For many Australians, 2022 has brought new financial challenges to our daily lives, not least in the form of problematic inflation and rising interest rates.
This week’s Federal Budget is the fourth annual Budget in just two years, but the first for the Albanese Government. The economic context is tricky for fiscal policy, with a deteriorating global and local outlook compounding concerns about living costs, housing, social services and skills. The Government clearly acknowledges the need to address widespread pressures on the cost of living and cost of housing, versus measures that aim to dampen excess demand and inflation. In addressing inflation, fiscal policy (revenue and spending) needs to work in concert with monetary policy (interest rates and related settings). This budget appears to be conscientiously doing that.
Four key themes in this Federal Budget touch on future housing markets and housing policy, but none include measures that will be implemented immediately or have a short-term impact on housing. We dive into the greatest detail on the first of the four themes below:
1. A new ‘housing accord’ to address national housing availability, but can we build it?
2. Labour and skills shortages in the construction industry and across the economy
3.Inflation and ‘cost of living’ pressures will ease eventually, but not immediately
4. Strengthen Government’s economic policy focus on ‘wellbeing’ and fiscal sustainability
Global geopolitical factors are contributing to energy and food pricing pressures worldwide, including the war in Ukraine and its direct impact on gas, oil, wheat and other commodity staples. In the United States, United Kingdom and Europe, inflation is already causing a significant deceleration in economic activity, and may even lead into recession. In China and elsewhere in Asia, industrial production, supply chains and passenger travel are still being disrupted by lingering COVID-19 impacts, plus inflation.
The budget documents confirm that Treasury expects Australia’s economy to grow by a reasonably strong rate of 3.25% per annum (p.a.) in 2022–23, but then slow to just to 1.5% in 2023–24 due to the weaker global outlook, high inflation and higher interest rates. This is weaker than Treasury had expected in April, when it released its pre-election outlook. Labour demand is expected to soften in response in 2023–24 and the unemployment rate
is forecast to rise to 4½% by the June quarter of 2024, which is still well below pre-pandemic levels. Workforce participation is likely to ease from recent peaks, as labour demand softens and jobseekers drop out of the labour market.
The current inflation surge is expected to peak this year at 7.75% p.a. due to global energy costs and the impact of flooded farmland, with headline inflation dropping back to 3.5% p.a. by June 2024 and 2.5% from 2024-
25.Local inflation spikes are likely to continue well into 2023, due to the impact of local flooding on food production. The broad-based nature of inflation is making it difficult for households to avoid price increases by switching and substituting between items. Energy inflation expectations are startling, with a further 56% increase in retail electricity prices expected over the next 18 months. No subsidies or rebates are offered to counter this rise. The combination of sustained inflation plus very modest wage growth implies further cuts to real incomes for many wage-earning households, at least until inflation subsides after 2024.
In the housing market, dwelling investment (spending on new housing and renovations) grew by a relatively strong 2.8% in real terms in 2021-22 (inflation-adjusted) but is expected to decline by 2% in 2022-23 and a further 1% in 2023-24, in response to postboom conditions and higher rates. Sustained inflation plus very modest wage growth implies further cuts to real incomes for many wage-earning
households, at least until inflation subsides after 2024.
In the housing market, dwelling investment (spending on new housing and renovations) grew by a relatively strong 2.8% in real terms in 2021-22 (inflation-adjusted) but is expected to decline by 2% in 2022-23 and a further 1% in 2023-24, in response to postboom conditions and higher rates.
One of the biggest headlines in this budget is a target of “one million new affordable homes” to be built over five years from 2024, through an agreement with state and federal governments, institutional investors and industry. However, this target is an “aspirational” one only; it is not fully funded by national or state Governments and is dependent on encouraging private investment. A range of measures and programs are listed in the budget as contributing toward this target, but in aggregate they will provide only a fraction of the headline ‘one million homes’. Direct Government funding commitments are very small, at just $350m over five years, and will contribute to just 10,000 new affordable homes ($35,000 per home) from 2024. States and territories will support an
additional 10,000 affordable homes, increasing the dwellings that can be delivered by the public sector under the Accord to 20,000.
