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GUEST OBSERVER
The latest ABS housing figures confirm the new home building sector as the star performer of the Australian economy.
Despite a modest decline in new dwelling commencements in the June 2015 quarter, there was still a record number of 211,976 new homes started in 2014/15 – an increase of 16.9%. 
That is a phenomenal result which caps three consecutive years of growth for new home building – only the fifth time in the last 60 years that this feat has been achieved.
Through its broad reach the new home building sector has delivered a strong economic dividend to Australia during a period when many other sectors of the economy have struggled. 
New dwelling commencements will fall in 2015/16, but should remain elevated at what would still be the second highest level on record.
The key to the short term prospects for new home building is how much work in the pipeline is converted into actual activity – it’s not coming through as quickly now. 
An orderly decline in commencements in 2015/16 remains the most likely outcome. However, the credit rationing aimed at curbing investor activity is having a broad impact and risks generating a sharper fall.
The ABS figures show there were 53,314 dwellings commenced during the June 2015 quarter, a decline of 3.2% from an upwardly revised March quarter. Detached house commencements fell by 2.9% in the June 2015 quarter to 28,046, while ‘other dwelling’ commencements declined by 4.9% to 24,482.
The profile for national dwelling commencements continues to mask large regional differences. In the June 2015 quarter new dwelling commencements increased in South Australia (+12.0%), Tasmania (+54.0%), and the Australian Capital Territory (+76.4%). Commencements fell in New South Wales (-1.6%), Victoria (-0.5%), Queensland (-9.6%), Western Australia (-10.5%), and the Northern Territory (-36.1%). 
<a href="/images/2015/10/15/Screen%20Shot%202015-10-15%20at%209.30.31%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2015/10/15/Screen%20Shot%202015-10-15%20at%209.30.31%20AM.png" alt="">
Harley Dale is chief economist, HIA and can be contacted <a href="https://hia.com.au/en/BusinessInfo/economicInfo/EcoGroup.aspx" target="_blank">here</a>.
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New home building sector is the star performer: HIA's Harley Dale

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GUEST OBSERVATION
A widely expected ‘no change’ decision has now been announced over three consecutive months.
There is still the possibility of a further rate cut this cycle and chatter about this prospect will ebb and flow through the remainder of 2015.
A very low mortgage rate environment is very supportive of new home construction activity. The RBA’s signal that they won’t be taking rates higher in 2015/16 is obviously welcome.
Governments can complement the RBA’s current interest rate environment by progressing vital economic and taxation reform. The imperative for supply-side reforms in housing around planning timelines, land supply, infrastructure delivery, and inefficient taxation has never been greater. 
Successful reform outcomes would generate improved economic and productivity growth, greatly assisting the rebalancing of Australia’s economic growth.
The credit rationing to residential investors and higher barriers to new foreign property investment is, however, a different story entirely. These moves will have some adverse impact on new home building activity. 
You wouldn’t want these controls to get out of hand given new home construction is the key driver of domestic growth through the economy’s current rebalancing.
Harley Dale is chief economist at the Housing Industry Association and can be contacted <a href="https://au.linkedin.com/pub/harley-dale/52/bb7/b8" target="_blank">here</a>.
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Steady RBA rate is only part of the story: HIA's Harley Dale

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The further reduction in interest rates by the RBA boosts the prospects of the residential construction industry mounting a sustainable recovery.
As we enter mid-2013 there is still no evidence of a sustainable national recovery in residential construction, despite such evidence being crucial to a successful rebalancing of Australia's economic growth.
Today’s move is therefore welcome news for the industry and a prudent decision by the RBA.
Australia's banks now need to pass this 25 basis point cut on in full and in rapid time, to business as well as household customers.
Meanwhile, the federal government needs to act decisively to complement easier monetary policy by using next week’s budget to begin reforming the excessive tax and regulatory cost base which acts as a major constraint on new housing activity.
Policies to reduce inefficient taxation and excessive regulation on new home building will unlock billions of dollars of economic activity and generate much needed revenue for the government.
A 1% reduction in red tape would alone generate $1.15 billion worth of economic activity per annum while obviously improving the nation's productivity.
A week out from the federal budget it is disappointing that amidst the fiscal options available, the silence around reform measures that could boost the nation’s revenue base is deafening.
Harley Dale is chief economist at the <a target="_blank" href="https://hia.com.au/">Housing Industry Association</a>.
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RBA rate cut will help residential construction: HIA's Harley Dale

