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Economic Multiplier Effect of Housing - $1 spent on construction generates $3 in general economy
Topic Started: 3 Aug 2013, 11:34 AM (11,492 Views)
Shadow
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Evil Mouzealot Specufestor

This is why the RBA wants house prices to rise and lead to a construction boom.

Housing construction employs architects, builders, plumbers, electricians, as well as the people who supply the raw materials for building. The houses require furnishing, whitegoods, TVs, generating business for many companies. Then you've got the extra business for real estate agents, brokers, lenders, solicitors etc.

For every dollar spent on construction, three dollars worth of activity are generated in the overall economy...

http://www.abs.gov.au/Ausstats/abs@.nsf/94713ad445ff1425ca25682000192af2/ed6220072793785eca256b360003228f!OpenDocument

Quote:
 
THE CONSTRUCTION INDUSTRY'S LINKAGES WITH THE ECONOMY

The industry's flow-on effects to other economic activity

Over and above the direct contribution of construction activity to the economy, it has 'flow-on' impacts on the activities of other industries. The possible size of these impacts can be illustrated using multipliers based on inter-industry flows in input-output tables. For the construction industry the multipliers can be characterised as follows:

the initial effect - an initial $1m of extra output of the construction industry, and related employment in the industry to produce that output;

a production induced effect - the combination of:

the first round effect - the amount of output and employment required from all industries that supply goods and services to the construction industry in order for that industry to produce the initial $1m of extra output;
an industrial support effect - the induced extra output and employment from all industries to support the production of the first round effect;
a consumption induced effect - the subsequent inducement for extra output and employment due to increased spending by the wage and salary earners across all industries arising from the compensation received for their labour as part of the other effects above.

Table 20.9 summarises the multipliers for output and employment in the construction industry. They show that, for every $1m spent on construction output (houses, non-residential buildings, etc.) in 1996-97, a possible $2.9m in output would be generated in the economy as a whole, giving rise to 9 jobs in the construction industry (the initial employment effect), and 37 jobs in the economy as a whole from all effects.

These flow-on effects are made up as follows. The initial effect of the additional construction is $1m. The first round effect for this additional construction would be the increased value of activity of around $0.5m in those businesses manufacturing the materials needed for the additional construction, such as concrete and steel frames. The businesses supplying and servicing the concrete and steel frame businesses, such as aggregate quarrying and raw steel production, experience an increased demand for their products and services. This industrial support effect is estimated to be an additional $0.4m. As activity has increased in the construction industry, as well as in the suppliers to that industry and the suppliers to the suppliers, there is an increase in wages and salaries to employees in this chain. The spending of these wages and salaries induces a further round of consumption effects in other areas of the economy totalling an additional $1m.
Edited by Shadow, 3 Aug 2013, 11:43 AM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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Foxy
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Zero is coming...

Shadow
3 Aug 2013, 11:34 AM
This is why the RBA wants house prices to rise and lead to a construction boom.

For every dollar spent on construction, three dollars worth of activity are generated in the overall economy...

http://www.abs.gov.au/Ausstats/abs@.nsf/94713ad445ff1425ca25682000192af2/ed6220072793785eca256b360003228f!OpenDocument

I think the construction of new houses should be supported.
People need to be housed.
Peter from Perth
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b_b
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Shadow
3 Aug 2013, 11:34 AM
This is why the RBA wants house prices to rise and lead to a construction boom.

For every dollar spent on construction, three dollars worth of activity are generated in the overall economy...

http://www.abs.gov.au/Ausstats/abs@.nsf/94713ad445ff1425ca25682000192af2/ed6220072793785eca256b360003228f!OpenDocument
I think this is an excellent poit much has been made of the decline in mining construction and that housing may not be enough to offset those effects. But this assumes the same multiplier for housing construction and mining investment. Housing always has a higher multiplier because it touches more parts of the ecanomy (the I impacts the C dynamically). Mining investment is a narrow channel and in my opinion has always been an overstated benefit of the Aussie economy.
(S – I) + (T - G) + (M - X) = 0
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genX
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Shadow
3 Aug 2013, 11:34 AM
This is why the RBA wants house prices to rise and lead to a construction boom.

