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.