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Against a backdrop of strong aggregate economic conditions, at least as measured by the latest National Accounts update, momentum in Australia's residential construction industry is still clearly heading in the wrong direction.
The latest national accounts figures show dwelling investment still detracting from Australia's economic growth. As a whole, residential dwelling investment fell over four consecutive quarters to be down by a significant 6.2% in the year to the March 2012 quarter.
New dwelling investment drove this result, falling over four consecutive quarters through to March this year. However, investment in alterations and additions (renovations) declined at an accelerating rate over three quarters to March. We will likely see in early September that dwelling investment declined further in the June 2012 quarter.
Ten of thousands of businesses in Australia, predominantly but by no means solely small businesses, rely on housing for their livelihood.
Housing also has a broad multiplier reach through to the wider economy in terms of activity and employment – into significant parts of the retail and manufacturing sectors, for example.
A weak residential construction industry therefore doesn't paint the Australian domestic economy in a favourable light, especially when you consider the basic product (and service) new housing provides – additional shelter for Australia's population.
In other words, housing is the provision of a necessary "good". However, supply is going backwards. Job losses in the sector are consequently mounting.
Right now, the new housing sector in Australia is experiencing its second recession in four years. Housing starts in the March 2012 quarter fell to their lowest annualised level since the new home building recession of 2000-01, considerably passing along the way the milder recession mark of 2008-09.
Despite what was an awful March quarter, leading housing indicators, poor weather conditions on the east coast, and a substantial problem with the new building act in Western Australia suggest housing starts weakened further in mid-2012.
So what's going on and what can be done about it? After all, it is clear to all those who can accurately count that Australia doesn't exactly suffer from an oversupply of housing. Some people point to the current weak demand for housing (which exists across new housing in all eight states and territories, renovations, and existing property transactions) as the reason, and that's part of it. Others point to seemingly intractable supply side constraints, and that's a big part of it. Those, such as the Reserve Bank, who recognise that both weak demand and high supply costs (i.e. excessive tax) are responsible for the parlous levels of new housing activity are spot on.
From the demand side, it is difficult to enjoy healthy levels of new home building activity when the household sector is cautious and nervous in the post-GFC world, as they travel down a deleveraging path that likely has some way to go.
There are a myriad factors driving weak household confidence. Historically low levels of household confidence is in turn having a clear negative impact on housing expenditure as opposed to household consumption, the latter of which appears in an aggregate sense to be very robust in 2012.
However, weak housing demand (including transactions of existing residential property, which are a driver of new home building activity and which are currently at historically low volumes), doesn't get you to the sub-140,000 mark for housing starts, which we are unfortunately again seeing in 2012. To get to that recessionary level, especially for the second time in four years and the third time in 12 years, you need to bring the supply side into the equation.
The cost (tax) of new housing is excessive, continues to increase, and is more transparent now in an environment of flat to easing existing property prices. Research conducted for the HIA by the Centre for International Economics (CIE) found that up to 44% of the final price of a house-and-land package is represented by federal, state and local taxes, with around half of these taxes described as “inefficient”.
The general equilibrium modeling of the taxation on housing conducted by The CIE showed that new housing is the second most heavily taxed of the 27 large sectors of the Australian economy. Where is the sense (or equity) in that?
New housing is a very efficient, competitive, dynamic sector of the Australian economy.
The most prominent recent example of this fact is the stimulus measures implemented to combat the GFC. Those policy measures directed at new housing were quickly reflected in increased housing employment, and in manufacturers turning casual employees into permanent employees and hiring new staff, well ahead of aggregate labour market conditions in Australia displaying signs of improvement.
The temporary tripling of the first-home owners' grant for new dwellings (often mistakenly lumped in with the doubling of the grant for existing property, even though the price outcomes were very different) was greeted aggressively by a very competitive sector that was facing a negative demand shock. The outcome was new homes to first-time buyers at a lower price than prior to the GFC. The social housing initiative, another GFC-related policy measure aimed at new housing, came in under budget.
However, a sector can be as competitive as a Bledisloe Cup match, but if up to 44% of the final product represents taxation, much of it inefficient, and the principal competitor – in this case existing property – is less heavily taxed, then intuituvely the end result won't be good. As the empirical evidence clearly demonstrates, the end result isn’t good and unfortunately it is being keenly felt by tens of thousands of businesses and well over 1 million labour market participants in the Australian economy.
As it stands, there are many reasons why new housing demand won't come roaring back. It will, however, recover. The lagged impact of lower interest rates will prove positive, for example, but the inherent cautiousness of households and the large, unfavorable gap between official rate reductions and what mortgagees (and businesses) have received, means an easing in monetary policy is no panacea.
Taxation reform is a key requirement to bolster confidence and lift activity.
The federal government could well do to reignite its appetite for leading by example in this regard. Meanwhile state (and territory) governments that have made a start, such as New South Wales, need to keep the foot down and those that have done little or nothing need to get on with it for the sake of wider domestic (non-mining) economic activity.
All the while, short-term investment in new housing is warranted to lift activity above the recession bar.
Well-constructed investment targeted at boosting new home building demand, through policies with a clear, short and finite timeframe, can lift new home building activity without spruiking final prices.
The cost of doing nothing now far exceeds the cost of implementing short term measures to complement a focus on wider policy reform aimed at creating a more efficient and equitable environment for new home building.
Harley Dale is chief economist at the <a href="https://hia.com.au/" target="_blank">Housing Industry Association.</a>
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Harley Dale

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