CONTRIBUTION OF THE HOUSING SECTOR TO THE AUSTRALIAN

ECONOMY
The residential building industry’s contribution to the Australian economy
The residential building industry is one of Australia’s most dynamic, innovative and efficient service
industries and is a key driver of the Australian economy. The residential building industry has a wide reach
into the manufacturing, supply, and retail sectors.

The aggregate residential industry’s direct contribution to the Australian economy is over $150 billion per
annum, with over one million employees in building and construction, tens of thousands of small businesses,
and over 200,000 sub-contractors reliant on the industry for their livelihood.

The latest data from the Australian Bureau of Statistics reaffirms that the housing industry is still in the midst
of an unprecedented new residential building cycle, albeit flourishing at a slower pace than a year ago.
Meanwhile, renovations activity is slowly recovering from a ten-year low. Growth in residential property prices
has been modest in the vast majority of markets outside Sydney and Melbourne.

• More than four-year long upturn in new home building activity has already made its mark as the longest
on record, however is unlikely to continue into the fifth year.

• Preliminary figures for the 2016 calendar year indicate that a total of 228,228 new dwellings were
commenced during the year. This was the highest total on record for any calendar year. The previous
record cyclical high was 187,000 commencements back in 1994.

• The national economic benefit flowing from this level of new building activity is unprecedented in terms
of output, taxation receipts, employment growth, and the ‘multiplier’ impact through to demand and jobs
in sectors such as manufacturing and retail.

• Indeed, residential building activity provides employment for over one million Australians, supporting
321,595 firms and directly producing $162 billion worth of economic activity each year - one tenth of
Australia’s total economic activity. The industry generates $77 billion in taxation annually, more than 17
per cent of the total taxation receipts across all levels of government.

• The Housing Industry Association (HIA) maintains that domestic demand in Australia would have grown
at a considerably slower pace in recent years without the record new home building cycle. Indeed
Australia’s domestic demand would be at or close to recession without the strength and multiplier
impact of housing industry activity across other sectors.

• There are substantial regional divergences in housing conditions in various markets around the country
when compared to previous cycles. Also, the composition of dwelling types being built has changed
substantially, with around 31 per cent of new dwellings being units of four or more storeys in 2015/16.
This compares with the five per cent of annual dwellings accounted for by units of four or more storeys
20 years ago. There has been a geographic concentration of activity in this segment, with over 75 per
cent of the multi-unit dwellings approved during the last 12 months in Australia being in the greater
metropolitan areas of Sydney, Melbourne and Brisbane.

• For the last several years and especially since the global financial crisis (GFC) many forces have
combined together in Australia to the support demand for residential properties including the lower
mortgage interest rates, population growth, and economic growth. Economic growth, and hence the
population movement into the eastern states such as the New South Wales (NSW) and Victoria have
been particularly pronounced, leading to a higher housing demand in these states compared to other
states in Australia.

• The failure to meet this demand and the resultant price growth is due primarily to a lack of readily
available and affordable land and growing land prices, but this also reflects the broader excessive and
inefficient taxation burden levied on the builders and the new home buyers.

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• HIA research demonstrates the ‘stretched’ nature of housing affordability metrics for the Sydney market
in particular and to a lesser extent Melbourne. However, heightened global uncertainty, the political
environment in Australia, and the over-reach of the Australian Prudential Regulatory Authority (APRA)
all run the risk of generating downward pressure on in the residential property price cycle in these two
markets which is larger than would otherwise be the case.

• While the current pipeline of apartment projects is likely to enable relatively strong levels of
commencements in the big three eastern seaboard states, the cyclical low point for non-detached
dwellings (apartments) is expected to occur in or around 2018-19 by which time the level of
commencements is forecast to fall to an annualised level in a range between 60,000 to 70,000
dwellings. This would equate to a fall of between 40 to 50 per cent in apartments from the current level.

Housing affordability
Over the past year from March 2016 to March 2017, the combined capital city house price index has grown
at an annual growth rate of 12.9 per cent, the highest annual rate of growth since the twelve months ending
May 2010. Four of Australia’s eight capital cities are now showing an annual growth rate in dwelling values
higher than 10 per cent (Sydney, Melbourne, Hobart, and the Australian Capital Territory), while Perth and
Darwin values continue to trend lower on an annual basis. This has put housing affordability heavily on the
policy radar in 2017.

Home ownership in Australia is about 60 per cent. There are also a considerable number of potential first
home buyers (FHB’s) who either rent or still live at home with their parents or other family members, who
desire to enter the housing market. They can’t afford to get on the Australian residential property ladder and
feel left out of the great Australian dream. This is one of the key areas where Australia’s housing affordability
challenge resides.

