Grattan Institute Insight: Weathering The Storm
By Brendan Coates, Household Finances Program Director at the Grattan Institute• 10 September 2020 • 6 min read
Australia is in the midst of its worst economic crisis in at least three decades. Unemployment is forecast to peak at 10 per cent in December, and remain elevated for years. Inbound migration has ground to a halt, and won’t return anytime soon. Rents have fallen sharply in major capital cities.
Faced with those circumstances, you would expect the Australian housing market to be in a world of pain. Yet the housing market, and the construction sector, has remained surprisingly unscathed to date.
House prices are down just 2 per cent nationwide since March. Only in Melbourne, gripped by Stage 4 restrictions after recent COVID outbreaks, have prices fallen by more. Construction employment fell in the early weeks of the March shutdowns, but recovered to be down just 3 per cent by June.
It could have been much worse. But rather than following rents lower, house prices have been cushioned by falling interest rates. A recent Reserve Bank paper suggested that cutting interest rates by 0.5 per cent, as the Bank has done since March, and pledging to keep them there for at least the next three years, would see house prices rise by 14 per cent.
At the same time, deferrals on mortgage repayments (‘holidays’) offered by the banks, early access to superannuation, and JobKeeper and JobSeeker payments, have forestalled large increases in arrears, at least for now. The scale of government support means the average Australian household probably has a higher bank balance now than they had in March. And unlike in many countries, the first wave of lockdowns in March left the construction sector largely unaffected, minimising the number of job losses at least for now.
Challenging Times Ahead
But the sector’s comparatively good fortune may be about to turn. House price falls are beginning to accelerate, especially in Melbourne, which is now down nearly 5 per cent from its pre-COVID peak. Prices in most other capitals are starting to fall.
Australia’s major banks are also working their way through the $192 billion in deferred mortgages, or 11 per cent of all home loans in Australia. The most concerning statistic was contained in market disclosures by NAB, which showed that one in five borrowers that have deferred their mortgages have lost 50 per cent or more of their wage income since April. If even a small share are unable to commence repayments when deferrals lapse, house price falls could accelerate as customers downsize or banks foreclose.
At the same time, job losses in construction are starting to mount. Firm payrolls data published by the ABS suggests about 6 per cent of construction jobs have gone since March, and the pace of declines has accelerated recently across most states.
Even before these declines come, the construction pipeline was already drying up, especially for apartments. The Government’s $25,000 Homebuilder grants for new builds and renovations coincide with a recovery in greenfield land sales, but they’re doing little to support urban apartment construction. The Housing Industry Association is forecasting multi-unit construction starts to fall from 72,000 in 2019-20 to 39,000 in 2021-22 – down from a peak of 120,000 starts just five years ago.
And the Morrison Government plans to begin reducing government supports such as JobKeeper and the Coronavirus Supplement for the JobSeeker unemployment benefit from October. Reducing government spending by more than $10 billion a month from November will leave a substantial hole in the economy.
It all adds up to further job losses in the months ahead. Consultancy group McKinsey is forecasting a further 150,000 to 205,000 construction workers could lose their jobs by March 2021, which would mean 12-to-18 per cent of all construction jobs would have been lost since the onset of COVID-19. We can and must do better.
Substantial fiscal stimulus is needed and social housing should be the priority
Grattan Institute’s Recovery Book report, published in June, recommended substantial fiscal stimulus in the order of $70 billion to $90 billion, or about 3 to 4 per cent of gross domestic product, to bring unemployment down below 5 per cent over the next two years.
In particular, the Morrison Government should invest in social housing as construction stimulus. The Government could repeat a GFC-era policy, the Social Housing Initiative, under which 19,500 social housing units were built and another 80,000 refurbished over two years, at a cost of $5.2 billion.
Under the initiative the federal government funded the states to build social housing units directly or to contract community housing providers to act as housing developers.
Public residential construction approvals spiked within months of the announcement.
Building 30,000 new social housing units today would cost between $10 billion and $15 billion. The boost to the economy would be almost immediate. Estimates typically suggest increased government spending on infrastructure would provide the biggest boost to the economy per dollar spent: each dollar spent on government infrastructure boosts GDP by at least one dollar. And social housing is typically faster to roll out than most infrastructure stimulus. State governments are already well versed in planning and constructing social housing and it’s much easier to build a five-storey apartment building than to try to build a tunnel under the Yarra.
Just as important, building social housing would also help tackle the growing scourge of homelessness. At the most recent Census (2016), more than 116,000 people were homeless, up from 90,000 a decade earlier. COVID-19 has shown us that if we let people live in unhealthy conditions it can help spread disease – affecting everybody’s health.
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