NewsBite

Robert Gottliebsen

Property downturns will impact wider areas of the economy

Robert Gottliebsen
The twin downturns impacting property will soon impact wider areas of the economy too. Picture: Jenny Evans/Getty Images
The twin downturns impacting property will soon impact wider areas of the economy too. Picture: Jenny Evans/Getty Images

The Australian dwelling market is being severely hit on two fronts. Construction has slumped in large segments of the nation’s new dwelling markets. The construction slump is reaching a crisis stage in Melbourne and Sydney. And at the same time wide areas of the existing dwelling market, which performed well in the March quarter, have now turned down under the weight of a big rise in the number of dwellings for sale.

The twin downturns will soon impact wider areas of the economy and confirm that the politicians’ bizarre housing construction targets currently have no fact basis.

To begin progress towards increasing dwelling construction will require dramatic changes in the policies of both state and federal governments.

The immediate trigger for the twin downturns is that Australian interest rates are no longer expected to fall at the pace that was forecast at the start of 2024.

Both the US and Australia are benefitting from lower prices of goods thanks to China’s deflation.

Sadly, US and Australian services costs are rising faster than the fall in the cost of goods and in the US, Federal Reserve Chair Jerome Powell is warning that American inflation has yet to ease back to the central bank’s target. That sent the two year treasury bond rate up to five per cent last night.

But Australia has a deeper services cost problem than the US and if global currency markets focus on this weakness then any upward pressure on US rates will again hit our dollar and could conceivably force the Reserve Bank to lift interest rates to protect the currency.

That is not a forecast merely a danger alert that needs to be monitored.

there is substantial capital available for build-to-rent projects. Picture: Jenny Evans/Getty Images
there is substantial capital available for build-to-rent projects. Picture: Jenny Evans/Getty Images

Behind those surface interest rate manifestations lie a series of deep forces that will need to be addressed if we are going to provide dwellings for our young people as well as the new migrants.

I am going to start with bank credit.

Unique in the world, Australia has structured its bank lending rules on the basis that bank lending must be very low risk.

That means that most young buyers without substantial help from the “bank of mum and dad” or grandparents can’t get loans from banks to buy dwellings.

The nation is forcing them to go to non-bank lenders and pay higher interest rates which in turn increases the cost.

Paradoxically these non-bank lenders are actually being financed by bank loans, but the banks’ risk is mitigated by equity in the non-bank lenders and high-interest, subordinated loans.

The combination of low bank risk rules and higher non-bank lending rates mean that large numbers of income-earning young people are being forced out of the housing market because they cannot pay dwelling prices that are economic to builders/developers.

The building/developing industry has already been severely mauled by past inflation which turned profitable contracts into big losses.

As they complete their loss making buildings, the politicians are now lumping further blows on them to make it as hard as possible for them to supply dwellings at prices that are affordable for younger people.

The blows vary from state to state but there are common themes. As you would expect, the chaotic Victorian government is the worst offender.

It deliberately discourages developers from buying land by a tax mechanism that enables the government to arbitrarily levy tax on development land.

Gen Zer moves back with parents because of rental crisis

Few will take the risk of buying land because a large development land tax bill that is not expected can completely transform the economics of a building development.

Those Victorian developers that have economic land are then subjected to more taxes and charges. As a result, new dwellings becomes unaffordable given the current banking risk rules.

And then, to compound the blows to dwelling construction, the Victorian ALP government is sucking building talent into their infrastructure projects by approving huge salaries to building workers.

When the current projects are completed, these people will be shifted to the infamous $250bn “train to nowhere” project.

Accordingly, reasonably priced talent to build dwellings is being deliberately drained away. These blows mean that unless somebody can get through to the Victoria Premier (a very difficult task) there will be very few new cottage projects started in Victoria by Christmas. However, Melbourne is beginning to smooth the planning and zoning for multistorey inner-city dwellings and there is construction in the pipeline. .

Paradoxically in Sydney, while NSW Premier Chris Minns makes favourable noises for dismantling the huge state and local government bureaucracies and committees that are holding back Sydney development, so far it has only been words.

He looks to be unable to deliver on the politics.

Accordingly, Sydney is not that much better than Melbourne albeit for different reasons.

Brisbane has a modern zoning system but is rapidly boosting the cost of labour while reducing productivity.

Talent will be drained from dwellings by the Olympics infrastructure albeit the scope of the Olympics project has been slashed.

Adelaide is attracting home buyers and Perth is similar to Brisbane.

At some point the Commonwealth is going to have to step in with its own incentives and, more importantly, penalise the anti-dwelling states. The Commonwealth might even start the process of loosening up the banking system.

The cutbacks in new dwelling development will curb price blows to existing dwellings. Nevertheless, the increase in the quantity of properties for sale, if maintained will make it difficult for the market to rally again given the restrictions on bank finance.

Meanwhile, there is substantial capital available for build-to-rent projects and the Coalition is promising that they will put together a package in next year’s election campaign that will enable young people to buy dwellings.

Everyone is on the edge of their seat waiting to discover exactly what that package will be.

Robert Gottliebsen
Robert GottliebsenBusiness Columnist

Robert Gottliebsen has spent more than 50 years writing and commentating about business and investment in Australia. He has won the Walkley award and Australian Journalist of the Year award. He has a place in the Australian Media Hall of Fame and in 2018 was awarded a Lifetime achievement award by the Melbourne Press Club. He received an Order of Australia Medal in 2018 for services to journalism and educational governance. He is a regular commentator for The Australian.

Add your comment to this story

To join the conversation, please Don't have an account? Register

Join the conversation, you are commenting as Logout

Original URL: https://www.theaustralian.com.au/business/property-downturns-will-impact-wider-areas-of-the-economy/news-story/66214b2e979e31a12eed656e038fdb09