The economy has almost completed its transition from the mining investment boom to its more traditional source of growth, housing construction. But it’s now more accurately called “dwelling construction”, and it’s exerting as strong an influence on the Australian economy as the mining investment boom ever did.
Who says? In February, the Reserve Bank found that “the estimated value of work to be done on residential dwellings was equivalent to 12 per cent of GDP”. That was the first time the RBA has given that estimate, and it was more than the mining investment boom, which the Bank had estimated at around 10% of GDP — although unlike the latter, which rose from around 2% of GDP over time, the dwelling construction sector started at a much higher base of around 7% of GDP in recent years.
Thanks to the rebound in commodity prices, there’s been a lot of attention on the impact of that surge in yesterday’s December quarter national accounts. Strong increases in export prices pushed up nominal gross domestic product 3% in the quarter and 6.1% over the year. Terms of trade were up 9.1% (after a 4.5% rise in the September quarter), and economists say we are on track for another, smaller rise this quarter. Real net national disposable income per capita jumped 2.5% in the quarter to be up 5.3% over the year.
But dwellings also played a role. That was partly with the help of the “wealth effect” from the Sydney and Melbourne home price boom (for established housing) — that would have contributed to household consumption climbing 0.9% in the quarter to be up 2.6%. But dwelling investment is the key — that climbed 1.2% in the quarter and 5.6% over the year, and contributed 0.1% to the GDP result.
That’s consistent with recent years. As the RBA said last month:
“Dwelling investment has supported growth in output and employment over recent years as the Australian economy continues to adjust to the large decline in mining investment. The pipeline of work to be done on residential dwellings has increased rapidly since 2013 to historically high levels and this should continue to support dwelling investment over the next couple of years … Residential building approvals have been almost 50% higher than their long term average over the past two years. The rise has been supported by low interest rates, population growth and strong growth in housing prices, particularly in the eastern states.”
The RBA points out that “compared to previous residential dwelling construction booms, this one is different in that there is a higher proportion of approvals (and projects) for higher-density building than detached housing. Higher density building approvals have accounted for around half of all residential building approvals in recent years, compared with a long-run average of less than one-third.”
And that means that the boom will be longer lasting — into 2018 — because apartment buildings take longer (around three times longer) to construct than detached housing.
That comes with its downside: when bad weather held up construction on the east coast in the September quarter, building investment slowed (it fell and dragged down the GDP by 0.1 percentage point). And because of the long lag times between approval and completion, the actual impact of all this apartment construction on the supply of housing is less predictable — especially if we’re building a lot of geographically concentrated developments, which we are in Melbourne and Brisbane, which increases the chances of local oversupply, falling prices and vacant units.
Even so, without construction, the economy would have fared far worse as the mining investment boom came to an end. Something for the “stop immigration” crowd to dwell upon.