In yesterday’s Senate Estimates hearing, David Gruen, Executive Director of Treasuries Macroeconomic Group, repeated the mantra that Australia’s officials are hoping for an uplift in housing construction to fill the void left as the mining boom unwinds. From the AFR:
The federal Treasury is relying on a jump in the construction of houses, apartments and office buildings to keep the economy ticking over as iron ore, coal and other commodity export prices fall more sharply than it expected and investments in resource projects peak earlier than forecast.
Treasury’s top economic forecaster told a parliamentary committee yesterday there are signs of a resurgence in the housing market that could be one of the economic drivers the government needs to balance the budget this financial year…
“In a couple of years, when mining investment does not contribute to growth any more, we will need other things to contribute to growth…”
“One of the most obvious things [to contribute to growth] is the housing market, given that we think there is under-supply. That is a natural and desirable development and we are seeing early signs of it.”
As noted yesterday, the construction of homes in Australia has been laclustre given the huge rise in values between 1996 and 2010, as well as the strong growth in the population since the mid-2000s (see below chart).
Given that Australia is starting from such a low base, there would appear to be ample scope to lift housing construction over the next few years, as per the Treasury’s and RBA’s wishes.
The early signs, however, are not good. Despite the -1.5% cut to official interest rates since November 2011, and an uptick in apartment construction recently, new house sales, house construction, and house approvals have been heading the wrong way (see below charts).
New home sales hit a 16-year low in August, according to the Housing Industry Association, which prompted Matthew Quinn, the head of Australia’s largest diversified property group, Stockland, to describe the new home market as the worst he had seen in more than 20 years.
Construction employment, too, is headed in the wrong direction. In the year to August 2012, the construction sector was the biggest loser, shedding -69,400 jobs (see below chart).
The construction sector has now shed -92,900 jobs since November 2010, representing -9% of the sector’s workforce (see below chart).
While the continued lowering of interest rates, along with new home incentives introduced in New South Wales, Queensland, and South Australia (offsetting the cancellation of the $13,000 First Home Bonus in Victoria), should help to alleviate the situation, I remain doubtful that new home sales and housing construction levels will pick-up to anywhere near the extent required to offset the unwinding of the mining boom.
The main problem is that Australian vacant land prices remain far too high, after skyrocketing over the past decade (see below charts).
At a median price of $193,000 per lot ($218,000 capital cities; $154,000 regional areas), the price of new house and land packages have risen beyond what many Australians can afford or are willing to pay. Until this situation is resolved, and land prices fall significantly, new home sales and construction levels are likely to disappoint.
Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.