Housing construction employs architects, builders, plumbers, electricians, as well as the people who supply the raw materials for building.
You don't need rising house prices to get that effect. If you are committed to broken window economics then you simply start burning houses down, and construction can begin on their replacements.
Quote:
 
The houses require furnishing, whitegoods, TVs, generating business for many companies. Then you've got the extra business for real estate agents, brokers, lenders, solicitors etc.
And so does burning houses to the ground. You need to replace the furnishings, whitegoods and TVs. Insurance companies employ more people to process claims, premiums rise which leads to rising GDP. Solicitors assist with claims.
Quote:
 
For every dollar spent on construction, three dollars worth of activity are generated in the overall economy...
All of which is COST. The net effect is zero. If there were no construction, the dollars would be spent on something else. Rising property prices means rising rents, which means reduced bottom line for businesses, especially small businesses who employ nearly half the workforce. Rising property prices also put pressure on wages to rise, which small businesses bear the brunt of also. The RBA's commitment to rising house prices is a commitment to higher unemployment as small businesses shut down because they can no longer operate profitably.

Your post answers my question though. The RBA is acting to transfer wealth from the productive sector of the economy to the asset owners.
Edited by genX, 3 Aug 2013, 12:05 PM.
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b_b
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genX
3 Aug 2013, 12:03 PM
You don't need rising house prices to get that effect. If you are committed to broken window economics then you simply start burning houses down, and construction can begin on their replacements.

And so does burning houses to the ground. You need to replace the furnishings, whitegoods and TVs. Insurance companies employ more people to process claims, premiums rise which leads to rising GDP. Solicitors assist with claims.

All of which is COST. The net effect is zero. If there were no construction, the dollars would be spent on something else. Rising property prices means rising rents, which means reduced bottom line for businesses, especially small businesses who employ nearly half the workforce. Rising property prices also put pressure on wages to rise, which small businesses bear the brunt of also. The RBA's commitment to rising house prices is a commitment to higher unemployment as small businesses shut down because they can no longer operate profitably.

Your post answers my question though. The RBA is acting to transfer wealth from the productive sector of the economy to the asset owners.
You have it all arse about.

The analogy of broken window is wrong. The net effect of a housing constrction cycle is not zero. It's more houses. Houses we actually need given a rising population. More houses mean more choice for renters and therefor limits rent increases.
(S – I) + (T - G) + (M - X) = 0
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Foxy
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Zero is coming...

genX
3 Aug 2013, 12:03 PM
You don't need rising house prices to get that effect. If you are committed to broken window economics then you simply start burning houses down, and construction can begin on their replacements.

And so does burning houses to the ground. You need to replace the furnishings, whitegoods and TVs. Insurance companies employ more people to process claims, premiums rise which leads to rising GDP. Solicitors assist with claims.

All of which is COST. The net effect is zero. If there were no construction, the dollars would be spent on something else. Rising property prices means rising rents, which means reduced bottom line for businesses, especially small businesses who employ nearly half the workforce. Rising property prices also put pressure on wages to rise, which small businesses bear the brunt of also. The RBA's commitment to rising house prices is a commitment to higher unemployment as small businesses shut down because they can no longer operate profitably.

Your post answers my question though. The RBA is acting to transfer wealth from the productive sector of the economy to the asset owners.
Well,
If you have ever been to Orchard towers when the American fleet is in town you would know that the girls are in high demand.
The deals are tighter so to speak.
When the fleet leaves and demand slackens,
Well so does the terms of the deals.
Supply and demand.
Peter
Edited by Foxy, 3 Aug 2013, 12:13 PM.
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genX
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b_b
3 Aug 2013, 12:12 PM
The analogy of broken window is wrong. The net effect of a housing constrction cycle is not zero. It's more houses. Houses we actually need given a rising population. More houses mean more choice for renters and therefor limits rent increases.
Okaaayyy ... so investors are going to pay MORE for a house that they can rent out for LESS. Is this how you invest your own money, or do you just recommend it to others?
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Shadow
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genX
3 Aug 2013, 12:42 PM
Okaaayyy ... so investors are going to pay MORE for a house that they can rent out for LESS. Is this how you invest your own money, or do you just recommend it to others?
Not sure how you arrive at that conclusion from bb's post.

For a start, most buyers are owner-occupiers.

Secondly, investors will generally pay as little as possible when buying, and will then charge as much rent as possible.

Investors won't intentionally set out to 'pay MORE for a house that they can rent out for LESS'.

But if prices are rising faster than rents then they are forced to accept a lower yield if they want to invest.
genX
3 Aug 2013, 12:03 PM
You don't need rising house prices to get that effect. If you are committed to broken window economics then you simply start burning houses down, and construction can begin on their replacements.

