KING It should go without saying that housing is essential infrastructure. It is important we understand that what we’re talking about is not just a product or an asset, but a human right.

Meanwhile, from an economic perspective, the residential building industry has the second-largest economic multiplier of all of the 114 sectors that make up the economy. For every A$1 million (US$686,000) of output in the residential building industry, there is a ripple effect of A$2.9 million per annum in the economy. Each A$1 million worth of investment in the residential building industry also supports nine jobs across the economy. On a per annum basis, the residential building industry’s component of GDP is around 5 per cent.

In other words, we are not just talking about the physical dwellings we live in but also about driving economic activity, supporting jobs and attracting capital investment. A strong housing system is beneficial for the economy more broadly.

The first thing we need to do is to ensure there are enough homes to meet the underlying demand for housing. We are currently falling well short. It’s important to understand that a housing shortage not only affects individuals but has broader economic implications, making a strong housing system vital.

There needs to be a shift in how we view housing. Some might argue that it is too often treated as an asset or investment, but we should perhaps focus more on recognising it as essential infrastructure and a basic human right.

From the HIA [Housing Industry Association]’s perspective, we consistently remind policymakers at all levels of government that taxing housing means taxing essential infrastructure that is critical to the way of life of citizens in this country. This is why the HIA strongly advocates for reducing the excessive taxation on housing, which is currently out of balance.

LAWLESS In some areas, absolutely. Vacancy rates in the rental market are generally extremely tight – around 1 per cent, or slightly higher in some markets. However, there are examples of markets that experienced a significant surge in supply during the previous building boom, from 2014 to 2019. This surge in construction, particularly in the high-rise sector, was concentrated in Melbourne, Sydney and, to a lesser extent, Brisbane. The effects of this additional supply are still visible today, especially since much of it was geared toward the investment market.

Rightly or wrongly, the type of housing stock created may not be ideal for first home buyers or owner-occupiers. In areas that saw a lot of supply, such as Parramatta in Sydney or Melbourne’s Port, Docklands, Southbank and the CBD, apartment prices remain lower than they were pre-pandemic. These markets have not experienced much, if any, price growth.

Maybe this is a good example of how supply affects the market. Sufficient or even higher levels of supply tends to keep a lid on price growth – which is exactly what we are experiencing at a macro basis in Melbourne. Looking back over 15 years in Victoria, there is typically a healthy supply response – at least relative to other markets in Australia.

Unsurprisingly, therefore, it is one of the few markets where affordability is improving. This can also be attributed in part to other factors, such as weak demographic trends and taxation policies that discourage investment. However, a key factor is that Victoria’s supply response has been healthier, and it still is. There are higher rates of completion per capita than in most other markets.

VOJVODIC Supply is a factor when we are analysing residential mortgage borrowers. But our focus is primarily on what happens once they have taken out a loan and are making repayments.

We are certainly not suggesting that an oversupply is imminent. In cases where demand exceeds supply, if a borrower defaults they can often sell the property, repay the loan and get out of debt. This is something we have observed taking place during the period of interest rate increases.

Certain sectors have been significantly affected. For example, arrears have notably increased among low-documentation and self-employed borrowers since rates began rising in 2022. However, major losses have not materialised because borrowers have been able to sell their properties.

There is an interesting comparison to be made with what happened in the financial crisis. The impact of the crisis was significant for the same cohort of borrowers. While in some parts of the world it was relaxed credit standards that led to problems, in markets like Ireland and Spain the issue was also about an oversupply of property.

Nonresidents had been purchasing and building homes, but they left when the financial crisis hit – leaving behind an oversupply that took years to clear. Defaults in these markets reached around 20 per cent, compared with Australia’s last recession in the early 1990s when the default rate was about 2 per cent. This highlights the dramatic difference in outcomes and the impact of the supply piece.

KING There are cyclical factors at play, such as rates of migration and net overseas migration. But long-term structural issues have constrained housing over the best part of 10-20 years.

We believe some of the greatest constraints have been excessive taxation on new home building, and inadequate supply of greenfield and infill land for development. There has also been disproportionate regulation of new home building, which is constraining the rate of construction, and a shortage of skilled labour for the best part of the last decade.

Key constraints have led to a worsening of the balance between supply and demand, and COVID-19 distortions resulted in an acceleration of underlying demand for housing. Supply has been dropping, so the existing shortage that has been a problem for 10-20 years has been exacerbated.

An additional issue is that policymakers have failed to accurately measure underlying demand for housing in Australia, and have been inaccurate in their forecasts of population growth. This has been costly.

We estimate that the underlying demand for housing in Australia is somewhere between 230,000 and 240,000 homes a year, hence the National Accord’s target of 240,000 homes a year. We really need to lift activity to achieve anywhere near it.

In 2016, during the apartment boom, we built 228,000 homes. This was the closest we got to making an inroad with supply and we have not got this far since. Consequently, there has been an affordability crisis.

LAWLESS We set a target of building 1.2 million homes. It’s great to have a stretch target but it is certainly going to be a stretch – and I don’t think we’ll get there.

