HomeBuilder program ‘overstimulated’ construction and drove house price inflation

More than 100,000 people drove the cost of the pandemic-era HomeBuilder program out to $2.3 billion, an analysis of the scheme has found, leading to an overheating of the building sector and adding to inflation pressures that have forced interest rates to a nine-year high.

Economists said the former Coalition government was right to try to inject stimulus to avoid a collapse of the home construction industry at the peak of COVID-19, but it became a victim of its own success with more than three times the number of people applying for the program than original estimates.

The HomeBuilder grant program was introduced to stimulate the residential construction industry.Credit: Erin Jonasson

In June 2020, the Coalition government announced the grant program, aimed at boosting economic activity in the building sector that had suffered through compulsory shutdowns early in the pandemic.

The Department of Treasury originally forecast there would be 27,000 approved HomeBuilder grants, at a cost of about $678 million. But a review of the program, conducted by KPMG with Treasury, found by the end of June 2022, after the program had been extended twice, 100,214 grants were approved at a total cost of about $2.3 billion.

Grattan Institute economic policy program director Brendan Coates said while the home building sector needed support at the time, it was now obvious that construction costs would be lower in a world where the HomeBuilder program had been smaller.

“It’s pretty clear in hindsight that it’s overstimulated residential construction, and contributed to the levels of inflation that we’re seeing today,” he said.

“It wasn’t really the best value for money during a pandemic, to offer grants for housing construction and in particular renovations for people on well above average incomes, when we’re struggling to house our community of homeless people.”

The cost of new homes rose by 20.7 per cent over the 12 months to September, according to the Australian Bureau of Statistics, and it was a significant contributor to the increase in annual inflation.

Inflation has reached 7.3 per cent and is forecast to reach 8 per cent by the end of the year, forcing the Reserve Bank to rapidly lift interest rates from 0.1 per cent to 2.85 per cent over the last seven months.

Housing Industry Association chief economist, Tim Reardon, said the scheme was the right solution to the problem at the time.

“That was a short-term fiscal stimulus to bring the economy out of recession, and it succeeded in doing that,” he said.

The report found the program exceeded initial expectations across the country. In Victoria, fewer than 10,000 grants were forecast at a cost of less than $250 million but more than three times that number were approved with a final cost of more than $700 million.

NSW and Queensland were both expected to get fewer than 6000 grants, but NSW ended up receiving about 17,500 while more than 20,000 were approved in Queensland.

Western Australia was expected to get fewer than 5000 grants, at a cost of under $100 million, but ended up with more than three times that number approved at a total expected cost of more than $400 million as home building boomed in the state during the pandemic.

The review, conducted by KPMG with Treasury, said states and territories provided insights that the residential construction industry “had experienced ‘overheating’ over recent years”.

The Reserve Bank has also noticed; in a September speech, governor Philip Lowe said strong demand – fed by a combination of low interest rates and government grants – met pandemic-related supply issues to cause “a big jump in prices”, which affected the overall inflation rate in the country.

Peter Tulip, chief economist at the Centre for Independent Studies, said the biggest problem with HomeBuilder was it increased the demand for housing without addressing supply.

“So the lucky recipients are better off. Everyone else who is buying a house or is renting is worse off,” he said.

“You don’t improve affordability by subsidising demand. It’s misdirected, we need to boost supply.”

Tulip said the grant program has added to inflation, and the government provided more assistance than it should have in hindsight, but no one accurately forecast the economic effects of the pandemic.

Reardon said there were many inflationary pressures on the home building sector through the pandemic besides the HomeBuilder program. The key drivers were skyrocketing costs of building materials due to global disruption in supplies and demand for labour, while record-low interest rates drove demand.

“What was unknown was that a pandemic creates demand for housing,” Reardon said.

“Certainly, the low cash rate has to be the dominant factor. There’s no doubt that it’s responsible for a large part of that demand for housing.”

He said the increase in the cash rate will bring that boom cycle to an end.

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