And so does burning houses to the ground. You need to replace the furnishings, whitegoods and TVs. Insurance companies employ more people to process claims, premiums rise which leads to rising GDP. Solicitors assist with claims.
Do you really believe it would be politically palatable to burn down houses? And how would this improve supply?

Quote:
 
The RBA is acting to transfer wealth from the productive sector of the economy to the asset owners.
Housing is the most productive sector of the economy...

Housing is Productive - Australian Property Market Productivity

How productive would you be in your job if you didn't have a dwelling to live in?
Edited by Shadow, 3 Aug 2013, 01:31 PM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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John Frum
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Shadow
3 Aug 2013, 11:34 AM
This is why the RBA wants house prices to rise and lead to a construction boom.

Housing construction employs architects, builders, plumbers, electricians, as well as the people who supply the raw materials for building. The houses require furnishing, whitegoods, TVs, generating business for many companies. Then you've got the extra business for real estate agents, brokers, lenders, solicitors etc.

For every dollar spent on construction, three dollars worth of activity are generated in the overall economy...

http://www.abs.gov.au/Ausstats/abs@.nsf/94713ad445ff1425ca25682000192af2/ed6220072793785eca256b360003228f!OpenDocument

This is completely foolish - property prices have to come down a long way before housing becomes a viable industry here, and even then unless we export our land (they would if they could!) it won't be anything like the self-sustaining cash-cow industry that you describe due to the reason genX gave you.

Exposure to housing in this country is based on the HUGE leg-up that the mining industry gave us, which has trickled down into the rest of the economy in the form of big gov't surpluses and high wages. Once mining capex comes off the boil and commodity prices start to drop the game is up, as maintaining the high wages that everyone needs to pay huge mortgages just prices us out of the global market for everything.

The only export that could replace mining in profitability to keep us well paid is our cleverness, unfortunately after a decade of having China paying us huge sums of money for dirt we've let that one slip.

http://en.wikipedia.org/wiki/Dutch_disease

Your post is the perfect case study in bull macro-myopia.
Edited by John Frum, 3 Aug 2013, 02:27 PM.
"It were not best that we should all think alike; it is difference of opinion that makes horse races." - Mark Twain on why he avoids discussing house prices over at MacroBusiness.
"Buy land, they're not making any more of it." - Georgist Land Tax proponent Mark Twain laughing in his grave at humourless idiots like skamy that continually use this quip to justify housing bubbles.
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herbie
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I think one point that's worth mentioning is that it's all debt based - And as such can tend to get less efficient at stimulating over time and to even get a bit wobbly on occasion - With the fallout from debt based housing busts (should one follow a boom) seeming to be particularly nasty.

Hey, as Stephens says “I am referring of course to a boom in credit, which saw a very significant increase in borrowing by households in particular, and a rise in asset values, especially dwellings.”

Source: http://www.rba.gov.au/speeches/2013/sp-gov-300713.html

Longer quote re same to give a bit more context maybe? : "The title of this talk, ‘Economic Policy after the Booms’, uses the plural quite deliberately. There were two ‘booms’. Before the mining boom, or at least before its full flowering from about the middle of last decade, there was an earlier boom. It was global, but Australians took part in it. I am referring of course to a boom in credit, which saw a very significant increase in borrowing by households in particular, and a rise in asset values, especially dwellings. This was associated with a lengthy period of unusually strong growth in consumption.

This boom did not end in Australia as painfully as it did in some other places, but end it did."

And yes, I did notice that the boss NAB dude would like to see us have more debt ta, please ...

Shadow
3 Aug 2013, 01:20 PM
How productive would you be in your job if you didn't have a dwelling to live in?

Think that's a bit of a bull furphy mate - A "dwelling" yes; But not the sort of dwelling most/lots(?) of Aussies seem to aspire to - And that all the vested interests of gov and banks and developers and builders etc seem to want them to continue to aspire too - Truth be told, one can be just as productive living in a caravan providing it's close to work 'n the park manager chucks out the rowdies who might otherwise keep you awake at night ... Is my guess.

But if one wants to base their economy on Houses 'n Holes 'n Debt, then yep, we all obviously MUST need lovely big 'dwellings' close to work to be productive - Is how the story will continue to be told I guess.
Edited by herbie, 3 Aug 2013, 02:23 PM.
A Professional Demographer to an amateur demographer: "negative natural increase will never outweigh the positive net migration"
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