There is little doubt that a fall in interest rates would have a positive impact on new housing starts. But, despite calls from the development industry for rates to drop today, there really isn’t any real need to build more new dwellings at present.
Whilst our market was undersupplied in 2009 – we only built enough new homes for 330,000 people, but needed to build for 465,000 people – we have been oversupplying the market since then. Last financial year, we built enough homes for 400,000 people but really only needed to house 310,000.
We consistently overbuilt during the first half of the noughties. Many of these new dwellings were secondary homes – used for holidays and the like – or were built as speculative investments, where the promise of capital growth outweighed the need for a rental return.
The recent drop in population growth has seen the underlying demand for housing drop by a third across Australia since 2009. Queensland and Victoria have experienced even greater falls.
As a result, we now have considerable spare capacity in our housing market. This explains why new dwelling sales continue to slide across the country.
In addition, we no longer need to build as many new homes as we once did. Social and demographic changes – children living at home longer; increasing longevity (coupled with diminishing superannuation balances); an increase in the birth rate (baby bonus impact) and more migrants from countries with traditionally large families – have lifted our household size, resulting in fewer new dwellings per capita.
2011/12 will be a slow year for new housing starts. Just 135,000 new dwellings are expected to be built over the next twelve months. This is 15% less than last year. This level of new supply would comfortably cater for the expected increase of around 325,000 in the Australian population next year. This forecast also assumes stable interest rates for the next six to twelve months.
Forward estimates are for, on average, between 150,000 and 160,000 new housing starts each year over much of the next decade.
Whilst a drop in interest rates would temporarily boost new housing starts, the only real reason why housing starts would need to rise across Australia would be to cater for higher levels of population growth.
When looking at the wider picture, the Australian economy is not suffering from a lack of demand. Whilst we do have a three speed economy, the overriding problem – apart from declining productivity (which is a serious issue and a topic for a separate missive) – is that we are still recovering from the enormous hit in the first quarter from the floods in Queensland, NSW, Victoria and Tasmania and Cyclone Yasi.
These combined to hit confidence levels, cut production of coal, iron ore, copper and other minerals as well as many rural products. This pushed the economy into the red in the March Quarter, but as the national accounts showed, consumption grew by around 3% in the year to June. Current projections are for a 3.4% increase this financial year. According to the ABS we are close to full-employment. This is not a recession.
Nor is inflation tamed. Far from it. The third quarter inflation figure is at odds with the longer term trend and might actually be wrong. This combined with our low labour productivity; union pressure on wages; rising global inflation driven by both developing countries and the west’s politically driven agenda of low-interest rates and printing money plus the large resource spending about to start across the country means that we are facing higher inflation in the years to come.
Rates should have fallen earlier this year, immediately after the floods and cyclone. But now the best course of action, I think, is to keep them steady and to do so for as long as we can. A cut in our official interest rate later today could spook the horses. Often a scared horse bolts, but sometimes they hide deeper in the corral. We just might conserve ourselves into a recession.
It is quintessentially Australian, to be on a day off – as that is exactly what Melbourne Cup Day is – and still expect interest rates to fall.
Be careful what you wish for. It just might come true.