Instead, the single largest source of Government support for the Housing Accord target will be provided through a new Housing Australia Future Fund which will receive $10bn in order to provide sustainable funding for housing supply and service delivery (e.g. through revolving credit), and will seek to draw in investments from state and territory governments and private capital providers. This new Fund will aim to provide 30,000 social housing and ‘affordable’ dwellings, 4,000 of which will be reserved for women and children affected by domestic violence and older women who are at risk of homelessness. A further 5,500 social housing dwellings
Theme 1: A new ‘housing accord’ to address national housing availability, but can we build it?
will be funded from the existing National Housing Infrastructure Facility, which holds $575m in previously unallocated funding. Other sources of government support for affordable housing will be provided through a combination of first home buyer guarantees, grants for Defence veterans and the existing shared equity scheme.
Going forward, Government intends to refine its approach to affordable housing, and will flesh out how it will meet its aspirational target through a new National Housing and Homelessness Plan. This will be supported by a National Housing Supply and Affordability Council, which will independently advise the Government on housing policy, report on key issues in housing policy, and promote the regular collection and publication of data on housing supply, demand and affordability.
The Budget makes clear that ‘one million new affordable homes’ is an aspirational target and not a funding commitment. It also clarifies that this target will include the collective efforts of all state and territory governments. This includes, for example, recent announcements by Queensland and Victoria about new affordable housing schemes in partnership with investors and developers.
Crucially, this national target aims to increase the supply (or fixed stock)
of homes available nationally, and not simply to generate turnover, activity and jobs across the construction industry. This means it must be carefully designed to ensure that the new homes are a net addition to existing housing stocks and do not displace homes that would have been built by the private sector anyway.
The Budget sets the timing of the target at five years from 2024 and notes that construction industry ‘capacity constraints are expected to ease’ from that time. Even if capacity constraints ease however, how realistic is this target of adding one million new affordable homes in only five years?
Recent history provides a good guide to our national home building capacity. Based on ABS estimates of the total stock of dwellings across Australia, it has taken a minimum of around five years to add one million homes to our national housing stock over the past decade, and sometimes longer. Most recently, the number of dwellings added to our national stock of housing grew by just 1.5% p.a. (around 160,000 net additional dwellings) in 2021-22, despite record levels of residential construction and renovation over that year. This was down from a peak of 2.2% p.a. (210,000 net additional dwellings) during the apartmentbuilding boom in 2015 and 2016.
Projecting an average growth rate
of 1.8% (the average for the past decade), Australia is currently on track to add 1 million homes to our current national dwelling stock of 10.8 million homes by 2027 and 2 million homes by 2032, without any additional Government support or measures.
If we wish to add a further one million homes in addition to the homes that could already be reasonably expected to be added over the next five years, then Australia’s annual growth rate in dwelling stocks would need to roughly double and remain at that higher level for around five years. Even if the target of one million net new homes were extended over ten years, this target would still require significantly faster dwelling construction than in the past.
With building backlogs and labour shortages already being reported nationwide, it is not clear that the construction industry has the capacity to undertake this amount of building in this time frame. Natural disasters and COVID-19 disruptions and delays between 2020 to 2022 mean that the backlog of repair and replacement work is significant and is still growing, with more homes damaged by extensive repeated floods across Victoria and NSW in recent weeks. These very real delays and capacity constraints in construction place a big caveat on any plans to add new homes quickly and cheaply, regardless of whether the work is funded by the public or private sectors.
A critical issue for the Government if it is to achieve its ambitious national housing plans will be ensuring the sector is able to access an adequate supply of skilled labour. Skills shortages and outright labour
shortages have plagued the Australian economy since the pandemic, not least in Australia’s huge construction industry, which accounts for around 10% of GDP and a similar proportion of employment. Residential construction
Theme 2: Labour and skills shortages in the construction industry and across the economyis running at capacity nationally, with a large pipeline of work waiting to commence, impacted by delays in the supply of materials and longer construction times due to weather, COVID and other disruptions. Skill shortages in construction have been problematic over an extended period due to problems with commencement and completion rates in apprenticeships, which are the main form of entry-level training in residential construction.
Apprenticeship numbers improved in 2021 and 2022 but are probably still lower than the industry needs over the long-term. No new funding is provided for apprenticeships and traineeships in this Budget. Instead, the Government is developing an ‘Australian Skills Guarantee’ that will require one in ten workers on major federally funded construction projects to be an apprentice, trainee or paid cadet, with specific targets for women.
For other types of entry-level training, this Budget provides funding for 480,000 fee-free TAFE places over the next four years and 20,000 new university places for students
from disadvantaged backgrounds. As flagged in the Government’s Jobs Summit, the National Skills Commission is being replaced by ‘Jobs and Skills Australia’ to undertake national workforce and skills planning.