HIA research demonstrates that the core policy focus to boost housing affordability needs to be on: a
reduction in stamp duty; and increased land supply. Wider taxes and charges also need to be addressed
(e.g. reduction in planning approval times, reform of environmental controls, alternative funding approaches
for non-essential residential infrastructure).

There are numerous informative metrics for assessing aspects of housing affordability, one of which is HIA’s
long running Housing Affordability Index. The Affordability Index assesses the affordability of a home
purchase through the lens of mortgage serviceability taking account of interest rates, earnings and dwelling
prices and is presented in an index format.

In the HIA affordability index, an index level above 100 indicates a situation where an individual earning an
income equal to the average weekly earnings of an adult working full time could service a mortgage on a
median priced dwelling without mortgage repayments consuming 30 per cent of their income (index
calculations assume a 90 per cent mortgage to valuation ratio).

The corollary of this is that an index level below 100 indicates a situation where it is challenging for an
individual earning an average income to purchase a median priced home. However, many households have
two or more income earners, a situation which can make affordability more manageable. An index level
below 50 indicates a situation where it would require an income equivalent to twice the average weekly
earnings (i.e. more than two full-time average income earners) to affordably service a mortgage on a median
priced home.

The table below presents HIA affordability index values for all Australian states and territories. At the national
level, during the December quarter of 2016, the HIA Affordability Index declined to 79.9 from 81.8 in the
September 2016 quarter, which represents a slight deterioration in affordability. This was the result of rising
house prices and almost stagnant income growth over this period.

To date the reduction in mortgage interest rates has almost exactly offset the increase in home price
nationally. However, the recent trajectory of dwelling price movements has been widely divergent around the
country, as have rates of earnings growth.

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More on dwelling price developments
Even taking into account the fact that earnings from employment are greater in Sydney than in other cities,
dwelling valuations in the city are still comparatively high. The chart below provides a comparison of the ratio
of median dwelling price to average earnings in each of Australia’s eight capital cities based on conditions
during the December 2016 quarter. In Sydney, the typical dwelling price is now equivalent to over nine years’
worth of gross earnings – considerably higher than in Melbourne (7.64), the next most expensive capital city.

Ratio of Median Dwelling Price to Average Earnings by Capital City, Dec 2016 quarter
Source: CoreLogic; ABS
10
9.22
9

8 7.64
7.01
7 6.59
5.91 5.91
6 5.42
5.22
5
4.28
4

0
Sydney Melbourne Brisbane Adelaide Perth Hobart Darwin Canberra 8 Capitals

Another perspective on Sydney dwelling prices can be obtained by looking at the relationship between
dwelling prices and rents. The chart below summarises the relationship between dwelling prices and
residential rents in each of the capital cities during the December 2016 quarter and compares it with the
situation five years earlier. In these terms, Sydney also has the highest dwelling prices which are equivalent
to over 30 years’ worth of rental costs – just higher than in Melbourne. Dwelling prices in Sydney have
strongly outgrown rents over the past five years – the median dwelling price has increased from about 20
years’ worth of rent in the December 2011 quarter to just over 30 years’ rent at the end of 2016.

Dwelling Price to Rent Ratio by Capital City, 2011 and 2016

Source: CoreLogic
35

30.5 30.0
30 28.2

25.9
25 24.1 23.9
23.2
21.9 22.2 21.8
20.6 21.1
20.7
20 19.3 19.1
18.6
17.2

15

10
Sydney Melbourne Brisbane Adelaide Perth Hobart Darwin Canberra All Capitals
Dec-11 Dec-16

The exceptionally strong growth in Sydney dwelling prices since 2012 and the elevated state of valuations
with respect to earnings and rents means that dwelling price growth in Sydney is likely to be much more

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modest over the coming years. The chart below summarises the long term rates of real dwelling price growth
in Australia’s capital cities over the past two decades. Sydney prices have increased at 5.2 per cent per year
in real terms over the past 20 years – this is in contrast to growth of 12.5 per cent annually over the past five
years (in nominal terms).

Annual Average Real Price Growth by Capital City over Different Intervals
Source: CoreLogic; ABS
7% 6.5%

6%
5.2% 5.0% 5.2%
4.9% 4.8%
5% 4.4% 4.4%
4.2% 4.2%
4.0%
4%
3.2%
3%
1.8%
2% 1.4% 1.5%

1% 0.7%

0%

-1% -0.7%
-2% -1.8%

-3%
Sydney Melbourne Brisbane Adelaide Perth Hobart* Darwin* Canberra 8 Capitals
10-Year 20-Year

Overall, residential land in NSW is the most expensive in Australia. According to the latest HIA-CoreLogic
Residential Land Report, the median lot price in Sydney increased to $438,000 during the September 2016
quarter, equivalent to $938 per square metre – easily the highest of the capital cities. Furthermore, NSW
accounted for three of the five most expensive regional land markets in Australia during the September 2016
quarter.

