While yesterday’s revised economic forecasts showed stronger commodity prices driving higher tax revenue — a change in forecast that apparently meant Wayne Swan should have been begging the forgiveness of the Press Gallery, which has a perfect record of prediction — they also predicted a softer domestic economy.
One of the key contributors was a significant downgrading of forecasts for growth in investment in housing, which for 2010-11 was reduced from 7.5% growth to 5.5%. Estimates for growth in the year just completed were downgraded from 3% to 1%. The only good news was that forecasts for 2011-12 were upgraded from 4% to 5.5%.
This isn’t the first downgrade of housing investment. Last year’s MYEFO upgraded the private dwelling investment forecast for 2010-11 from 11.5% growth in the 2009 Budget to 12% growth. But this year’s Budget downgraded that to 7.5%. The Budget did raise the forecast for 2009-10 to 3%, but now Treasury thinks it will be lower than the MYEFO forecast of 1.5%.
This has real implications for whether Australia can start to close the gap between supply and demand for housing that has opened up over the last decade.
Behind the figures are two factors — the level of new dwelling approvals, and what factors are working to prevent approvals translating into actual investment in and, thus, construction of new housing.
The impact of low interest rates and the Government’s First Home Owners’ Boost in 2009 drove housing approvals to levels not seen since 2004. Since late last year, however, approvals have fallen with the same speed, driven by the end of the FHOB and rising interest rates.
That peak in late 2009 clearly drove Treasury’s strong forecasts that approvals would generate substantial increases in investment, with a fall-off in 2011-12.
But clearly there have been factors at work that have prevented that peak in approvals turning into bricks and mortar.
Harley Dale, the HIA’s chief economist, identified several factors at work. “In the first half of this year a number of people were ‘spooked’ by the prospect of interest rates moving higher over the 2010 year than was ever likely to be the case — there were some references, for example, to mortgage rates hitting the 9’s or even 10 this year. So, some approvals may have been put ‘on hold’.
“And in NSW in particular there are some projects approved long ago that were never started, but the approvals needed to be ‘reissued’ as the time period to start construction had elapsed. These projects aren’t necessarily going to be started any time soon. A third point is the perennial issue, which the First Home Owner Boost highlighted, that we have actually regressed with our planning systems and it takes longer (and is more complicated) to get through an approval process now than it did ten years ago.”
Dale says that some of these hold-ups will eventually show up in actual activity and hence dwelling investment.
However, the most serious issues remains the lack of finance for the residential property sector, driven by the big banks exploiting the GFC-induced collapse in the non-bank lending sector to grow their exposure to the residential mortgage sector, slashing higher-risk lending to businesses and, in particular, property developers.
Dale says the lack of finance is hurting not just large property development companies, but small and medium developers who don’t have the option of accessing equity finance. The banks’ focus on mortgage lending means “they’re stimulating demand for housing but restricting finance that will enable supply to meet it.”
“This means that we may simply never see as much conversion to actual activity as is usually the case – hence the need for a downgrade.”
This is an issue that will only be addressed once we start returning to something like the levels of competition in the residential mortgage sector that we saw prior to the GFC. As Christopher Joye noted on Tuesday, there continue to be signs of life in the RMBS market thanks to the Government’s ongoing commitment to supporting the RMBS sector with $16b of funding via the Australian Office of Financial Management. The more non-Big 4 mortgage lending, the more pressure there will be in the big banks to stop clinging to low-risk mortgage lending and revive business lending.
Having banks that concentrate on the Australian market, which is the source of their de facto government guarantee, rather than chasing high-risk foreign ventures, would be handy as well, but that’s another story.
The longer-term implications of the lack of lending for property development go directly to Australia’s ability to start narrowing the gap between housing demand and supply. “Over 2010,” says Dale, “there has been increasing evidence that the current first stage recovery will run out of steam in 2011. That would mean the duration of the up-cycle in dwelling investment, regardless of the magnitude, wouldn’t run for as long. Without a sustained recovery, demand will continue to outstrip supply.”
Even at a forecast 5.5% growth in dwelling investment next year, the gap between population growth and housing supply looks set to continue widening, driving house prices higher and fixing the attention of the Reserve Bank, which has repeatedly expressed concern about housing supply.
COAG meets again next week, sans an election, and we should hear about progress from Treasurers on their efforts to advance a housing supply reform agenda. Real action is more urgently required than ever on one of the country’s most pressing economic problem.
But adam Schwab and those other guys said house prices are going to collapse by 60% I don’t understand
Bernard, get this supposed ‘housing supply problem’ out of your head. It’s extremely unlikely there is a real shortage of housing in this country, and even if there was, the solution would be to get land price speculation down and building costs down — the main reason for slow sales right now is that asking prices are simply too high for the average purchaser’s pocket. Let alone the recent shocking track record with speculative purchases of housing on tick in this country, relying on negative gearing breaks to bail out amateur investors running at a permanent loss.
However, studies of the building rate in Oz suggest that there has been a dwelling built for every new 2.3 people, where the average number of occupants per dwelling nationally according to the ABS is 2.6 people — so if anything, supply is being built at a faster rate than is currently the occupancy norm.
The reason the building rate is down is that housing sales in this country is a price-fixing racket designed to profit a few vested interests, particularly the banks and NBLs like ‘Aussie’. You cannot divorce the flow of easy credit into this country obtained from ‘overseas wholesale funds’ from the shenanigans on Wall St, either, and you can only expect the cost of money to now go up from those sources, or dry up almost altogether post-GFC — investors will not take a risk with Australian bubble house prices going forward.
Most of what you have written here is rubbish supplied directly by financial vested interests — banks and developers — ‘explaining the problem’ but conveniently missing the real problem — too much easy credit causing a housing bubble, the GFC, etc etc. Everything that has been said here can easily be turned on its head from an affordability perspective of a typical householder, and explains perfectly the reasons why developers hare having trouble sourcing finance, or why as immigration dries up we suddenly don’t need their new stock. You are putting the cart before the horse almost perfectly here. Apparently we the people exist simply to provide a revenue stream for banks and developers through the medium of providing human shelter at excessive cost.
PS The COAG enquiry you mention is supposed to leave no stone unturned re providing *affordable* housing solutions which actually work, unlike the NRAS, not on ways of making life easier for investors and banks. This includes the prospect of developing affordable housing on govt-owned reserves of land that will remain in govt possession, kind of like British leasehold properties, because the conventional market approach to providing affordable, decent human shelter in this country has manifestly and abjectly failed, due to letting speculative market forces run away with it in irrational exuberance — much as in the Great Depression, the dotcom crash, the railways boom, the TV boom, the radio boom, the tulip boom, the South Seas bubble, etc etc. The only trouble with fixing the problem in Oz now is that both major political parties are in bed with the banks and developers, and don’t want to see mum and dad speculative investors losing out either — although middle class neg gearing handouts are costing Treasury billions every year, and continue to rise without end. Forget the RSPT, you could save a fortune every year by quarantining neg gearing away from personal income as Ken Henry was too afraid to suggest this time around, but as was done by Keating in the 80s and in the US.
Is usury against the law?