Another method of addressing skill shortages is the annual skilled migration programs, which provides permanent and temporary visas for skilled workers in occupations identified as being in shortage. For 2022-23, the Government will increase the permanent Migration Program planning level from 160,000 to 195,000. Priority will be given to offshore applicants in skilled occupations in demand and to onhand applications for the ‘Skilled Independent visa – New Zealand’ stream of applicants.
Total net overseas migration will be somewhat higher than the permanent migration quota due to long-term temporary visa holder movements. Treasury estimates that net overseas migration recovered to 150,000 in 2021-22 (after a net outflow of 85,000 in 2020-21) and will rise to 235,000 net arrivals per year from 2022-23.
This Budget is framed as a response to inflation and cost of living pressures. With regard to inflation, fiscal policy must work in tandem with monetary policy, to ensure that they are pulling in the same direction. Currently, both are seeking to pull inflation lower. In practice, this means no large new household spending programs, no rebates and no tax cuts that might fuel discretionary demand.
Instead, ‘cost of living’ relief is being provided through a ‘5-point plan’ that delivers targeted measures to discrete groups of households and will be implemented over several years. It includes:
• Increasing childcare subsidies, at an estimated to cost of $4.6b over the forward estimates period (the next four years) and eventually benefiting 1.2m families;
•Reducing the ‘co-payment’ (outof-pocket) costs of specific PBS
pharmaceutical items, at an estimated cost of $190m per year and benefiting 3.6m people;
•Expanding paid parental leave from 20 weeks currently to 26 weeks by July 2026, and improving access to paid parental leave for both parents. This is estimated to cost an additional $531.6m.
•Disaster relief and planning assistance will also be boosted, with an additional $38m to Disaster Relief Australia to help support more than 5,000 volunteers and $200m per year to the Disaster Ready Fund for disaster prevention and resilience projects. Most of this is expected to go to regional communities. A separate investment of $22.6m will go towards reforms to address insurance affordability and availability issues in high-risk locations that are affected by natural disaster risk.
Theme 3: Inflation and ‘cost of living’ pressures will ease eventually, but not immediately
A wellbeing statement is added to the Budget this year. This is additional to the long-standing ‘women’s budget statement’ and serves a similar purpose. This statement is akin to an ‘ESG’ reporting framework (environment, social, governance) and will be expanded in coming years. In this first wellbeing budget report, Australia rates as ‘worse than the OECD average’ for household debt, but ‘better than the OECD average’ for housing affordability (defined here as the proportion of household disposable income that is left after paying housing rent, utilities and maintenance, but excluding the upfront costs or mortgage serviceability costs of housing purchases). Treasury has also modelled the impact of climate change on the economy as part of this budget.
Fiscal sustainability – or budget balance – is a long-term objective for
all Government treasurers, but has been difficult to achieve over recent decades. This year, the deficit was reduced to $37bn by ‘windfall’ revenue gains from high resources prices and strong employment, but annual deficits are set to rise again from 2022-23, as the financial benefits of high commodity prices fade. Some relatively small savings were found this year, but the largest categories of spending – including healthcare, aged care, the NDIS and defence – are all set to keep growing strongly (over 6% p.a. in the case of health care and aged care). This long-term structural deficit will persist until spending can be reduced and/or revenue can be increased. In the meantime, government debt will grow and borrowing costs will rise, with higher interest rates hitting hard on a larger Government debt.
For many Australians, 2022 has brought new financial challenges to our daily lives, not least in the form of problematic inflation and rising interest rates.
The shift from outright deflation in 2020 to high inflation in 2022 has happened rapidly and somewhat unexpectedly.
In June 2022, the headline inflation rate surged to 6.1 per cent per annum – the highest level since 1990 (excluding the GST introduction in 2000).
This surge is due to a range of complex global and local factors, including geopolitical conflict; freight and supply chain disruptions; food production disruptions; interruptions to immigration flows; natural disasters; changing consumer demand patterns and temporary demand surges following lengthy COVID-19 shutdowns.
Many of these sources of inflation are already subsiding as borders re-open and supply chain disruptions are resolved.
Although some inflationary pressures are now receding, 2022 has seen prices rise across a wide range of goods and services. This indicates stronger demand across the board
–and stronger demand than our economy has the capacity to supply. The RBA has responded to these circumstances with a rapid sequence of cash rate rises to dampen demand and nudge inflation down toward its target band of two to three per cent per annum, after an extended period of historically low rates.
