Any budget is a big deal as it pulls together in the one place the government’s agenda and how it will be paid for over the next 12 months, and the forward estimates. Beyond the rhetorical flourishes from the parliamentary despatch boxes, the budget papers provide the Treasury’s best efforts at forecasting.
The following is a quick look at factors of immediate interest to our industry:
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|
Outcomes |
Forecasts |
|
|
2021-22 |
2022-23 |
2023-24 |
|
Real GDP |
3.9 |
3.25 |
1.50 |
Showing how rapidly the outlook is changing the forecast for GDP is down a further 1.0% on the May pre-election update to 3.25% next financial year and down to 1.50% in 2023-24. So still positive but facing stiff headwinds.
The GDP outlook is being driven by the impact of inflation and the need to curb economic activity through increases in official interest rates.
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|
Outcomes |
Forecasts |
|
|
2021-22 |
2022-23 |
2023-24 |
|
Inflation |
6.10 |
5.75 |
3.50 |
The inflation outlook is challenging, with the quarterly data for September 2022 showing annual CPI at 7.30% (refer detailed article on CPI elsewhere in Stats Count). The Budget papers indicate inflation is expected to peak at 7.75% in the December quarter, but due to higher energy prices next year is now anticipated to persist longer. The forecast is for more moderate price increases of 3.50% in 2023-24. Not surprisingly this is consistent with the RBA outlook which is based on calendar years with inflation expected to be above 3% in 2024. However, a significant difference in the outlook since the budget is the peak inflation rate. In its recent statement the RBA is now expecting inflation to peak at 8% in the December quarter.
Some commentators are suggesting the RBA may have to take more aggressive action on interest rate increases, as the Melbourne Cup Day move indicated. It is a matter of irony that the most inflationary impact on household budgets has been interest rate movements over the last year.
The expected outcome for unemployment is still strong although expected to increase from fifty-year lows.
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|
Outcomes |
Forecasts |
|
|
2021-22 |
2022-23 |
2023-24 |
|
Unemployment |
3.80 |
3.75 |
4.50 |
This should still provide the confidence for households to keep spending with household consumption being the major source of growth next year (refer to blue in graph below).
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|
Outcomes |
Forecasts |
|
|
2021-22 |
2022-23 |
2023-24 |
|
Household consumption |
4.10 |
6.50 |
1.25 |
Critically for our industry the outlook for dwelling investment remains bleak.
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|
Outcomes |
Forecasts |
|
|
2021-22 |
2022-23 |
2023-24 |
|
Dwelling investment |
2.80 |
-2.00 |
-1.00 |
Despite a large backlog of work for detached houses (refer to the more detailed article in this issue of Statistics Count) dwelling investment is expected to fall by -2.0% in 2022-23. This is being driven by supply disruptions and capacity constraints, reflected in increasing building costs.
National Housing Accord and the One Million Homes
One of the most significant elements of the October 2022 Federal Budget was the announcement of the National Housing Accord, a new national agreement focussed on pursuing additional social and affordable housing. In many regards, the most significant element of the budget was not the focus on housing, but the emphasis on affordable housing and the regions.
It is worth unpacking the details, starting with the headlines:
- ‘National Housing Accord’ a national agreement to pursue affordable housing
- ‘Housing Australia Future Fund’ – $10 billion to build 30,000 new social and affordable dwellings[1]
- $350 million to build 10,000 further affordable homes over 5 years from mid-2024, to be matched by the States, to total 20,000 new dwellings
- Target: total of one million new dwellings over five years from mid-2024
- Regional First Home Buyers Guarantee, providing support for 10,000 buyers in regional areas, each year
One million dwellings
It is a little hard not to think of Mike Myers’ caricature Dr Evil when saying ‘One Million Houses’ with emphasis, but it’s fair to say the Treasurer pulled it off without a smirk in the room as he spruiked the National Housing Accord. For good reason really, because in many respects, housing is set to be the signature policy of the new government’s first budget.
There may be a long pipeline of current housing work, but new approvals are slowing dramatically. Most forecasts predict housing starts will be at their base around the middle of 2024.
A goal of one million dwellings would not be especially ambitious in normal times – Australia completed around 974,732 over the five years ended June 2022, for instance. However, the economic conditions are nothing like normal right now, and indeed, they were not over the last five years.
The nearly one million dwellings completed over the recent five years were fuelled by historic low interest rates, super-heated by the HomeBuilder grant and other ‘gifts/transfers’ and in a climate favourable for developers to release land and also to build apartments.
By contrast, the next five years will see higher interest rates, labour shortages and materiel challenges, along with lower house prices which in turn can reduce the incentive for land releases by those banking land or holding back on large multi-residential investments.
In that context, achieving a target of one million new dwellings over five years, mainly from the private sector, requires something significant to change.
National Housing Accord
The Commonwealth and State Governments have agreed a National Housing Accord. It is understood the Accord – which the housing construction sector and institutional investors are being invited to endorse – will be coordinated by a new Housing Australia body, with wide remit on housing for the homeless, new housing investments, maintenance of capital stock and other programs.
Broadly, the institutional investor sector has welcomed the development and endorsed the Accord, including for the reasons set out in this briefing. The housing construction sector is, as ever, somewhat more fractious, at least so far.
In addition to the AUD350 million direct investment in social and affordable housing, the funding managed through the Accord will operate to provide gap cover between market and subsidised rents and other housing sector activities.
Housing Australia Future Fund
The AUD10 billion for the Fund will build 20,000 social housing dwellings, of which 20% will be for at risk women and children. The Fund will also supply 10,000 affordable dwellings for frontline workers, to be built in the ‘right locations’.
Inevitably, the arising questions will include what the Federal Government can do to ensure the release of suitable land in suitable areas, in a timely manner. It will be hoping to have the support of States and Local Governments through the National Housing Accord.
Other minor and smaller measures some pre-announced – included other forms of ‘help to buy’ programs.
Build-to-Rent and the role of institutions in the Australian built environment
Around the world, since the GFC, the ‘Build-to-Rent’ model has evolved and expanded. It now includes the ‘Build-to-Rent-to-Buy’ model. Both are increasingly popular, especially in the UK and the US.
There are potent long-term economic drivers at play here. From around 1980, labour’s share of total income first stagnated and then declined. Mainly this occurred because capital returns (profits) were outstripping economic growth, causing a redistribution of wealth that has reduced the capacity of many to acquire a dwelling, as the average value of the capital base (land and dwellings) was growing at a faster rate than incomes.
At the same time, population growth and centralisation of populations around large cities also drove land and dwelling prices higher, putting ownership beyond the means of many.
In seeking to engage institutional investors in affordable housing developments, including superannuation funds, the Government is trying to leverage available capital to an asset class that sees less institutional investment in Australia than in many other countries. Some commentators have suggested tax treatments will need to change for these investments to be genuinely attractive to institutional investors.
This policy objective is partly catching up with other countries, but what may prove to be just as important is the role government expects to play in sustaining construction through the now widely anticipated downturn. That emphasis manifests itself in Government’s role in focussing on affordable housing.
[1] Affordable housing refers to rental housing provided at below market rent to qualifying tenants and is taken to be between 70% and 80% of the market rent.
