Senate Economics Legislation Committee, , 3:28:26 to 3:34:53
Analysis of falling dwelling investment forecasts, construction sector profitability, and regulatory constraints on housing supply.
Topics: Infrastructure, Agricultural productivity
Speakers: Dr Sarah Hunter, Senator Andrew Bragg, Michele Bullock, Unknown Speaker
Um what impact do you think the taxes have had on the on the values in the suburbs where there has been a price fall by more than 5%.
That's a very difficult. I don't think we have any particular value.
So Senator said we really concentrate um in the in a conjunctural sense. We concentrate our analysis at the housing market and indeed at the whole economy at that sort of aggregate macro level, because that's the level that's most relevant for monetary policy. Uh and even at that um aggregate macro level, we've not undertaken to decompose uh the individual drivers of um of the housing market at the moment. We can see that a number of factors are coming together. Uh, we do know higher interest rates uh will uh will slow down activity in the housing market and way of prices, and so that's part of it. Uh we we can also see that the tax changes um have uh played a role uh and broader economic conditions um and you know people's um concerns around the environment and uncertainty, which is understandable. So uh we think all of those factors are are playing into this, but as I said, we've really we concentrate at that aggregate level when we're thinking for monetary policy lens, uh, and even there we haven't done that decomposition that you mentioned.
So I see that you have negative dwelling investment forecasts coming through from December 27. Is that right?
Uh yeah, so that number that you're quoting from. The statement of monetary policies from the August SMP, I think. Yeah, so that's uh saying we expect the dwelling investment to be falling year on year uh through the December uh quarter 2027. That's correct.
And what's driving that? Do you think is that going to be taxes and interest rates again or other factors?
Yeah, it's the play through of all of that. So the fundamentally the the driver of dwelling investment, if you're talking about new residential construction, um is uh the sort of profitability of um any given uh project, so you know demand in the market. Um it's not atypical, in fact, very typical to see when we get um house price declines that that flows through into lower levels of dwelling approvals. So developers, some projects just don't stack up because their final sale price has gone down. So there's lower dwelling approvals, and then that comes through into commencements and into actual activity, which is what you're seeing here. Um that can also be the case when it comes to renovation activity as well. So some households that might have been thinking of doing a renovation and alteration and addition, uh, may not go ahead with that work because that housing market has shifted. So it's those things coming together. Um it just takes a little bit of time to fully get into the actual activity numbers, uh, because as you can imagine, particularly for medium and higher density projects, the pipeline and timelines into approvals and then international activity can run uh for months, quarters, even into years. So it just takes time, which is why you see it's from 2027, late 27 onwards.
So I I take your your evidence that the the factors of the taxes, the interest rates, I think you mentioned profitability. I mean, this is one of the reasons I imagine that we have high levels of approvals but lower levels of completions on a relative basis. Um I mean politicians are loath to say this, but my sense of it is that the building and the construction sector is really struggling to be profitable, and therefore people are doing other things with their capital. Um but I mean I'm interested whether you you would agree with that analysis, uh, whether your stats back it up or whether you think that it's already profitable and uh we'll get you know the 1.2 million houses
Um so Senator, we do hear through our the lison program, and we talk to um a number of uh organizations right across the construction sector and across the country, so uh you know in different regions. Um they do say to us that um through the last few years, rolling the clock all the way back uh through into COVID times that um that there were uh there were significant challenges with profitability at various points. So we've had some really quite substantial and in some cases historically sharp movements in material costs, for example. We see if you're on a some sort of type of fixed price contract uh for your end products, if you've got your input costs moving sharply, that can then create some profitability challenges. Um clearly we have seen um over the last year or so evidence, um, and then this is reported by the ABS in the uh in the inflation data that we've had over that time, uh, the builders um in terms of new dwelling uh costs or prices um that consumers pay, they have been uh trying to pass through some of those cost increases that they've faced. So uh I don't have any um specific numbers or or data to hand uh to confirm what you're saying or not, but certainly as I said through our liaison program, we do hear around challenges around profitability. Um equally we have seen some evidence of at least some costs passed through. So I suspect it's different in different parts of the countries, different in terms of the type of activity an individual firm might be undertaking.
Okay, last question for me. Um so surely the last thing that this sector needs is more red tape and more taxes, if it's got a profitability problem.
Uh so again, just going back to our liaison program, which is just a great source of information for us. Yeah, uh, businesses in the construction sector in many uh sectors will talk to us about the challenge around uh compliance costs, um, you know, the sort of regulatory uh and compliance issues that you're talking about. Yep. Um what uh what those regulatory settings look like is obviously a massive for government, but in the context of our liaison program and what we hear from uh people on the ground in that sector, that this is an issue uh that is raised. Yes.
This is this Senator, as you well know, this is an issue that um has a long history um and it's been um brought up for a number of years that the constraints and the regulations around new housing development are constraining uh supply of new housing, and this is one of the sources of the structural undersupply of housing in the country.