Housing Starts to Underpin Domestic Economic Growth

New-Home-Construction

Unemployment came in better than expected with February numbers at 5.8% down from the 10 year high of 6.1% posted in January. This, along with a slew of positive indicators, pushed the local currency back towards 95 cents against the US dollar. The share market’s gyrations has many questioning the economy’s future direction, however, housing starts are as good a barometer as any of its health and the numbers are mostly pointing up.

The Housing Institute of Australia (HIA) Chief Economist Harley Dale, presenting at a UBS conference, outlined his take on the Australian housing construction market and his views are worthy of consideration.

Harley’s opening comment set the scene of what is today a very different scenario, “We are in a very different position today than was the case two years ago. Two years ago we would have been talking about eight declining State markets. Twelve months ago we would have been talking about six declining State markets. Today in an aggregate sense, the construction market is on the rise.”

He noted that five Australian States are now seeing positive growth in construction activity with new detached housing starts growing in New South Wales, Victoria and Queensland. Harley noted that this is a big deal because it has been a very long time since all three markets have moved in the same positive direction. In fact, it has been over a decade.

Today, the numbers indicate total new housing starts running at 160,000 annualised and even this is a lagging indicator since they relate to data up to September 2013. Harley’s take is that the numbers are much stronger and probably closer to 180,000 housing starts. His confidence his based on leading building indicators that show that what is approved and what is started gets built. If this holds true again then the HIA can see housing starts rising to 195,000 and in the context of history that would be a record. The previous peak of 187,000 took place in 1994, while the most recent peak occurred in 2010 when 177,000 starts took place.

Furthermore, this level of housing starts is regarded as a minimum level needed to meet the growing housing demands arising out of population growth, including net migration intake which is running at 240,000 persons annually.

It has been some time since the housing and building industry has enjoyed a sustained period of growth. Importantly, the drivers behind this rise are fundamental in nature and the economic benefits that flow run deeper and wider than perhaps many would appreciate. For our local economy the switch from mining led to housing driven growth appears to be well underway and the long term benefits of such a move should see a more sustained level of economy activity.

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