The Sydney Morning Herald reported on a Housing Industry in crisis yesterday with more than 363 companies from the building industry hitting the wall since January 1.
The Herald’s Adele Ferguson writes “What is even more alarming is the trend seems to be getting worse, with 30 building companies failing in March, 33 in April, 51 in May, 63 in June and a whopping 40 collapsing in the first 10 days of July.”
Today, the Housing Industry Association convened an emergency roundtable meeting in Parliament House lobbing the government for an immediate rescue package to save the industry.
Shane Goodwin, Managing Director of Housing Industry Association said “Economic conditions in the housing industry are the worst in decades”.
The lobby group pitched a case showing the residential property industry is worth $70 billion a year to our economy and the downturn is having a flow on effect to supply chain business, forcing further job losses. It appears some of the blame for the downturn is aimed at red tape.
The Lucky Country
While crisis talks were underway in Canberra, Reserve Bank governor, Glenn Stevens was addressing the Anika Foundation Luncheon in Sydney talking up Australia’s economic prospects with a speech titled “The Lucky Country”
Early in his address he said, “But some observers – admittedly not the majority – still harbour concerns about the foundations of recent economic performance and question the basis for confidence about the future. There are several themes to these doubts, but the common element is that recent relative success owes a certain amount to things that will not continue – to luck – and that our luck may be about to turn.”
One such concern is China, with Deloitte Access Economics releasing a report yesterday suggesting the mining boom will peak in two years’ time.
Another is house prices.
“Australia saw a large run up in dwelling prices and household borrowing until a few years ago. Some other countries that saw this subsequently suffered painful corrections and deep recessions, associated with very stressed banking systems.” Steven’s then asked, “Can Australia escape the same outcome?”
He reported house prices are down 30 per cent in the United States with some suggestion they now appear to have hit the bottom. In the United Kingdom, prices have come off 15 to 20 per cent and we are down around 5 to 10 per cent.
According to data he presented, Stevens believes, relative to income, house prices are today as affordable as in 2002. But, he also says it is hard to provide a definitive response to whether dwelling prices are overvalued.
His address today could appear to be some back pedalling from the “Glass Half Full” speech he delivered last month in Adelaide. At the time, he indicated the RBA should not try to “engineer a return to a housing price boom” after an “unusual” decade to 2007 during which real house asset prices per person appreciated at 6 per cent or more per annum.
But Stevens did warn today “It is a very dangerous idea to think that dwelling prices cannot fall. They can, and they have,” but adds “The point is simply that historical or international comparisons, to the extent they can be made, do not constitute definitive evidence of an imminent slump.”
Housing lobbyists have always argued the concept that house dwelling prices do sustainably double every 7 to 10 years, despite other factors such as household income falling to keep up the pace causing deteriorating affordability.
The unusual decade of 6 per cent house price appreciation ended with the GFC and record levels of household debt.
For any septics questioning if house prices could sustainably double every 7 to 10 years, the industry was armed and ready with another fact – a shortage of houses would put a floor under house prices. It was common belief there was an acute shortage of homes in Australia.
To help understand and address this important issue, the independent National Housing Supply Council (NHSC) was established by the government in May 2008. After examining and analysing a myriad of statistics including the number of people occupying a dwelling, the projection was clear. There was a chronic shortfall of some 228,000 homes in Australia. We were simply not building enough.
But for some, the perplexing problem in recent months was why dwelling commencements had been falling since June 2010. Despite a shortage of homes, there was dwindling demand. In addition, the housing stock on the market was steadily increasing.
The answer was reviled with the release of the 2011 census data. The NHSC projections were based on the trend of number of occupants living in each dwelling continuing from previous census survey five years prior.
The GFC had caused a structural shift with households becoming more risk and debt adverse. With housing affordability at record lows, more people were cramming into fewer homes to help share the burden of rising living costs. The number of five plus households was surging.
As a result, Morgan Stanley researchers calculated there were just over 1 million fewer households and as a result our 228,000 house shortage has turned into a 341,000 oversupply.
This, along with housing affordability, now explains why the housing construction sector is in rapid decline. And that floor under house prices has evaporated.
While the housing industry lobby wants more stimulus, it is hard to see what it will achieve with today’s oversupply.
HIA’s Shane Goodwin said last night, ”Residential construction is experiencing its second recession in four years.”
The first residential construction recession started amid the GFC and was put on hold by the Rudd Government’s First Home Owners’ Boost. But when the boost ended at the end of 2009, and without continued support for housing, dwelling starts headed south little more than 6 months later.
I’ll leave you to ponder if luck was involved and if our luck may be about to turn?
But, It is a very dangerous idea to think that dwelling prices cannot fall.
» The Lucky Country, Glenn Steven’s Address to The Anika Foundation Luncheon – RBA, 24th July 2012.
» Industry gradually crumbling – The Sydney Morning Herald, 23th July 2012.