Good Things Can Come from Challenging Times

Before we start, Government grants in themselves do not make houses more affordable. They can have the opposite impact – by sustaining prices above market clearing rates and reducing overall consumer welfare at a given level of production. The trick to making a grant effective lies in delivering more houses which may lead to an orderly market price correction.

I’m sure that this was at the forefront of the minds of the Federal Government when it announced the Homebuilder Package in early June 2020. The Homebuilder Package was a response to dire predictions from industry groups that showed a cliff fall in construction activity in the latter part of 2020. 

Since the announcement there have been issues raised regarding the practical eligibility of the package in the two largest markets – Melbourne and Sydney. What the critics fail to acknowledge is that the package is the single biggest stimulus provided to the industry. Not only that, the Government is involved in a very tricky balancing act where it doesn’t want to artificially prop up prices in markets that are arguably already overpriced (and will be even more so when household income falls). When taking these two important points into consideration there may be justification for the eligibility criteria. 

The key to success of the program has little to do with the grants themselves. It has more to do with housing delivery. If more housing is delivered the grant will not exert undue influence on house prices and this is where it gets even more complicated. The Federal Government has little direct control over housing delivery. This is the domain of State and Local Governments – through the planning system. Failure by State and Local Government to deliver real and immediate change in planning approvals will seriously undermine the effectiveness of the Homebuilder Package.

It must be acknowledged that efforts are being made to improve the planning system by accelerating the process. On a whole it is working reasonably well but not without problems. The acceleration program in New South Wales has overwhelmingly approved State Government projects to date. There are still specific Councils in Sydney stuck in a pre- COVID folly.  After reading media comments from my former colleague Danni Hunter from UDIA Victoria, the situation in Melbourne is probably similar.

Things aren’t always perfect and what is important is the intentions of our policy makers. You must give them all credit for trying in these difficult times. The key to success will be the collective efforts of all levels of government with the Federal Government working on demand stimulus and the State and Local Governments working on the (far cheaper) supply responses together. Get this out of sync and there could be issues.

Now homes aren't built by Governments. The industry has a role in this as well.  They have a responsibility to avert the cliff fall in activity by sustaining it (and not holding onto approvals without delivering homes). Banks have a responsibility to keep lending to homebuyers and revisiting presales requirements that simply aren't realistic in the present circumstances. We are seeing efforts on all these fronts.

Good things can come out of challenging times. The past few months have been traumatic for many businesses and individuals. The amazing thing is how Governments, businesses and individuals have responded to the challenges. While not perfect we are navigating uncharted waters and the efforts of all involved have been indefatigable.

The final equation will be the homebuyer. We have heard a lot about the impact of lower immigration on demand for homes. Immigration recently accounted for 60% of population growth – it hasn’t always been at that level and the impact of reduced entrants to Australia on home purchases are probably a little overstated. It is all about the price and the availability of credit. It is likely that there will be low growth in the short to medium term as we see an orderly market correction there will be a recovery and the homebuyers will benefit in the longer term.

There are many actors in this script and not everything will play out as anticipated or forecast. There will be different responses to changing circumstances that may materially change outcomes. But at the moment, it has been handled prudently and responsibly and there is a chance the doomsayers can be kept at bay for a little longer.