Cost is one factor – builders won’t build homes if they can’t turn a profit. We know there has been a huge amount of liquidity pressure across the residential construction sector. Cost-side pressures are very complex. Throughout the pandemic, there was a surge in demand associated with the Home Builder scheme. But because of its eligibility criteria, projects had to start within a certain time window. This flurry of activity was met with a whole bunch of supply chain constraints, which pushed up prices.

We are now in the midst of a labour supply shortage that is also putting upward pressure on prices. The problem is that we are in an environment where margins are under immense pressure so there is not a profit to be made.

It is a simple feasibility issue. Builders want to make a reasonable profit – it can’t be too narrow to the extent that it becomes a risk. Developers need to charge a premium over the established marketplace for newly built product because of the cost involved in building and, at the moment, the market simply won’t tolerate this premium. Consumers won’t offer a premium in an environment in which credit is tight and affordability is already crunched.

HASSAN If you told a lot of other industries that population growth means demand is going to be 30 per cent higher for five years, they would be delighted – because they would be able to scale up relatively quickly. But housing construction doesn’t have the benefits to volume in the way other industries do. This is because fixed costs are not a large part of the cost base.

The relatively low fixed capital that goes into the production process means home builders do not get big synergies when scaling volume, compared with, say, manufacturing or iron ore production.

The challenge here is that the target will be a little harder to get to. We are asking an industry to scale up by 30 per cent and to take on thousands of additional employees for a period on the promise that this demand will materialise and that it will be at a high enough price point to be profitable. This is a huge risk we are asking the industry to take on. It’s very hard to suddenly commit.

The policy element that might help here is that the national target, the 1.2 million, involved a policy agreement between federal and state governments with federal compensation for states that achieved their targets over the five-year period. But this comes at the back end, and developers were already thinking the whole thing was la la land – the target was unachievable and they would never see the money.

If government is going to commit to this, bring the incentives associated with meeting the target forward. There may even be a case here for dwelling supply to be embedded in the way GST allocations are made between the states. Maybe it should be occupied dwellings rather than simple population splits.

There are ways to embed this response over a medium-to-longer term framework that helps rebalance the fact that we have had a strong housing market but also persistent under build on the supply side.

LAWLESS There was, to some extent, a private sector certification issue that ultimately led to a crisis of confidence for newly built or off-the-plan apartments across the consumer base. There is still a hangover of this, even though we have now gone in the other direction and the building commissioner has become quite stringent.

KING The HIA releases a quarterly trade availability index, surveying our members about the availability of trades. There was actually a worsening of trade availability in the September quarter. A major cause is that the residential building industry is in direct competition with significant public infrastructure expenditure, which is ongoing and is primarily Commonwealth-driven. Even in states like Victoria, which are more fiscally constrained at a state level, Commonwealth projects are still taking place.

There is starting to be some evidence of market confidence returning, and regions like Perth, south-east Queensland and Adelaide are looking stronger. But they are in a crunch of trying to source skilled tradies to get projects done in a timely way. This is why build times are not shrinking in the way we might have expected them to. In fact, build times have increased slightly – and this is applicable to most states.

We can address this through policy on sourcing skilled labour domestically. Creating training opportunities for Australian residents should be the preferred workforce development strategy for policymakers. We need to increase and make a long-term commitment to a stable arrangement of apprentice and employer subsidies to encourage more employers to take on apprentices and to support apprentices through their apprenticeships.

HIA also advocates for much greater efficiency and expediency in the pathways of skilled tradespeople coming to Australia from overseas. Data from the Department of Home Affairs shows that there are just 3,644 workers on temporary skill shortage visas working in these key trade occupations currently in Australia. When we consider that we need another 83,000 skilled trades, this quota of overseas workers is insufficient.

HIA just released a research report indicating what kind of volume of workers is needed to achieve the National Housing Accord target. We estimate we need a 30 per cent increase in skilled tradespeople employed here in Australia, which equates to about another 83,000 skilled workers over the next five years if we are going to build 1.2 million homes.

The reality is, we’re not going to train up enough apprentices to get to this number. We need a combination of sourcing them locally and of expediting pathways for overseas labour to come in.

HASSAN There are a few issues. There are risks when it comes to dialling down or reprioritising infrastructure. A lot of infrastructure builds happening at the moment are mega projects that we can’t just stop half-way through. A lot of projects that are happening now are also likely to be productivity enhancing and will improve the amenity of existing housing locations within Australia, and Sydney in particular.

There is also an infrastructure counterpart to a big construction build. Sydney in the late 2000s was in the early stages of these chronic housing supply issues and it also had a really intense infrastructure problem. There was a ‘lost decade’ of infrastructure building, in fact. In a way, we are only now just catching up for a lot of these issues – whether it’s connecting rail lines to the fringe suburbs or building brand new metro lines.

If we now return to an even bigger period of housing building and again neglect the infrastructure element, we will end up with similar kinds of problems – congestion and amenity issues in the outer suburbs.

