- Australia’s unprecedented residential construction boom is starting to roll over. Building approvals are falling noticeably, as is demand for construction workers.
- Some groups have expressed concern that proposed tax changes proposed by Labor could result in less homes being built, job losses and even greater housing affordability constraints.
- Australia’s next federal election is expected to be held in May next year.
After an unprecedented boom in the past two years, the outlook for residential construction in Australia is now clearly starting to soften.
Building approvals are tumbling, especially for apartments, as the combination of tighter lending standards, a reduction in foreign demand and a record supply of new housing acts to weigh on established home prices.
Unsurprisingly, demand for workers is also starting to weaken. This could act slow jobs growth further given construction is the third largest employer in the country behind healthcare and retail.
Given that backdrop, along with an expectation that home prices are likely to fall for some time yet, the question that many are now asking is whether the housing construction boom will be replaced by an equally large bust.
At this point most expect the downturn will be modest, leaving residential construction at elevated levels compared to prior norms.
However, according to new modelling from Cadence Economics on behalf of the Master Builders Australia, a likely change in government at the next federal election — and coinciding proposed changes towards the tax treatment of housing — could make the current downturn a whole lot worse.
“Labor’s policies on negative gearing and CGT fails its own test,” said Denita Wawn, CEO of Master Builders Australia, referring to the Labor Party’s proposed policy to halve the capital gains tax on properties held for over 12 months and limit negative gearing to new builds from a yet to be determined date.
Rather than helping to boost new housing supply and employment across the sector, it says the proposed changes will have the opposite effect.
“Independent modelling by Cadence Economics shows that Labor’s policy would mean up to 42,000 fewer new homes would be built over the five years following the implementation of Labor’s policies, resulting in a reduction in the value of residential building activity of between $2.8 billion and $11.8 billion,” Wawn said.
“Home renovations would also be hit by an expected reduction of between $50 million to $210 million in activity over a five year period.
“Inevitably this would mean a fall in employment which is expected to be between 7,200 and 32,000 less jobs across the country.”
In response to the figures presented by the group, Shadow Treasurer Chris Bowen said they did not take into account Labor’s policy to grandfather existing tax arrangements for previously purchased properties.
Slight problem with the modelling in today’s Australian. It does NOT model Labor’s policy. Labor policy fully protects and grandfathers existing investments. The policy modelled by the Master Builders has NO grandfathering. #factsmatter pic.twitter.com/QNaVIEDYdq
— Chris Bowen (@Bowenchris) October 23, 2018
“The modelling specifically says it doesn’t take into account Labor’s policy of fully grandfathering existing investments,” Bowen said in a separate post on Twitter. “Therefore, it doesn’t model Labor’s policy at all.”
While Bowen cast doubt over the figures, more broadly, Wawn says that housing market conditions are now very different to what what they were when Labor first proposed the changes in 2016.
“The context of Labor’s policies, namely an ‘overheated’ housing market no longer exists bringing into question the need for reforms to curb investor activity,” she says.
According to the Labor website, the current tax arrangements on housing have “given investors an unfair advantage over first home buyers”, helping to “fuel an investor driven property boom, leaving more and more young people and first home buyers unable to purchase a home”.
It says the “interaction of negative gearing and the capital gains tax discount has also encouraged speculative behaviour exposing the economy to unnecessary levels of financial risk”.
“These changes will promote productive investment rather than debt-fuelled speculation in existing property,” the party’s website says.
Given that investor activity has declined sharply in recent years, largely in response to combination of tighter lending standards and falling prices discouraging investment at a time when gross rental yields are already low, it raises some questions as to whether the proposed changes are now required, particularly should the current strengthening in lending standards be maintained or bolstered further in the period ahead.
Macroprudential regulations have successfully addressed many of the concerns that were previously, and in most instances rightfully, raised by Labor.
The question is whether it will remain that way should “macropru” be removed or watered down in the period ahead, requiring an additional deterrent to curb speculative activity in the established housing market?
And if these policies do become law, will they encourage new investment to help improve affordability for both renters and prospective first-home buyers, especially at a time when Australia’s population is strong?
Australia’s Housing Industry Association (HIA) says the answer will almost certainly be no.
“With house prices falling and building activity in decline this is not the appropriate time in the housing cycle to increase Capital Gains Tax,” HIA’s Principal Economist Tim Reardon says.
“Increasing the tax on housing will result in less investment in housing, fewer houses being built and inevitably a worsening of the affordability challenge.
Based upon separate independent modelling it commissioned with the Centre for International Economics, the HIA says that while reducing the capital gains discount down from 50% to 25% will likely help improve housing affordability in the short-term, it will only exacerbate existing affordability challenges over a longer period.
“The CIE concludes that increasing the tax on rental homes may initially benefit ‘first home buyers’ but over time this gain will be lost as rental costs rise leading to higher home prices, that will once again force first home buyers out of the market,” Reardon says.
He says that Australia “cannot tax its way out of the housing affordability problem”, suggesting instead that a more coordinated response is required to ensure housing supply is sufficient to cope with population growth.
“Addressing affordability requires coordinated effort by all tiers of government to allow the industry to respond with the type and location of housing required to satisfy the pent-up demand,” Reardon said.
Earlier this week, RBC Capital Markets forecast that Australian home prices would fall 15% from peak to trough by the end of 2020, partially in response to the proposed tax changes put forward by Labor.