When it comes to the outlook for residential construction in Australia, few dispute that it will be lower in the years ahead.
The only real question is how quickly it will fall, and by how much?
Some think that it will be a gentle slowdown with high immigration and still-low interest rates helping to support underlying demand for housing. Others, however, think it could be significantly worse, creating headwinds for economic growth leading to upward pressure on unemployment.
No one knows the true answer, just that it’s going to decline.
When it comes to the debate, Australia’s Housing Industry Association (HIA) thinks the fall in residential construction will be modest in nature, from a record high of 234,000 starts in the 2015/16 financial year before bottoming out at around 176,000 starts in 2018/19, leaving it at elevated levels compared to prior norms.
However, while that’s the group’s baseline scenario, it has not been impressed by recent steps from Australia policymakers that it says risks exacerbating the downturn in construction activity in the years ahead.
“The housing sector has already stepped back from its role driving the Australian economy and now is not the time for governments to hit the industry with punitive charges,” said Tim Reardon, the HIA’s principal economist in a report released today.
“Government interventions into the market so far include state governments imposing punitive stamp duty charges on foreign investors, federal charges for foreign investors, a new set of visa rules that could slow overseas migration, restricting lending to domestic investors and new regulations limiting interest only lending.”
According to Reardon, this constant intervention in the housing market risks leading to an even deeper pullback in residential construction.
While Reardon is merely talking his own book — he is, after all, a representative of Australia’s peak housing construction body — it does raise an important question: Do these policy tweaks, aimed to solve problems such as housing affordability for first-home buyers, land-banking from foreign investors and financial stability concerns from an increase in interest-only lending to investors, risk creating more problems that what they solve?
It’s a curly question, and one that will surely create debate.
By looking to curb foreign and local investment, could it lead to a more pronounced slowdown in the economy? Or could it see residential construction fall back to trend levels or below, exacerbating housing affordability constraints for both renters and buyers?
Or, on the contrary, could reducing demand lead to a decline in housing prices, especially in areas where supply has increased rapidly during Australia’s recent building boom?
And, nearer-term, could it lead to some construction companies running into financial difficulty, putting thousands of jobs, potentially more, at risk?
There’s already worrying signs that’s occurring in southeast Queensland, a hotbed of high-rise construction activity in recent years.
Given recent moves to curb housing demand from Australian investors, coming at a time when China has introduced tighter capital controls in an attempt to slow money leaving the country, it’s easy to see why the HIA is concerned that by limiting demand, the decline in residential construction could be far steeper than what many currently predict.
At a time when Australia’s household sector is constrained by weak wage growth and high levels of debt, the residential construction downswing will need to be slow and modest to ensure it doesn’t derail Australia’s fledgling economic recovery.
And, even if that does eventuate, there’s no guarantee it still won’t slow the economy, as Westpac chief economist Bill Evans pointed out earlier this year.
“It seems clear from the dwelling approval data that the housing construction cycle has peaked,” he says.
“We expect that, through 2018, housing construction will be a negative influence on growth subtracting around 0.25% from growth compared to a contribution of 0.3% in 2016.”
Coupled with the likelihood that household consumption is unlikely to pick up in any meaningful way, Evans says economic growth is unlikely to rebound back above 3% next year as the Reserve Bank of Australia currently forecasts, seeing unemployment lift back towards 6% and keeping a lid on wage pressures.
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