Rising interest rates are often characterised as a blunt mallet rather than a finely tuned tweezer, but they are surprisingly effective in reducing aggregate consumer demand and hence inflation. This must be balanced, however, against the deceleration in activity (GDP) and employment that usually accompanies slower demand, deliberate or not.
A small degree of income redistribution also occurs because people who derive income from interest paid on savings will get more income (e.g., self-funded retirees), but this will be outweighed in total by the higher interest bill that must be paid by all debtors.
It is worth noting that with no RBA cash rate rises since 2010, a high proportion of Australian adults haven’t experienced the impact of rising
inflation and interest rates before. This lack of lived experience is probably a factor in explaining the surprise and even outright anger that many Australians appear to be feeling about rising interest rates in 2022.
It might also mean their reactions are less predictable, with many people adjusting their spending to these new financial circumstances for the first time.
The way in which individuals adjust their household finances to rising rates depends upon their housing ownership status and debt levels, as well as their employment, income, other expenses and personal circumstances.
Reactions can vary greatly in speed as well as depth. The RBA recently noted that significant delays are built into the ‘transmission system’ of interest rate changes at many key junctions (e.g. waiting for banks to adjust and apply their new interest rates to variable
loans, waiting for fixed-rate loan tenures to end, or waiting for rental agreements to expire).
Jonathan Kearns, Head of the Economic Analysis Department at the RBA said the total effect in housing and mortgage markets “tends to be drawn out, occurring over years rather than months”.
Australia’s latest census counted 10.8 million private dwellings and 25.4 million people in August 2021.
Of the 9.8 million dwellings that were occupied3, 31 per cent were owned outright, 35 per cent were mortgaged and 31 per cent were rented (plus 3.4 per cent of ‘other tenure’ types).
Interest rate rises are affecting these broad types of households very differently:
• 31 per cent of homes are owned outright. This group of (often older) homeowners are largely unaffected by interest rate rises, unless they hold debts for other purposes. They may even benefit if they hold interest-earning savings. If they are also housing investors, then the interest paid on their housing investments will rise. This additional cost will need to be covered by their other income and/or passed on to renters if possible. Either way, the outcome will detract from aggregate consumer spending, as intended.
• 35 per cent of homes are owner-occupied with a fixed-rate or variable mortgage. For a typical variable-rate mortgage of $500,000, the latest rate increase of 0.5 per cent in September would have added $2,500 in annual interest payments, or $208 per month. The cumulative increase of 225 basis points so far this year will have added $11,250 in annual interest payments, or $937 per month in additional interest payments. For those on fixed-rate loans, this hit will be delayed until the end of their current loan tenure, but will then arrive in one huge increase, rather than in stepped increments.
PEXA’s research indicates that rising interest rates are prompting record numbers of mortgagees to seek refinancing in 2022. PEXA’s Refinance Index hit a record high in August 2022. PEXA’s Consumer Refinance Report indicates that already in May, over one million of Australia’s nearly eight million mortgage holders had refinanced their home loan in the previous year and 2.3 million intended to do so in the next two years (with 800,000 in both groups). 71 per cent of mortgage refinancers were ‘anxious about rising rates’ and 51 per cent were mainly or partly motivated by the desire to find a lower rate.
• 31 per cent of homes are rented. Advertised rents are already rising sharply nationwide, with rental vacancy rates at record lows in many locations. This is hitting those currently seeking a new rental property earliest and hardest. For established renters, rental agreements in Australia tend to be around 12 months tenure on average. This gives them only a short delay before their rent is likely to increase.
For renters who aspire to be first home buyers, the journey to home ownership will inevitably take longer with higher interest rates. House prices might fall a touch, but their maximum loan size will be significantly smaller.
The RBA recently calculated that the 225 basis point increase in interest rates since May 2022 “will have reduced borrowers’ maximum loan size by around 20 per cent … and monthly payments on a new (principal and interest 25-year) loan will be around 25 per cent larger”. This will inevitably result in fewer people moving from renting to owning, and at lower average price points.
It was a privilege to present at the recent Melbourne Business Analytics Conference, hosted by the Melbourne Business School. I spoke about the importance of using realtime, unique data and insights to optimise the settlement experience for all stakeholders involved in a property transaction, most importantly home buyers and sellers.
PEXA has adopted a new Settled First Date (SFD) metric to measure the performance of lenders and practitioners involved in settling property sales on their scheduled day. This new metric is a significant step
forward towards ensuring the industry is working together to deliver for the most important stakeholders in a property transaction – the buyer and seller.
