Is housing sector weighing heavily on Australian Economy?

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Australian Economy, Uncategorized

 

 

The building and construction industry is playing a key role in the transition of the Australian economy dependence from resources, to a more diversified economy. It is one of the largest contributor to GDP. In addition to this direct contribution to GDP, construction activity supports a large upstream and downstream supply chain. The production of building, building components and accessories are supplied from manufacturing, while the sale and management of property is the preserve of real estate services. The financing of property mortgages is part of the financial services sector. Similarly, engineering and architectural design services are professional services, while the transport and wholesaling of all building materials are included in the transport and wholesale trade sectors respectively. These upstream and downstream industries are significant and collectively, they extend the reach of construction-related activity to around 20% of the economy, in output (‘value added’) terms.

 

Building and Construction activity, generally measured in terms of the value of work done in Residential Building, Non-Residential Building and Engineering Construction, amounted to $225 billion last year. Based on the May 2016 Australian Construction Industry Forum (ACIF) estimates, a second consecutive 5% annual fall in overall activity, cut 2015-16 total construction activity by $12 billion to $212 billion.

 

Construction and employment

The construction activity has employed over 1.05 million employees. Employment in the construction industry had seen a solid recovery in 2013 and splendid growth in 2014 supported by the recovery in housing and apartment building activity. The employment ratio is directly related to the growth of the construction industry while slowdown in the industry would have direct impact on the employment. This is an ongoing economic cycle, as housing and building construction industry creates employment, employment increases earning power to support demand for building and construction activity. This in turn enhances the sale of production and services, which would spur demand for other industry good and services and increase capital expenditure, flow of funds in the economy.  This rate is however slowing down due to the slowdown in mining industry. Manufacturing investment in the resource industries like buildings, structures, plant and equipment has been expected to be 21% p.a. lower in 2015-16. Till a decade ago, manufacturing and mining were responsible for around the same levels of annual investment spending, but the level and share of investment coming from manufacturing has progressively decreased in past few years.

On the other side, according to ACIF study, residential building growth has peaked, and is expected to be $91 billion in 2016-17 and $84 billion in 2018-19. Non-residential building is linked to the non-mining business investments. Engineering Construction activity fell by 15% in 2014-15, and is further expected to fall by 46%, which will bottom out by 2017-18.

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Estimates for Non-residential, residential and engineering activity (Source: ACIF)

The interest rate is another factor affecting the housing demand. The fall in interest rate had led to a spur in the demand, however with the expectation that the interest rate might rise could impact demand for housing and building construction activity.

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Property council Survey (Source: ANZ)

The housing demand has also been helping to keep up the economy growth. In 2015, private dwelling construction contributed 0.49% points to GDP growth. But, the growth in the building of houses and apartments would not be able to offset the decline in construction, as non-dwelling construction had cut GDP growth in 2015 by 1.1% points in seasonally adjusted terms and 0.9% points in trend terms.

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Housing construction outlook (Source: ANZ)

Hence, on an overall note, in the era of slowdown in building and construction activity, the whole related cycle is getting affected. Slowing down of the demand for goods and services from several industries is affecting the investment. Lower production and sales would have a straight impact on manufacturing leading to a poor monetary flow in the economy. Moreover, any potential rise in interest rates might lead to low investment which could affect the Australian economy growth.

As per the recent improvements in labor market conditions with regard to Australia’s unemployment rate at the lowest level in two and a half years and better business conditions for profitability and jobs growth, Australian economy is now seen little stable than previously envisioned. However, factors such as slower housing market, weak wages growth and uncertainty in consumer confidence still bring some hiccups to housing construction. Market expects a softness in wealth effect and slower growth in housing construction with respect to supporting the GDP growth through 2016.


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