The federal government’s target of building 1.2 million homes over five years began in July 2024. However, the recent subject of debate in the public domain is productivity in the home building industry. The contention is that there are more skilled trades in the economy than in the 1990s, but the number of homes completed has not risen by the same proportion.

Many arguments, data, and conclusions that the home building industry is inefficient are misleading or simply incorrect. The purpose of this article is to address some of these misconceptions and demonstrate that home building is a highly productive industry.

First, it’s time to get some of the economic jargon out the way. Simply defined, productivity is a measure of the outputs of an industry divided against some input, such as labour or capital. Below is a reader’s cheat sheet for identifying movements in productivity:

• There’s an increase in productivity when more outputs are produced by the same number or fewer inputs.
• There’s a decline in productivity when fewer outputs are produced by the same number or more inputs.
• There’s no change in productivity when the number of outputs changes at the same rate as the number of inputs.

It sounds simple but the dilemma with measuring productivity in the home building industry is that the only available analyses from government agencies are too broad. Data published by the Australian Bureau of Statistics (ABS) and the Productivity Commission reflect that of the overall construction industry. This data includes non-residential building, heavy and civil engineering construction, and construction services, not just home building.

Additionally, concocting measures of home building productivity has its own challenges from both an output and input perspective. The wealth of publicly available data on home building outputs, whether through ABS Approvals or Building Activity data, does not account for quality changes in the typical home through the years. With data on inputs, such as the results of the ABS Labour Force Survey, there is also difficulty measuring only those directly involved in building a home.

Beginning with outputs

It’s difficult to compare a home built in the 1970s to one built in the 2020s: the typical 1970s home has less insulation, fewer bedrooms, a separate garage, and fewer amenities than the 2020s home. Homes in this decade must comply with the Building Code of Australia, achieve 7-star energy ratings and have more bedrooms, specialised rooms and modern features.

As the standard of living of the typical Australian household increased over the decades, so did their demands of the family home. This increase in complexity is driven by both consumer demands and government regulation through the Building Code of Australia. The change in the quality of homes makes it difficult to compare a house approved, commenced or completed many decades ago to one built today.

Analysis by the Australian Productivity Commission on the labour cost of building a home more than three decades ago compared to recent years revealed a 41.3 per cent increase in the number of hours required to build a home. Much of this comes from increased complexity and quality of homes built today.

Therefore, public analysis of ABS Building Activity data comparing the volume of homes in decades past to that in the 2020s needs to consider that it’s not an ‘apples-to-apples’ comparison of outputs. Moreover, the output of the home building industry is not just new homes – it also includes renovation work. The doubling of Australia’s dwelling stock from 4.6 million in 1981 to 10.9 million in 2021 means more homes will require maintenance and renovation, which is not accounted for in new home completion data.

On inputs

There appears to be an increased number of people directly employed by the residential building industry, as well as the number of skilled trades in the economy compared to that in the 1990s. Commentators conclude that outputs have remained flat despite the increased number of skilled trades, so productivity has declined. This, too, is incorrect. Especially given we have just established it’s difficult to compare outputs across time periods, not to mention other reasons we have yet to explore.

Those who work in home building know very well that the industry primarily engages skilled trades on an independent contracting basis, arguably the most efficient way of managing work. Home building requires different skilled trades at various times, so directly employing these workers would be incredibly inefficient (for both the building business and the tradesperson).

Skilled trades for home building are paid by their scope of work, as opposed to earning an hourly wage or paid a salary as in other industries. This key area confuses many who misinterpret ABS Labour Force data, which measures direct employment. Those counted as employed by the home building industry will also include occupations not directly involved in construction. It will also reflect changes to the industry’s structure, such as regulatory burdens resulting in increased administrative tasks, as well as the increase in pre-fabrication.

The increased number of skilled tradespeople compared to the 1970s reflects a growing economy, servicing various industries. This partly reflects growth in Australia’s mining and civil construction sectors, which engage the same skilled trades (i.e. electricians) as the residential building industry.

Lastly, a key constraint to home building that often gets forgotten is the taxes and other costs imposed on new homes by governments. The Centre for International Economics (CIE) analysed these imposts on new homes, finding that in Greater Sydney, taxes, fees and charges cost as much as half of a new house and land package. The current median house price in Sydney is $1.4 million, so on an equivalent new house and land package, that would include:

• Almost $300,000 in statutory taxes such as stamp duty, land tax and GST
• Around $370,000 in regulatory costs due to government policies that restrict land and housing supply relative to demand
• Almost $30,000 in excessive charges where the price charged for government services or infrastructure is more than the resources required to provide these items.

If the government was keen to identify and resolve productivity challenges for the industry, it should focus on the 50 per cent of government-related costs that burden new home buyers. Significant productivity improvements will come from removing unnecessary government intervention rather than tinkering with the efficient structure within which the industry operates.

First published on 20 September 2024.