KING HIA commissioned the Centre for International Economics to do an independent piece of research on the taxation of new housing in 2019. It was a report on the capital city markets. Unsurprising, Sydney was the worst story. The report found that up to 50 per cent of the cost of a house and land package is made up of excessive taxes, regulatory costs and government charges. It was marginally better in other markets, like Melbourne and Brisbane, but it still came out at 38-42 per cent.

The reality of layers of taxation at a local, state and Commonwealth level is that we are building in housing cost increases. When these taxes and charges are levied at the early point of the supply chain, it creates a cascading effect.

Punitive taxes like stamp duty get levied at the beginning of the supply chain as well as at the point of sale. These taxes cascade through the supply chain and we find ourselves back at the point Tim touched on: builders and developers are trying to deliver a product at an affordable rate, but they are also trying to cover their costs and remain profitable.

This is why we cry foul when new taxes like the Victorian government’s short-stay levy – or ‘Airbnb tax’ – are introduced. There is already a significant contribution of taxes, charges and regulatory costs in the price of a house. Now is not the time to add more.

It is also important to remember that these taxes contribute to uncertainty in the market – particularly for investors, including foreign and domestic investors. Supply is quite elastic, and investors are going to be deterred by uncertainty at policy level about various levies and taxes. We are already getting reports of foreign investors making an exodus from Melbourne, and it’s largely due to new taxes and charges such as the short-stay levy.

HASSAN I think there is more wriggle room when it comes to tax policy. A guiding principle in economics is that we tax in a way that incentivises the things we want to happen. What we want here is new building. If we rejig stamp duty and other tax elements to make them specifically target new construction, making it more favourable, this would be a better way to achieve it than, say, to reduce lending standards for all borrowers.

We want to try and encourage new construction at the margin, while at the same time guarding against potential oversupply issues that might occur down the track. If we can do this I think we have a more coherent strategy.

VOJVODIC There has been discussion about increasing borrower capacity to buy properties, in other words loosening credit standards at the borrower level. But I don’t think this will help supply. Lending people more money means they can pay higher prices, which could constrain affordability even further.

There have been some changes to underwriting standards relating to affordability in the last 12 months, one of which has been lowering the interest rate buffer used in the assessment of mortgages to ensure borrowers can repay their loans. This buffer is 2 per cent in the nonbank space versus 3 per cent at the banks. An increasing number of lenders is using an even lower buffer for certain borrowers – such as for refinancing or for mortgages within certain LVR [loan-to-value ratio] limits.

The argument in favour of lower buffers is that we are at the peak of the interest rate cycle. But the buffers are also there if something happens in borrowers’ lives. Reducing it erodes the protection against unexpected things, too.

The other development we are watching is that more low-documentation loans are being written to self-employed borrowers. This was an active sector prior to the financial crisis, then the market totally went away. Now it’s coming back. Since the initial return of these loans, less verification of income methods is being used.

There is downside risk from a credit rating perspective. We need to think about what impact these changes could have on mortgage performance and, if borrowers get into arrears, what this could do to housing supply – especially if some of the risks are layered. Given most of these changes are to recent borrowers it is too early to tell what the potential impact could be.

LAWLESS To Natasha’s point, I am certainly cautious about unlocking demand when we don’t have a supply response in the wings. How do we get to a supply response? There is some low-hanging fruit. About 22,000 homes have been approved and are waiting in the wings – this is supply that is not reliant on approval or any sort of bureaucratic mechanism to get into the market.

Kickstarting this supply could be a priority. The reason it is languishing may be because these builds are unfeasible, and we can look at ways to make them feasible. Headworks charges and infrastructure costs are a big component of getting these projects into a construction phase. Maybe the government could look at covering some of these costs or lowering them. Low-interest loans to cover headworks costs for developers could be a way to reach some of the low-hanging fruit.

Another is to bring more labour supply. Matt has talked about it in detail but the bottom line is that if the industry is undersupplied with labour we simply can’t build. We’re competing with a lot of big infrastructure projects that are not going to get mothballed or delayed.

Bringing in more population that is skilled in the trades we need must be a high priority, and it doesn’t seem to be on the political agenda. The focus needs to be on unlocking the capacity constraints that are pervasive across the sector.

LAWLESS Regardless of the type of housing being discussed, it still has to be built – and the same capacity constraints apply. Regardless of whether or not it is social, affordable or government-owned housing, it is going to have the same capacity challenges. Perhaps the feasibility and profitability side of it become less important when it is in the social and affordable, government-backed space.

It is important to remember that there are other channels. The build-to-rent channel, for example, has been talked about a lot but seems to be held up by the Senate not getting key taxation policy changes through – including halving withholding tax to 15 per cent from 30 per cent and picking up improved depreciation benefits. But there is no political agreement on the best framework and what components should be affordable housing and so forth, so it seems to be held up in the political mechanisms.

This would be another way by which we can get more supply into the marketplace – it would at the very least start delivering more multi-unit sector rental supply to the market, with an affordable rental component associated with it.