Even within the three eastern seaboard states there are considerable differences in housing conditions. The
HIA Housing Scorecard provides the clearest example of this fact. New South Wales, Victoria and
Queensland are ranked number one, two and three, respectively. However, NSW is streaks ahead of the
other two states while Queensland is not very far ahead of South Australia (ranked number four) because of
the big gap in housing conditions between Southeast Queensland and the rest of the state.

Impact of the housing sector on the Australian economy

The residential housing and construction sectors interact with the rest of the Australian economy through a
complex web of connections. To understand the relationship between residential housing industry and the
wider economy, the Housing Industry Association (HIA) commissioned a report (CIE, 2012) that used a
general equilibrium model of the Australian economy to quantify this relationship. Some important results are
presented below, however for the full range of results, the CIE report can be accessed on the web
(www.CIE.com.au).

The effects of construction on the economy

Among possible economic changes in the construction sector (including residential housing, non-residential
housing and engineering sectors), productivity increases in the sector provide sizable flow-on benefits to the
rest of the economy.

Productivity increases in housing and construction

A 1.0 per cent total factor productivity increase for the construction industry is estimated to increase national
GDP by $2.36 billion a year. The flow-on impact is estimated to be $4.75 of additional GDP per increased
dollar of activity in construction.

• While causing the construction sector to expand by 0.39 per cent, the productivity

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• Improvement also enables mining to expand by 0.62 per cent, manufacturing by 0.07 per cent and the
rest of the economy by 0.34 per cent.

• A 1.0 per cent total factor productivity increase for the residential housing sub-sector alone is estimated
to increase national GDP by $863 million a year. The flow-on impact is similar, being $4.19 of additional
GDP per increased dollar of activity in residential activity.

Reductions in inefficient taxes on housing

• As identified in the Henry Tax Review (Henry at al 2010) many taxes on housing are distortionary and
inefficient particularly stamp duty.

• A reduction in these inefficient taxes that would lower the cost of residential building by approximately
1.0 per cent would raise residential building activity by around 6 Construction and the wider economy
0.6 per cent. However, it would also increase national GDP by an estimated $780 million so that for
every dollar of extra activity it created in residential housing, it would expand national GDP by an
estimated $2.26.

Increases in the demand for housing investment

• A 1.0 per cent increase in the demand for new residential housing investment will increase GDP by an
estimated $88 million a year.

The effects of the economy on construction

• According to the report (CIE 2012) for the residential construction industry, the

• Productivity improvement in the rest of the economy provides two positive effects: cheaper inputs into
the industry and higher demand for the industry because of higher wealth and higher activities
elsewhere.

• A one per cent improvement in productivity of the rest of economy has the biggest impact on residential
(2.2 per cent higher) and construction activity (1.4 per cent higher) as well as the whole economy (2.1
per cent higher).

Housing’s Contribution to Gross Domestic Product (GDP)

Housing’s combined contribution to GDP generally averages 23 to 24 per cent in recent years, and occurs in
two basic parts:

Residential investment, amounting to around 5.8 per cent of GDP since 1990, includes gross construction of
new dwellings (both detached houses and units), residential alterations and additions, manufactured
dwellings and brokers’ fees.

Consumption spending on housing services, amounting to around 18 to 19 per cent of GDP since 1990,
includes gross rents and utilities paid by renters, as well as utility payments and owners’ imputed rents (an
estimate of how much it would cost to rent owner-occupied dwellings). During 2016, total dwelling investment
accounted for 5.8 per cent of GDP with housing services amounting to an additional 17.6 per cent of the
total. This means that in aggregate housing-related demand accounted for some 23.4 per cent of GDP
during 2016.

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References
CIE (Centre for International Economics), 2013, Taxation generated from the housing sector, Canberra,
Australia.

CIE ((Centre for International Economics), 2012, Construction and the wider economy: A General Equilibrium
Analysis, Canberra, Australia.

Henry, K., Harmer, J., Piggott J., Ridout, H., and Smith, 2010, Australia’s future tax system: Report to the
Treasurer, http://http://taxreview.treasury.gov.au/Content/Content.aspx?doc=html/home.htm

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