A key aspect of the Morrison government’s economic recovery plan was the homebuilder program designed to spur the building of houses. It worked as intended but the latest construction data suggests it might have been a sugar hit that has now gone, while the impact of the pandemic on the economy continues.
Australians, it is clear, love a house. Politicians know this very well, and the Liberal party more than any, because the past 20 odd years of politics has mostly been around them trying to suggest Labor will make home loans too expensive due to rising interest rates, and then that changing negative gearing will mean your house won’t be worth as much.
So it wasn’t a great surprise that the Morrison government’s response to the pandemic was not to focus on infrastructure – which has a public purpose – but instead home building.
The government’s homebuilder program, which initially provided a $25,000 grant and then a $15,000 one for building a home, essentially sought to use the private housing market to encourage construction work.
It worked mostly quite well.
Giving money to people does actually create an incentive to build a home, and in the first quarter of this year residential housing construction was (aside from the nebulous “change in inventories”) second only to government spending in contributing to growth of the economy over the past year:
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The 0.34% contribution to GDP growth in the first three months of this year was the biggest quarterly contribution by residential construction since 2003. The annual contribution was the biggest since the construction boom of 2012-16:
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But the difference between now and five years ago was that boom was led by ever-falling interest rates powering a massive increase in apartment building. That boom is now well and truly over:
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With even record-low interest rates doing little to spur apartment construction, the homebuilder plan focused on houses. After a slowish start in the first three months of the program, home construction began to soar by the last quarter of 2020.
New private-sector housing construction increased 3.4% in the 2020 December quarter – the best for more than two years. And then in the first three months of this year it surged 12.3% – the biggest jump since September 2001:
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And then in the three months to June it stopped.
Housing construction increased just 0.1% in the June quarter and total residential construction didn’t increase at all.
The boom was sharp and short.
This suggests that the June quarter of GDP figures coming out next Wednesday will not get a boost from residential building work.
Neither is there going to be much joy on the infrastructure construction side of things.
While there was a slight increase in the volume of engineering construction – which includes things such as roads, bridges and rail – there was still less work done in the three months to June this year than the same period in 2020:
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Michael Pascoe, writing for the New Daily, has noted reports that the end of the housing construction boom should be replaced by state government infrastructure projects.
That clearly is vital to occur given not only the end of the homebuilder surge, but also because as we have seen in the past three months the pandemic is not yet over.
The problem with these construction figures and the soon to be released GDP figures is that they are essentially out of date – they don’t reflect the ongoing state of the economy. Instead they record the experience of a period when things seemed to be good and normality appeared to be returning, whether through people going to the footy again, or everything being open for business.
The end of the surge of home building would have been fine were the economy truly back up and running, and if international trade had returned to where it was prior to the borders closing.
But the lockdowns have seen construction halt and jobs around Australia fall:
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And so we find ourselves in the next stage of the pandemic – not just one where we are rolling out the vaccine, but where the need for government incentives and stimulus remains at a time the Morrison government was planning for it to be over.
