A multi-faceted approach needed to fix new housing sector

There is no simple policy response to lifting a major sector of the economy, housing, out of its current doldrums.

Financial stimulus packages such as increasing the value of first-home owners’ grants and stamp duty concessions do work. However, as welcome and necessary as these fiscal stimulus policy measures are, they need to be complemented by other monetary policy and regulatory reforms to overcome the challenges in the post-GFC deleveraging environment.

The new housing market is well known for its cyclical behaviour but the current cycle, impacted in recent times by the GFC, has highlighted the systemic problems of housing supply, housing affordability and the need for fundamental reform.

The here and now

Residential building is going through a worrying and long weak phase during which industry activity, in real terms, has essentially tracked sideways for close to nine years now. The short-term outlook remains poor despite the RBA’s cumulative rate cuts of 1.25 percentage points over the past 12 months, and residential building is set to weaken further during the remainder of 2012 and into 2013.

Master Builders’ surveys as well anecdotes from house builders point to poor sentiment affecting purchasing decisions. Households remain sensitive to global woes, job insecurity and flat to falling house prices.

‘Hangovers’ from the global financial crisis created an increased propensity to save and reduce debt. This trend appears long lasting.  Confidence remains fragile. Although leading indicators of new home building are finally showing some – albeit nascent – signs of improvement, activity continues to languish around the bottom of the cycle.

Actual work done is expected to weaken further in the short term. Sales and enquiries are drying up, and profitability is under severe pressure. So it is no surprise that builders say they are looking to reduce employees and contractors.

Further RBA rate cuts are warranted, although the banks must fully pass on these rate reductions to home owners and not simply bolster their profits. Reviewing home loan eligibility requirements would also assist.

Forward indicators should improve during the latter part of 2012 and early 2013, with an improvement in work done beginning to flow through in 2013-14.  Nonetheless, the upswing will be from a low base. Dwelling starts declined by 11.5% to less than 140,000 dwelling units in 2011-12, after a 5% decline the previous year.

Understanding the problems

A much better understanding of the underlying, structural or systematic problems is needed if there is to be any meaningful response to stimulate a sustainable recovery in the new housing market.

The first key challenge is to redress the undersupply of new housing by building more. This would, in turn, work to address the second key challenge, housing affordability.

Lack of supply, first and foremost

Economic analysis points to a substantial and increasing under supply of housing in Australia. Projections from the federal government’s National Housing Supply Council point to a current shortfall of 228,000 dwellings. Based on current policy settings, the council believes it will increase to 370,000 dwellings in 2016 and potentially 663,000 dwellings by 2031.

Federal government programs to improve the supply of affordable housing have been worthwhile, but do not address the fundamental constraints driving the broader supply problems.

The affordability issue just won’t go away

Even if a cyclical pick-up in demand works to underpin a recovery in Australia’s new housing sector, the nation will still have a serious underlying problem in terms of housing affordability.  Without a coordinated national policy response by all three levels of government, the problem will only worsen.

Global economic uncertainty has contributed to the current sluggish housing market conditions but is masking the true extent of the housing challenge.  Housing affordability remains problematic for many in the Australian community, in particular first-home buyers looking to gain a foothold in the housing market.

The decline in established house prices experienced in the immediate aftermath of the GFC (falling 5% in 2008-09) and the more recent falls coinciding with the ongoing sovereign debt crises in Europe and the United States (down 6% in the past two years) are not sustainable or politically desirable solutions to the longer-term structural challenges of housing affordability.

Policy needs to focus on supply-side impediments

The short-term focus of governments often ignores longer term structural economic and social policy ramifications.  Reforms are required on both the supply and demand side of the market.

Demand-side drivers of house prices influencing housing affordability include: income, taxation, mortgage interest rates, employment and unemployment, consumer confidence, attitudes to household leverage (debt), population growth, the incidence and pattern of household formation, labour market and social changes, patterns of urbanisation, and changes in housing quality.

Supply-side drivers of house prices include: building and planning regulations, availability of adequate land supply, taxes and charges imposed on the housing supply chain, and labour market policies, practices and regulations.

Government failures must be corrected

The primary challenge for the federal, state, territory and local governments is to develop and implement a set of nationally co-ordinated policy settings to remove the supply-side impediments in the Australian housing market.

Immediate priorities must revolve around remedying government failure in areas such as regulation and regulatory processes – land supply and development approvals, as well as taxes and charges affecting residential housing supply and transfer.

Governments must reduce developer charges and taxes such as stamp duties, speed up development applications and increase land supply. These key measures would go a long way towards solving both housing undersupply and poor affordability.

Action to remove the barriers to housing supply would also assist in underpinning economic growth and jobs.

Master Builders Australia’s blueprint for reform

The federal, state, territory and local governments must act collectively through a radically reformed housing affordability agenda under the auspices of the Council of Australian Government.  This reform agenda must include accountability for delivering housing supply and housing affordability policy outcomes.

Master Builders wants to see the setting of competitive benchmarks for the respective state, territory and local government jurisdictions. Under these benchmarks, the federal government commits to pay competitive, efficiency payments to the best-performing state, territory and local governments delivering superior outcomes against rigorous and transparent performance criteria.

Key performance metrics can include: adequate supply of imminently ‘releasable’ land, streamlined building approvals processes, agreed ‘master plans’ covering urban and regional infrastructure plans and urban consolidation, adherence to the Building Code of Australia, and removal of state and local government variations, and reforms to infrastructure (also known as ‘developer’) charges.

A plea for action

Australia desperately needs a long and strong phase of residential building. We have been underbuilding for nearly a decade.

The well-documented supply-side impediments and inefficiencies need to be addressed urgently, or a pick-up in housing demand will simply run into these constraints. This will force up new house prices, making established houses more attractive and forcing people to chase existing stock – thereby sowing the seeds for the end of the new house building upturn.

Surely this should be enough incentive for governments to work together to agree on a set of reforms to address key issues such as the length and complexity of the planning process, issues related to the provision and funding of infrastructure, and other challenges related to infill development.

If successfully resolved, this would ensure new residential building and the industry that provides it, is able to effectively respond to changes in housing demand.

In the recent past, governments have made some small progress in addressing these concerns, but there is a long way to go if we are to fix supply-side rigidities that bedevil the nation’s housing and residential building markets.

Peter Jones is chief economist for Master Builders Australia.