More than 20,000 families rely on PEXA every week. In early 2022, we identified an opportunity to further learn and unlearn processes and systems to enhance settlement certainty for home buyers and sellers. PEXA observed settlements had an approximate 70% success rate, and although this is a strong number when compared to global standards, we led research into how the industry could improve.
We found that of the settlements that did not complete on the day as originally planned, we saw many instances of when the buyer and seller agreed to move the settlement date. However, we also observed the following opportunities to improve:
• 24% were due to operational delays (i.e. issues picked up at final inspection)
• 16% were due to document delays (i.e. buyer and/or seller forgetting to submit paperwork on time).
• 13% were due to complex delays (i.e. a home is attached to a small business, with financial links/ collateral)
• 7% were due to funding issues (i.e. financial discrepancies such as miscalculation of water rates).
PEXA shared our research with industry, and together we developed a program comprising four streams of work, driven by data and insights. We also looked at behaviour insights, industry best practice and platform enhancements.
PEXA believes open and transparent information to the market, based on the above insights, will deliver a better experience for all. In order to measure the on-time settlement performance of participants involved in the settlement process, PEXA has developed a metric called Settled First Date (SFD). This metric, which will be publicly reported quarterly, and has been used to assess the performance of both lenders and practitioners (with practitioners being property lawyers or conveyancers acting on behalf of buyers and sellers).
Pleasingly, we have already seen a very positive uplift. As a result of strong industry collaboration, more than 30,000 more home buyers were able to get into their property on time during FY22. Getting this important process right is in the best interests of all stakeholders within the property eco-system to get people into their homes on time.
PEXA will continue to learn and unlearn systems, processes and behaviours to further shape improvements for the industry and home buyers and sellers.
To read more about the public report, please visit: https://www.pexa.com. au/insights/pexa-on-timesettlements-report.
In August 2022, PEXA announced its acquisition of .id, a strategic investment undertaken as part of the PEXA Insights growth strategy. We invited .id CEO, Lailani Burra to tell us a little bit about herself, .id and the synergies she sees between PEXA and .id.
Hi Lailani! Thank you for joining us today. As a start, please tell our readers a little bit about yourself.
I was born in London, grew up in country NZ, worked in Central Australia and now live in suburban Melbourne. This gives me good personal insight to different types of places and what they are like to live in. That’s pretty useful for my work. Strangely, I’ve never lived by the coast, but I love to swim and surf. And I must say, one of my best moments is getting up on a surfboard for the very first time!
What is the biggest thing that keeps you awake at night?
I like to sleep! If I’m waking up at night, it’s because I’m over-thinking something rather than taking action. Things like: When will our society be able to confront the truth about the lived experience and loss of Indigenous people? Why are we so cruel to people seeking asylum?
Tell us more about .id.
.id stands for “informed decisions”. We’re a company of expert geographers, economists, demographers and technologists who want to contribute to building our communities. We understand how our cities and regions grow and change. We capture and share this knowledge through intuitive webapplications so our clients can make informed decisions about investing in place to provide appropriate services to their communities. We believe that making information transparent and accessible helps build a fairer, more sustainable society.
Our information tools are designed to solve the problem of “too much data, not enough knowledge”. We convert demographic, economic and geographic data into stories of place. This means our clients can build an evidencebased story when they’re developing a business case, engaging the community or advocating on their behalf.
Over 300 local governments, covering 80% of Australia’s population, subscribe to our digital information platform. In addition, the platform is publicly available, so the end-users extend beyond council officers to include business and industry groups, community organisations, local residents, home buyers, students… basically, anyone interested in finding out about a region, suburb or neighbourhood.
We also work with organisations making decisions about where to locate their facilities and services – education departments, utilities, retailers, property developers, franchisees, emergency services, aged care, childcare… even cemeteries! We call it nose-to-tail demography.
And what our customers are most looking for: Two things – people need information for a relevant geography (catchment, suburb, town, planning district), and then they need that information to tell a story.
Data alone though is not enough. It’s the way you put the data together to answer questions in a compelling way that informs decisions.
PEXA and .id have a shared vision to make information about people and places accessible and transparent for everyone so we can build better communities.
Together, we share a keen interest in mapping how land is used. To forecast future populations, we need to understand where development activity is taking place – now and in the future. With our partner organisations, Frontier SI and Landchecker, we can use new technology to capture and map development and build a national population forecast at a microgeography. This is very exciting as we expand the scope for our clients to quantify demand for housing and services for any catchment in Australia.
For more information on .id, or to check out its products and services, visit https://home.id.com.au/
