies to first home buyers purchasing newly constructed homes. Net overseas migration and population growth is strong. And yet new home sales and construction remain remain weak.
What does this tell you? That’s right, the price of new homes (and land in particular) remains too high, pricing-out many would-be buyers.
The fact of the matter is that further cuts to interest rates would do little more than provide a short-term sugar hit to new home sales and construction. What is really required are structural reforms to the supply-side of the housing market – namely: elimination of regulatory barriers to land supply; speedier approval processes; an end to upfront charges on new development; and improved financing and provision of infrastructure – in addition to genuine taxation reform (e.g. broad-based land taxes in place of transaction taxes).
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As an aside, I am also amazed that the HIA is not lobbying to shift negative gearing towards newly constructed dwellings only, since it would dramatically boost demand for home builders.
Continuing to treat the symptoms of the problem, via reductions to interest rates, is no solution at all.
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.
