Structural shift

There’s a prevailing myth that productivity in detached home building has declined in recent decades. This is based on a misunderstanding of Australian Bureau of Statistics (ABS) data and logic errors. Productivity is a measure of output from an industry divided by the inputs. The following outlines the challenges and errors in measuring detached home building inputs and outputs.

There has been a decline in labour force productivity within the home building industry in Australia. This is then suggested to contribute to the deterioration in the housing supply. These two contentions are premised on the basis that outputs from detached home building have remained constant over recent decades while labour inputs have increased over the same period. This is erroneous and ignores the labour structure in our industry.

Measuring outputs

Two common errors are made when measuring detached home building outputs in Australia. The chart below shows new home starts and completions since the 1980s. The figure below shows the number of houses completed has remained stable over decades. 

Errors in measuring productivity: Outputs

The first error in assessing outputs from detached home building sector is that a home built in the 1980s bears little resemblance to a home built in 2024. A ’70s home, clad in asbestos, with little insulation, typically three bedrooms without a garage, is significantly different from a 2020s home. It’s compliant with the Building Code of Australia, achieves a 7-star energy rating, has more than four bedrooms, a garage under the roofline, wheelchair accessible, with power to charge an electric vehicle.

The difference in the type of homes built over decades makes it difficult to use approvals, commencements or completions of houses as a measure of outputs from the industry. The second error is that they fail to incorporate the growth in the volume of established homes. In 1986, there were only 5.8 million total dwellings in Australia.

Since then, the stock of dwellings has increased, with 10.9 million dwellings in mid-2022. Hence, the size of the renovation segment has become larger. As the pool of established houses increased, so too did the labour required to maintain and renovate this pool of homes.

Errors in measuring productivity: Inputs

There are two main contentions made to demonstrate that inputs to detached house building have increased. These are:

1. Employment has increased: Residential building companies employ more people in 2024 than in the past but build the same number of homes. Therefore, productivity has declined.
2. There are more tradies in the economy: There are more skilled trades in Australia in 2024 than in the past, but we build the same number of homes. Therefore, productivity has declined.

Contention one: Productivity is declining because the number of people employed by building companies has increased, but the volume of homes completed has remained stable. 

The figure above is the ABS Labour Force Detailed Data (Cat. No. 6291.0) on the number employed in the residential building construction sector (ANZSIC Group 301). Prima facie analysis would suggest that the number of people employed by residential building businesses has increased, and given that the number of homes completed has remained stable, therefore productivity in the industry has declined.

This contention is wrong because:

• The number employed in ANZSIC 301 measures people directly employed by building companies. This includes lawyers, accountants, sales staff, administrators, etc. It’s not a complete stocktake of those skilled trades engaged to undertake work onsite, such as carpenters, joiners, electricians, architects, engineers, etc.
• Detached home building in Australia is undertaken by subcontractors who are paid to complete tasks. They are generally not directly employed – they subcontract to businesses. For this reason, they are largely excluded from the ANZSIC 301 measure of those directly employed by building businesses. Some skilled tradespeople are directly employed by building companies, but it’s not the dominant form of engaging skilled trades.
• The rise in ‘supply and install’ arrangements as vertical integration has also grown. ‘Supply and install’ describes an arrangement where the supplier of a product, for example, bricks, also supplies the labour to install the bricks. Under these circumstances, skilled tradespeople are more likely to be directly employed by the original equipment manufacturer, which will not fall under the definition of a ‘building business’. Moreover, the employment growth recorded by the ABS as part of ANZSIC 301 largely reflects changes in industry structure. These changes include consolidation, vertical integration and increased pre-fabrication within the detached home building sector. These structural changes have occurred largely since the GFC and are associated with increased foreign direct investment within building businesses.
• One in 10 detached houses built in Australia in 2023 was built by an overseas-owned company. The emergence of large investors in the sector has also seen the trend toward vertical integration and, therefore, direct employment. Moreover, as the industry moved to more pre-fabrication, more skilled trades were employed directly in off-site manufacturing facilities, and fewer skilled trades are engaged onsite.

It would be an error to conclude that this shift toward pre-fabrication, or vertical integration, is evidence of a decline in productivity in the sector.

Contention two: Productivity is declining because the number of tradies has increased, but the volume of homes completed has remained stable. 

When looking at the ABS Labour Force Detailed Data (Cat. No. 6291.0) on the number employed in the Construction Services sector (ANZSIC Subdivision 32), it shows that the number of skilled tradespeople engaged in building homes has increased. Given that the number of dwellings completed has remained stable, productivity in the industry has declined.

This contention is wrong because:

• The number of employed persons in ANZSIC 32 Construction Services does not accurately reflect the number of skilled tradespeople who build a house because non-residential building sectors also use these services.
• There are more skilled tradespeople in the economy now than in the 1970s because they are employed in non-residential construction (i.e. hospitals, schools, commercial, civil) and mining.
• The growth in the number of skilled tradespeople engaged in the economy more closely reflects the increase in the Australian mining sector, which is a large employer of the same tradespeople, than the growth in residential house building.

State of productivity

The public discussion examining the state of productivity can be easily misrepresented. Measures of the inputs and outputs of the industry are difficult to estimate and, even then, can be easily misunderstood.

This opens the question of how to measure productivity, such as time to build or gross output. These would require a more extensive analysis of data that may not have a sufficient history or may not be publicly available.

International productivity comparisons are also challenging, given that building sites are largely accessible year-round. Meanwhile, many northern hemisphere countries have shorter years due to weather, requiring a larger volume of pre-fabrication. For these reasons, it’s an error to conclude that there is a need for productivity reforms in the detached home building sector based on the evidence presented above.

Even if measured accurately, commentators have also made the error of assessment when concluding that a growth in those directly employed by building businesses is increasing while the volume of homes built remains constant. This is because a change in employment from direct employment to subcontracting, or vice versa, does not by itself indicate a change in productivity.

Productivity improvements in the residential building industry will likely come from removing the most significant market failure – unnecessary government intervention.

First published 27 November 2024