By Nerida Conisbee
New figures from the Australian Bureau of Statistics show Australia’s economy shrank 0.3% in the March quarter as the coronavirus pandemic gripped the nation, bringing certainty that the country will suffer its first recession in 29 years.
But as COVID-19 restrictions ease and governments scramble to develop a road map to economic recovery, Australia’s property industry beams hope for the future.
According to a 2018 study by the AEC Group, on behalf of the Property Council of Australia, the property industry employs more than 1.4 million people, more than any other sector in the country, and is the biggest direct contributor to gross domestic product making up $87.9 billion annually in combined tax revenues.
However, the property industry is not immune to the impacts of COVID-19, and while expensive established house prices will likely come out relatively unscathed, it’s expected the building industry will take a significant amount of time to recover.
Property investors and offshore buyers are not buying like they used to, which is bad news for new development. At the same time, sellers of established property are also showing low levels of confidence and this lack of stock turnover will likely impact many parts of the economy, as well as government revenues.
While the property industry has taken a hit during the pandemic, there are six ways it could act as a secret weapon to help boost economic recovery post-COVID-19.
1. Stamp duty reforms
Stamp duty is undoubtedly one of Australia’s most unpopular taxes, which prevents people from buying and selling leading to a lack of stock turnover.
This doesn’t just mean less work for real estate agents and fewer listings for property portals – it also means that people spend less, as selling and buying property increases retail spending; it prevents people moving to housing that better suits their needs and; it makes housing more expensive.
The tax is problematic for state and territory governments as its reliance on property transactions makes annual tax revenues highly variable. This year will be a particularly bad one for government coffers with very few sales due to COVID-19.
A positive solution would be to move away from stamp duty towards a broad-based land tax system. However, this process would take years, which is not ideal when trying to re-boot the economy.
At a more targeted level, stamp duty exemptions are used by many state and territory governments to get first-home buyers in to the market. At the very least, these exemptions could be extended for at least the remainder of the year.
2. Incentives for the development industry
The development pipeline has been disrupted significantly during the pandemic and most forecasters are now predicting a turnaround in new house and apartment development will not happen until 2022.
If correct this will have significant negative impacts on employment within the sector, but there are ways to avoid this such as the provision of a government new home grant between $40,000 and $50,000.
New home grants are already provided to first-home buyers in many states and territories, but this extension would reach upgraders and potentially investors.
According to the Australian Construction Industry Forum, pick up in house and land development will happen sooner than new apartment development. This is consistent with enquiry data on realestate.com.au, which shows enquiry for house and land projects is far more resilient than new apartments.
A key reason for this is that first-home buyers – predominantly house and land buyers – are very active at the moment. On the flip side, both local and offshore investors are showing very low levels of activity, which is having a significant impact given these buyers usually dominate new apartment purchases.
Changes to taxation would be an effective way to get local and offshore investors back in to the new development market. In most states, offshore buyers pay additional taxes compared with local buyers and removing this would make Australian property far more attractive to this group.
3. More relaxed planning restrictions
Easing planning restrictions could have an enormous impact on economic growth.
An article in The Economist earlier this year estimated, if the cities of New York, San Francisco and San Jose relaxed planning rules, it would lead to US GDP being 4% higher. An equivalent estimate is not available in Australia, but the US example demonstrates the substantial impact poor planning processes have on affordability and overall economic growth.
In most states and territories, planning approvals are already being fast-tracked and this is helping to get new projects off the ground. At the end of April, the New South Wales Government announced 24 projects earmarked for fast-tracking, meanwhile the Victorian Government this month approved projects with an end value of $2.5 billion.
While there has been some criticism that these approvals don’t help with demand, the time taken between approval and completion may make this less of a problem in 18 months to two years time when they are completed.
4. A boost to social infrastructure
Australia has a shortage of public housing, and in the past, economic downturns have led to a pick up in government spending on this sector.
There have already been several announcements in relation to public housing during COVID-19 including in Victoria earlier this month where the state government announced plans for more than 2000 new units.
Meanwhile, the New South Wales government has launched a $33 million pilot plan to get commercial builders developing public housing, in a bid to rebuild some of the 125,000 public housing stock.
While building public housing is not necessarily the most popular option for developers, it does achieve positive social outcomes for state governments.
5. A push to increase migration levels
The coronavirus crisis has closed Australia’s borders and, at its most extreme, the Australian Treasury has estimated that migration could drop by 85% in the next 12 months. While this is just an estimate, housing demand is fundamentally driven by population growth and with Australia’s natural rate of growth being relatively low, the country is heavily reliant on migrants to drive new construction.
At a more localised level, the type of new arrivals to Australia also has an impact on the type of housing being developed. The new apartment sector in big cities, close to universities has largely been driven by migrants on student visas.
New house and land developments on the urban fringe have also been driven by increasing numbers of new arrivals on skilled migrant and family visas.
Changes to migration levels are highly political but any increases would mean greater levels of activity for the construction industry.
6. Better access to cheaper finance
Banks are cashed up with $90bn worth of stimulus from the Reserve Bank of Australia and keen to restore their reputations after the Financial Services Royal Commission – but they are nervous, particularly about rising unemployment rates so forcing banks to take on higher levels of risk is not really sensible at this time.
The RBA could potentially move interest rates into negative, making mortgage rates close to zero or in the case of what has been done in Denmark, negative.
While providing cheap, easy finance does generate activity in the housing market, it is a strategy that needs to be watched carefully at the moment given rising unemployment.
Originally published as Property to the rescue with Australia set to suffer first recession in decades