Speech to the Committee for the Economic Development of Australia Housing Forum
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I would like to begin by acknowledging the Gadigal people of the Eora nation, the traditional owners of this land on which we are meeting today.
The global recession was just beginning to unfold when I addressed CEDA in Melbourne last July.
Few could have predicted that by September, institutions like Lehman Brothers and Bear Stearns would collapse – or that mortgage giants Fannie Mae and Freddie Mac would need a $200 billion bail out to survive.
In Australia, as across the globe, every arm of policy – fiscal and monetary – needed to be used to help protect our economy against the powerful winds of financial turmoil.
And the following six months were the toughest the world has faced financially since the Great Depression in the 1930s.
By November last year, IMF head Dominique Strauss-Kahn was warning ‘the global financial system (is on) the brink of systemic meltdown.’
The Australian Government acted early and decisively, with measures that had far reaching impacts – and as a result we are now better placed than most other nations.
Australia is now the only one of the world’s 33 advanced economies to have expanded over the past year – recording 0.6 per cent growth in the year to the June quarter 2009.
The Government’s cash payments to households provided an immediate boost to the economy; while the construction and infrastructure spending components of the stimulus packages are now ramping up.
Treasury estimates that if the Government had not stepped in with this stimulus, the economy would have contracted in each of the last three quarters; and would have fallen by 1.3 per cent over the past 12 months.
The necessity of the Government’s stimulus plan was borne out by the latest OECD report on the employment outlook for 2009 when it was released two weeks ago.
It makes for sobering reading for the global economy, particularly on employment.
The report makes it clear that OECD countries are facing a jobs crisis – with 15 million people joining the ranks of the unemployed across the developed economies since the end of 2007.
This is why the Government’s $42 billion Nation Building Economic Stimulus Plan has been so important for our economy – and for Australian jobs.
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The OECD report went on to say that stimulus packages adopted by many of the world’s major economies have had an important impact on employment, stating that ‘job losses would be significantly larger if vigorous macroeconomic measures had not been taken.’
The report estimates that OECD area employment will be 0.8 per cent to 1.4 per cent higher in 2010 than would have been the case had national governments not adopted sizeable, fiscal stimulus packages.
The OECD also points out that the Government’s stimulus measures have been particularly effective in saving Australian jobs:
‘Australia’s fiscal stimulus package seems to have had a strong effect in cushioning the decline in employment caused by the global economic downturn.’
The OECD estimates that employment in Australia in 2010 will be between 1.4 and 1.9 percentage points higher than what it would have been without our stimulus measures.
That means around 200,000 more Australians will have a job because of the Government’s economic stimulus measures.
A significant part of these efforts were directed to my area of housing.
Housing is critical to the economy – with apologies to Charles Dickens – in the best of times and in the worst of times.
In the worst of times – it is a critical confidence booster for the nation.
As BIS Shrapnel emphasised in its ‘Building Industry Prospects’ report in August, ‘dwelling construction will be vital to economic growth in 2010.’
The construction sector is a key component of the national economy – contributing around six per cent of Gross Domestic Product.
It is also a key employer – accounting for almost nine per cent of employment in Australia.
This shows why the Government looked to housing to provide Australia with a strong foundation on which to confront the global recession.
Australian Bureau of Statistics building approvals data paints a stark picture of where the construction market was heading at the time Lehman Brothers collapsed in September 2008.
What is now clear is that the Government’s stimulus package hit the market at just the right time – preventing it from going into free-fall.
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On 14 October 2008 we announced the first instalment of our stimulus plan – in the form of a $10.4 billion Economic Security Strategy.
It included a $1.5 billion boost to the First Home Owners Grant to support activity in residential construction and help young Australians to buy a home of their own.
The Boost was extended by six months in this year’s budget – a further investment in the stability of the construction sector and the Australian economy more broadly.
The Boost had an immediate impact – bringing first home buyers back into the housing market in record numbers.
By the end of August this year more than 153,000 Australians had benefited from the First Home Owners Boost.
Many builders told me that first home buyers made up 50 per cent of their business – helping them maintain jobs during the global recession.
In May this year, over 19,000 first home buyers entered the home ownership market – which was 28.5 per cent of all new housing finance commitments for the month.
This was the highest proportion of first home buyers in the Australian housing market since records began nearly 20 years ago.
It is also double the number of first home buyers in May of the previous year (9,643).
Naturally this has had a very substantial impact on the construction sector.
Steep declines in the number of housing finance commitments and private house approvals in 2008 have been followed by significant increases in 2009 as the impact of the Boost and other stimulus programs kicked in.
The number of residential building approvals has risen by 28 per cent since the start of 2009 and now sits at around pre-crisis levels.
Finance commitments for the construction of new homes are up 58 per cent since October 2008.
While the proportion of first home buyers is starting to fall from the historic highs it reached in May, it can safely be said that the Boost has done its job.
The Boost has maintained jobs in a key sector of the national economy, as well as providing flow-on benefits through multiplier effects on retail, construction, materials, finance and elsewhere.
