The ability of the Australian economy to perform ‘better than expected’ reached superpower proportions in 2017. Building activity drove the Australian economy after the end of the mining boom, but even as housing activity declined, the economy continued to push forward.
The decline in building activity is not uncommon, but for the first time in living memory this hasn’t been driven by a recession, jumps in interest rates or a financial crisis. The cycle has been nudged by the Australian Prudential Regulation Authority (APRA), and state governments with their ill-considered tax hikes on foreign purchasers.
But overwhelmingly the cycle has been driven by market forces: short-term demand has been met so the residential building industry has eased back on the accelerator. Of course there are significant regional exceptions to this picture like Western Australia, the Northern Territory and regional Queensland where their down cycles were driven by the post-resources investment boom hangover.
There is no catastrophe behind the current downturn in residential building, so we see better prospects for national activity to ease rather than collapse in 2018. As always though, a significant driver for consumers to build or renovate is their level of confidence. The year got off to a bad start on this front with yet another media-driven debate about negative gearing and capital gains tax: will prices fall and by how much; and what about rents? As usual all of the experts woke from their new year slumber to contribute to another hasty debate. Pleasingly though, talk of bubbles has mostly gone.
Unhappily this debate about tax reform will go on until the next federal election if not longer. HIA commissioned economic research into these tax issues, which concluded that in the long term prices and rents will both rise from a reduction in the capital gains tax rebate and further restrictions on negative gearing.