Reflecting on Recovery

Housing Industry Association

In direct terms, it appeared that Australia’s residential construction sector may have dodged a bullet in the controversial May budget. However, the industry is always – and deeply – affected by consumer sentiment, and even if house-building itself was not hit by taxes or other disincentives, it is highly probable that some of the more contentious outcomes of that budget may impact on sentiment – and therefore, on market strength.

We asked Harley Dale, chief economist at the Housing Industry Association (HIA), whether the industry was a winner, a loser or a bystander in all the financial furore. First off, he pointed out that a couple of important issues relating to housing construction were not addressed in the budget because they are subject to White Papers over the next 12 to 18 months – one on taxation and the other on fiscal relations between states and federal authorities.

“Some of the risks to the housing industry, a prominent example being some form of amendment to negative gearing provisions, have clearly not come through in the budget,” says Harley. Issues such as whether negative gearing should be reduced or even abolished as some people suggest are “big-ticket questions for the industry that were not amended in any way in the federal budget because they are going to be dealt with in the near future. We have a very strong expectation that the White Paper process will address these issues. The federal government has made a commitment to do so within the current government’s term.”

One of the most talked-about budget provisions (mainly in shrill voices and with more passion that sense) was the “plan to slash $80 billion from schools and hospitals over the next decade” at state level, as the ABC put it, and the consequent likelihood of some kind of rise in the GST, which will be examined in the upcoming White Paper on taxation.

Harley explains that the HIA sees consumer sentiment as the biggest risk from this budget. “The decisions taken, and the bad news imparted, damages consumer confidence to an extent that it has an impact on the actual demand for residential construction. I think there is little doubt that consumer confidence, at least in the early weeks and months following the budget, will be damaged.” This is hardly rocket science, he adds. “The key is the extent to which any damage to consumer confidence manifests itself in an actual reduction in demand in the economy. There will almost certainly be some reduction in demand and that will primarily be in and around household consumption. But what would be even more damaging to the economy is if that dent in demand in the household sector extended to residential construction as well. We think there is a reasonable chance that will not happen but clearly it is a prominent risk that a recovery in new home building is derailed on account of a dent in consumer confidence.”

This lack of confidence could affect sales of built homes and stop people moving house (or, a worry for the burgeoning aged care market, moving out to a retirement property financed by a house sale). “This gets to the heart of where the risk is,” says Harley. If you look beyond the resources sector, which has seen a once-in-a-lifetime boom and may be nearing the end of the best times, “the housing industry sector recovery is about the only thing the Australian economy has got going for it right now. There is no tangible evidence of a recovery in non-resource business investment, nor of a sustained recovery in household consumption that will get us back to the sort of growth in household consumption that we saw over the last 10 or 20 years. So in terms of the domestic economy we have just one thing going for us and that is a new home building recovery that has a channel extending to the existing property market and back.” If that new home recovery is derailed for any reason, “it would have very substantial implications for domestic economic growth in the next one to two years.”

However, the HIA has its fingers crossed that we might avoid that scenario because the risk of a derailment to the new home building recovery is considerably mitigated by two factors. First, the budget is sufficiently ‘tight’ that any modest prospect of the Reserve Bank of Australia starting to raise interest rates from late in 2014 has effectively been quashed. There is now also a higher chance that the first increases to interest rates may not occur until later in 2015.

Secondly, while fiscal policy has been tightened, the extent of this tightening is relatively modest. This budget certainly represents a modest tightening when compared to the two benchmark tight budgets of the modern era – the 1986 Hawke / Keating budget and the 1996 Howard / Costello budget. The fiscal settings outlined on 13 May are appropriate given that the Australian economy is growing below trend and will continue to do so for some time. Most of the impact of the fiscal tightening will be felt from 2015-16 onwards.

HIA notes that the First Home Saver Account Scheme will be discontinued due to lower than forecast take-up rates. The government will cease making contributions from 1 July 2014 and tax concessions and the income and asset test exemptions for government benefits associated with these accounts will cease from 1 July 2015. Accounts will be converted to regular savings accounts by the financial institutions in which they are held.

Meanwhile, the Reserve Bank’s head of financial stability, Luci Ellis, cautioned first-time home buyers to remain patient and see off the latest boom before jumping into the property market. “This is probably more a cyclical phenomenon than a structural one. It is still probably quite disheartening for potential first home buyers,” she told a Sydney conference just after the budget. “As such, it would not be a good outcome if they responded by overstretching themselves to try to get into the market during upswings. As well as being against first home buyers’ own long-run interests, that would increase risk in the financial system.” The proportion of first home buyers has been running well below average for more than a year, hitting a record low of 12.3 percent (according to ABS) of new loans being taken out for owner-occupation in November last year, and hardly improving since.

The Tools for Your Trade programme, which provided a grant to apprentices to cover costs associated with training, has been replaced with the ‘Trade Support Loans Programme’ which provides loans to apprentices on similar terms to those available to university students to cover the costs of tuition under the Higher Education Loan Programme (HELP) scheme. Eligibility to the scheme will be restricted to those undertaking trades on the National Skills Needs List. The HIA feels that while many of the key trades in residential building are on this list, eligibility should be expanded to all apprentices in recognised construction trades.

As well, the federal government will not be proceeding with Round 5 of the National Rental Affordability Scheme. Funding for incentives from earlier rounds that are uncontracted or not used within agreed timeframes will be returned to the Budget. Funding for tenanted NRAS properties is not affected.

On a brighter note, the HIA welcomes the fact that the Government will provide $1.0 billion over five years from 2015-16 for a grants programme to support the construction, expansion and enhancement of infrastructure across Australia. Grants will be available for projects to be delivered in partnership with local, state and territory governments, the private sector, and community groups. Funding partners will be required to contribute at least half the total project cost.

A key aspect of the industry in which HIA does a great deal of work is in the regional and state variations in industry performance and strength. Harley agrees that it is often nigh on impossible to make national statements or forecasts because of the severe variations from one place to another. So research tailored to an individual company’s town or operational area may be of great value, and the HIA is particularly valuable in this area.

In such volatile trading conditions, it may be worth reminding the industry that another of HIA’s most valuable member services is the design, execution, analysis and presentation of tailored market research on the Australian housing industry – from short online surveys through to industry-wide research on a company by company basis. Harley has a strong team of heavyweight economists and forecasters who can crunch numbers with the best and perhaps even point a way forward.

For more information about Housing Industry Association, please visit http://hia.com.au.

Home Automation

Call it ‘domotics,’ and you are likely to receive a blank stare, but refer to it as ‘smart home’ or ‘home automation,’ and you will get a nod of acknowledgement. For the past few years, consumers have heard the word ‘smart’ attached to countless products and services, from food and drink to snacks like popcorn and mobile phones, which no one seems to refer to as a ‘cellphone’ anymore. Yet what, exactly, constitutes ‘smart’?

January 17, 2019, 4:55 AM AEDT