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.
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