Can housing construction fill the mining hole?

Fairfax’s Matthew Kidman has today published an interesting article weighing-up whether housing construction can recover enough to fill the void left as the mining investment boom unwinds from 2013. Let’s take a look:

CAN the Australian housing market recover as it has in the past or is it different this time?

…The bulls like myself believe that history will repeat itself and lower interest rates will eventually trigger a building cycle that in turn will drive domestic economic growth. The bears counter this by saying it is different this time because household debt still sits at a lofty 172 per cent of gross income. They believe any spare income from lower interest rates will be used to pay down debts and not ploughed into the property market.

In the early 1990s, household debt was only about 50 per cent of gross income, providing a sturdier platform for a housing boom.

If the bears are right, the Australian economy has a real chance of falling into recession as the peak of the mining and energy boom passes.

…Housing is our only realistic hope of avoiding a protracted period of substandard economic growth…

Last week, building materials group CSR said it was optimistic that a recovery in housing activity was in its nascent stages. It pointed to a spike in housing finance as a strong lead indicator for future building activity…

Goldman Sachs wrote earlier this year that if the Reserve Bank managed to reduce official interest rates to 2.75 per cent by 2014, housing starts could exceed 180,000 by 2015. That would be a full-blown recovery and a major boon for the economy as the tailwinds from the mining and energy booms drop off…

The RBA has lowered rates by 125 basis points over the past year and we are still waiting for a tangible increase in housing starts. The lead indicators such as approvals, finance and auction clearances are heading in the right direction but 2013 will be a key year in working out whether the old rule that lower interest rates automatically fire housing activity still applies…

I believe that lower interest rates will eventually lead to an increase in starts even if more gradually than in the past. My view depends heavily on the RBA continuing to lower rates in 2013, allowing first home buyers to get in. With a surge of people entering the first home buying age of 30-34 in the next five years, starts may reach a record.

An examination of the key data around housing construction provides some pointers as to whether Australian housing construction could rebound in a sufficient enough way to counter-act the upcoming decline of mining investment, which is currently running at all-time highs (see next chart).

Certainly, the latest new home sales data from the Housing Industry Association(HIA), as well as building materials data from the Australian Bureau of Statistics (ABS), shows that the housing construction industry is contracting, suggesting that a pick-up in housing construction will not be forthcoming. New home sales hit 16-year lows in September, despite generous incentives on offer from developers, whereas the volumes of clay bricks, concrete blocks, and roof tiles – materials typically used in dwelling construction – also continued to contract (see below charts).

On the positive side, both the number of dwelling approvals and finance commitments for newly constructed dwellings have ticked-upwards recently (see below charts).

When combined with changes to first home buyer grants in New South Wales and Queensland, which favour newly constructed dwellings (albeit partly offset by the recent reduction of subsidies in Victoria), these datasets suggest that new home construction will soon rebound.

My own view is that Australian housing construction will pick-up from current depressed levels, but that the rebound is likely to be fairly weak and certainly won’t be enough to offset the hit to growth and jobs as the mining investment boom unwinds.

Despite underlying demand supposedly running well below current rates of home construction, the worsening economic conditions as the mining boom unwinds is likely to lower overall demand for housing and weigh on the construction of new homes. More Australians are likely to opt for group accommodation in order to save on housing costs, which will adversely affect the rate of new home construction and thwart the RBA’s and Treasury’s plans for housing to fill the void as the mining boom unwinds.

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.