The Business Rory’s Ramble

Post-COVID-19: the way ahead

After 10 weeks at home running a business by Zoom and getting lots of odd jobs done around the house, I had my first dinner at a restaurant last night. It was nice to be out but odd sitting isolated in the middle of an empty room. It looks like our office life is still a while away.

The construction industry has been fortunate to be allowed to continue throughout the crisis, as it’s seen as an essential service and the major employer in the Victorian economy, and particularly as an economic generator of the State. It took a lot of co-operation between HIA, UDIA, MBA, PCA and unions to assure Government that we could safely conduct our business, which we have successfully done.

Property has been a rollercoaster the last few years in terms of demand, supply and prices.

Firstly, we experienced major price rises in 2017-18 – due to high population increases, low interest rates and a shortage of properties available for sale thanks to a lack of PSP-approved land. Lot sales peaked at 23,000 in 2017 compared to a sustainable annual average of 15,000 lots. The average greenfield house and land package tipped over $700,000.

The word ‘Affordability’ became the topic on everyone’s lips.

The problem is, the cost of producing a block of land also increased with the rising price of land. It was fuelled by a supply shortage and competition from overseas buyers; the raw landowner put their hand out for exorbitant prices. Correspondingly, construction prices spiralled due a lack of skilled workers and materials, particularly with the State’s major infrastructure projects absorbing our capacity.

The knock-on effect of all these caused the ICPs and Responsible Authority charges to spiral – everybody in the food chain had their hand out – and the end result was that prices got out of control.

The spiralling of prices in 2017-18 came to a halt with the introduction of the Banking Royal Commission, creating a credit squeeze on developers’ funding to produce stock and also buyers’ ability to get a housing loan. Banks basically reduced household borrowing capacity by 20%, so developers and builders had to scramble to produce smaller lots and homes with reduced floor space to meet the new sub $500,000-$600,000. The credit squeeze caused 2019 greenfield lots sales to crash to 8,500 lots. Then, just as things were getting back to normal in early 2020, COVID-19 struck and sales, and jobs, plummeted.

The attached chart shows where greenfield sales are now – at the lowest rates they’ve been for a short period since late 2011 at 400 per month (annualised to only 4800 per annum).

To compound our future recovery, 50% of our population increase is by immigration, which has obviously stopped, so our current local demand has dramatically decreased. The real effect of the stoppage in immigration normally has a lag of two years, so we will feel its effect for some time to come.

All industry groups are now campaigning all levels of Government to suggest means of stimulating public confidence to spend money in the economy again.

Besides fiscal stimulus announced across all sectors of our economy, now is the opportunity for the planning industry to do its bit and to introduce reform, particularly with red tape, to assist our industry to get back on its feet. Reform is needed across inner, middle ring and greenfield planning. SUPPLY = DEMAND = AFFORDABILITY into our future.

Most industry groups are looking forward to Red Tape Commissioner Anna Cronin’s findings which, hopefully, will be released imminently, and hopefully contain meaningful recommendations that will be implemented.

The whole industry also needs a re-set. Everyone in the industry must take a haircut on their margins – all the way from the original landowner through contractors, authorities, developers and builders. We need affordability restored if the economy is to recover.

It’s critical that developers keep building product, building lots, because land is the start of the supply chain. Whilst a land development program might employ tens of thousands of workers, when the housing construction starts, employment blossoms into hundreds of thousands of employees across our growth corridors.

It is also critical that banks continue to support those existing buyers who bought the 8500 greenfield lots last year. They must be allowed to settle this year, when their titles issue, otherwise there’ll be no stock for builders to begin house-starts. The Australian Financial Review quoted me on the topic on Monday 1 June.

At the moment, everybody’s treading water with the JobKeeper lifeline but, once that finishes, we’re going to be really relying on activity resuming to keep the Victorian economy going.

The chart also shows where sales are at now, and two lines of possibility going forward:

One is continued no Government Building stimulus and continued very slow sales with potentially increased unemployment postJobKeeper;

Two is a housing stimulus package which would create more optimism. The key to it all working, is people having confidence in their job to build their home. The banks also need to participate and make home loans available to fulfil existing contracts.

Surprisingly, we’re still making reasonable sales. Inquiry has dropped dramatically but those who do inquire are quite serious about buying a house, so the conversion of sales is much stronger. I recently asked a buyer in a greenfield project why he was so keen to buy now. He said that titling was 12 months away and figured that by then builders should be far more competitive with their prices

When people wonder about immigration, it’s important to remember that Australia needs immigration to keep its economic growth going. This is widely recognised by most economists and politicians. The question is when and how. I believe immigration could be resumed earlier rather than later if people were given a definitive virus test – before they jumped on the plane – to ensure they arrive in our country healthy.

The Government’s attempting to get the economy back to the new normal by September, but by then we’ll be in a state of really high unemployment and we’ll really need demand and spending to underpin the recovery.

So when the time comes, the question is: Will people still want to immigrate and will the general population of Australia want them to come?

Victoria effectively had a five to six-year recession from 1989 to 1995 where there was high unemployment and very little economic activity. Unemployment peaked at 11.2 per cent in 1992 and the population was calling for cuts in immigration on the grounds newcomers would be competing for our jobs.

But in reality, the average immigrant who comes to Australia must pass an asset test. They in fact come to Australia ready to spend money, whether starting a business or buying a house or both. Whilst some parts of the population won’t understand the benefits, immigration is essential to the recovery of the economy.

The question is: Will people come? I believe they will come. I believe they will want to come in droves. Australia was previously seen as a great destination but now it will be seen as an even stronger and safer destination.

It will be seen as a destination with a great health system and strong government – as a destination where our cases of coronavirus and deaths have been miniscule compared to many other Western countries in the world.

Our business has taken the situation seriously, Directors have not been drawing income to ensure cashflow to keep our staff employed long term. Staff have been working from home on slightly reduced hours.

We have been working with buyers, assisting them to settle their lots.

Everyone in the industry must roll up their sleeves and do their bit to get our economy functioning again and avoid a seven-year recovery experienced in the last recession.

Keep safe.