The First Home Owners Boost will continue to support employment in the construction industry, even beyond its withdrawal at the end of 2009, as contracts signed before 31 December 2009 translate into new homes built in the first months of 2010.
Developers tell me that ‘upgraders’ are returning to the market; and that there is now a greater sense of optimism among investors.
In its ‘Market Insights’ publication for September 2009, Westpac says:
‘…first home buyer demand will start to wind down…How well overall activity and prices hold up…depends crucially on how much both ‘upgrader’ and investor demand expands to fill the gap…we expect a smooth transition with demand consolidating at relatively high levels overall.’
Front and centre of the Government’s plans to facilitate the smooth transition is a suite of programs that will increase the stock of social and affordable housing by up to 80,000 homes.
These include the Social Housing Initiative – a key component of the Nation Building Economic Stimulus Plan, as well as the National Rental Affordability Scheme and specialist accommodation for homeless Australians.
We expect the Social Housing Initiative in particular will be making its considerable presence felt in the construction sector by the end of the year.
So as the impact of the First Home Owners Boost phases out over the next few months – the impact of the Social Housing Initiative will start to flow through the market.
This program will build 19,200 new homes with the assistance of State and Territory Governments and the not-for-profit sector, and refurbish more than 60,000 existing properties.
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$5.7 billion is being invested in the Social Housing Initiative – making it the single largest investment in social housing ever undertaken by an Australian Government.
Just as importantly – the program is estimated to support 15,000 jobs across Australia over two years.
Jobs for electricians, plumbers, builders, carpenters, plasterers, bricklayers, architects, project managers – as well as the associated manufacturers and suppliers who help to keep the economy ticking over.
The Social Housing Initiative is on track and has substantially over-achieved on its construction and refurbishment targets
Already over 35,000 homes have had repairs and maintenance work completed; and a further 15,000 homes benefiting from work on common areas.
Our plan was for this work to return 2,500 homes to stock – homes that might otherwise be uninhabitable within two years without this investment.
But we now know that the repairs and maintenance program will return over 10,000 homes to stock – four times what we expected.
We approved construction projects in two stages. The first group were projects already on the books of the State and Territory Housing Departments that could commence quickly.
The majority of these projects have commenced construction.
The second, larger tranche, were new projects including projects sourced from private builders and developers with new stock they were having difficulty selling on the private market.
Construction has now commenced on 1,759 new social housing dwellings around Australia.
Twenty-eight homes have now been completed and the first families have now moved in.
In May I visited the first house to be completed anywhere in Australia at Yennora.
The building is a quality home for the Sada family and their three children – who had spent years on the public housing waiting list.
One of the children has a serious disability.
The house has been built with wider hallways and doorways that will easily accommodate his wheelchair.
It also has a water tank and is fitted with energy efficient devices that will keep running costs lower.
While I was there I met a number of staff from Degree Constructions – the small building company that had just finished the house.
The building supervisor said that 52 people were involved in building the house – including three apprentices.
One of those apprentices had been put on for the first time because Degree Constructions had won work as a result of the Government’s investment.
Since then I have met builders all over Australia who have benefitted from this work, coming as it does, at a time when otherwise they may have expected to be laying off staff. Instead, many are putting people on.
Builders are also reporting that winning work through the stimulus package has helped them to restart projects that would otherwise have stalled.
We estimate that an additional 2,000 private sector dwellings will be built by companies that have been able to attract finance because they have sold some houses to the stimulus effort.
The Government is also investing more than $1 billion in the National Rental Affordability Scheme over the next four years to increase the supply of new, affordable rental homes across Australia.
This innovative new program will help build up to 50,000 new properties across Australia by 2012, which will then be rented out at a minimum 20 per cent below market rate.
The level of interest from institutional investors in the second round has been particularly encouraging and we expect investors to continue to take advantage of this new investment opportunity.
To conclude – we all know that predicting the future can be perilous, even in the best of times.
As BIS Shrapnel noted in their August newsletter, the effectiveness of the Government’s stimulus measures has seen uncertainty dissipate.
A strong construction sector is vital for continued recovery.
BIS Shrapnel put it bluntly:
‘Given that overall business investment is set to decline substantially over the course of 2009-10, the housing upturn will become an imperative for negotiating the overall economic recovery.’
The housing market is expected to continue its solid recovery as the impact of the global recession recedes.
The budget forecasts for dwelling investment were for growth of 11.5 per cent in 2010-11 – after a flat outcome in 2009-10.
Of course, bank lending for multi-unit development will have to increase if we are to meet the housing supply targets we need.
I remain concerned about activity in the multi unit sector. Developers tell me that access to finance continues to be a problem that is holding back increased activity.
The Social Housing Initiative will continue to support activity and jobs in the housing sector for some time yet.
We know that ongoing strong population growth will continue to drive strong demand for housing.
Moreover – if they remain optimistic, investors are likely to return to the property market in greater numbers in the near future.
The Government’s adaptive, creative and flexible approach to the global recession has helped to cushion Australia from the worst of it.
And not least due to our recognition of the importance of the housing sector to the economic and social fabric of our nation.