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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 (11,500 Views)
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The wheels have fallen off the construction industry: Michael Matusik

By Michael Matusik
Thursday, 29 August 2013

Here is a good question for you.

Which industry is Australia’s largest?

One might think it would be mining, given the amount of airplay it gets. But with about 8,500 business operations you would be way, way off.

Have another go. Public administration? Wrong. Professional services? Incorrect. Retail? No.

The answer is construction, with just under 350,000 businesses operating across the country.

One in every sixth business in Australia builds something.

Sadly, however, the building game must be on the nose because 5,575 construction-related businesses stopped trading over the last 12 months alone.

According to some great work by Craig James and his economic team at Commbank, we know that 1,840 residential property operators closed their doors last year. A further 680 home builders shut up shop. So did the same number of brick layers. Plasterers broke the trend with just 630 operations laying down their trowels.

Talk about the wheels falling off the ute.

Australia’s dwelling construction rate – measured as the number of new homes built per capita – is at record lows.

Since I was knee-high to a grasshopper, the average Aussie build rate has been eight new homes per 1,000 head of Australian population. This rate, like all things in the construction game, has peaked and troughed, but since the mid-1990s it has been on a steady trend down. Today it averages just six.

This might not sound like much. So let me put it to you another way, we are now building 25% less homes than we used to.

New property has never been our first choice. This applies across the spectrum – whether you are buying for the first-time; upgrading or downsizing; or buying for investment.

The statistics suggest that just one in every five first homes purchased is new. It is even less for investors, with 85% buying a resale instead of a new dwelling. Second and subsequent owner-buyers, seem a little keener for something new, with one in four opting to buy new digs rather than something older.

The Commsec analysis also shows that there has been a major increase in the number of Australians starting their own superannuation funds.

Apparently there are now 75,000 superannuation funds in operation across Australia. This segment is growing by about 5,000 new businesses each year.

As a result of this growth – and in direct contrast to residential property operations – Australia’s non-residential property sector is increasing in size, up by 300 new businesses last year, to 57,000 operations Australia-wide.

Also, the bulk of Australian workers are employed by small or medium-sized businesses. In fact, 61% don’t employ any staff at all. A further 24% employ just a few people. Just one in every 20 Australian businesses employs more than 20 people.

As one would expect, most businesses are located in NSW (33%); followed by Victoria (26%); Queensland (20%); Western Australia (10%) and South Australia (7%).

Business numbers grew the most in Victoria (up 8,000 new firms), then followed by NSW (up 4,000) last year. Business numbers fell last year in Queensland; South Australia; Western Australia and Tasmania.

Talking a longer view, there have been 70,000 new business start-ups across Australia over the past five years – 32,500 were in Victoria; 21,500 in NSW; 7,300 in WA and just 4,000 in Queensland.

For more information from the economics team at Commbank, go here.

Job creation – and that means new business operations – is very important when it comes to the overall health of the property market. With new business market shares like this, it is little wonder that the Sydney, Perth and now Melbourne residential markets are doing so well.

There has been very little national conversation about getting more housing starts underway. Sadly, not a peep out of either side of federal politics. Precious little meaningful dialogue is coming from state or local government, too.

Interest rates need to continue falling in order to (hopefully) lift housing starts.

One thing to consider is allowing superannuation funds – with the right caveats – to invest more easily in new housing construction. It is starting to happen. It can be a great and secure investment. Unlocking this potential is one way forward.
Post the September 7th election, it is small and medium-businesses that will make Australia work. Wind back the legislation. Make it easier for us to operate.

It is a 24/7 world – no penalty rates, leave loading, mandatory sick leave or (within reason) minimum set hours. Cut the red tape.

The vast majority (like 99%) of employers aren’t shitty bosses, they reward good staff. Allow us to employ more.

Read more: http://www.propertyobserver.com.au/economy/the-wheels-have-fallen-off-the-construction-industry-michael-matusik/2013082864637
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mel
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The above article makes some impressive and very compelling arguments.

After years of conflicted emotion and misunderstanding I would like to take this opportunity to come out of the closet if it's ok with everyone.

I am mel. And I am keynesian.

ah, that feels so much better
:lol
APF - a place where serious people don't take themselves too seriously. There's nothing else like it.
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Construction industry continues to slump

September 6, 2013 - 9:53AM

Australia’s construction industry continues to struggle despite low interest rates, with activity in the sector falling for the 39th consecutive month.

The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (PCI) fell 0.4 points to 43.7 in August.

An index reading below 50 indicates activity in the sector is falling and the lower the reading, the greater the speed of the decline.

Although the construction industry is still weak, there are signs of a gradual improvement in business conditions, Ai Group director of public policy Peter Burn said.

‘‘On the positive side, the house building sector remains close to the point of stabilisation, with lower interest rates starting to provide some support to levels of activity and new orders within the sector,’’ he said.

‘‘However, clearly we need to see much stronger conditions to offset the slack resulting from the winding down in mining related projects and the distinct weakness that persists in commercial and apartment building activity.’’

Read more: http://www.smh.com.au/business/the-economy/construction-industry-continues-to-slump-20130906-2t8zs.html
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Shadow
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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

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.
Might be worth bumping this again, now that housing construction has just hit a record high.

Housing construction with its 3x multiplier effect has taken over from the mining boom.

The RBA has won. The bulls have won.

The big crash is off the table once more. Sorry bears, you lose again.
Edited by Shadow, 17 Jul 2014, 12:54 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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Veritas
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Shadow
17 Jul 2014, 12:52 PM
Might be worth bumping this again, now that housing construction has just hit a record high.

Housing construction with its 3x multiplier effect has taken over from the mining boom.

The RBA has won. The bulls have won.

The big crash is off the table once more. Sorry bears, you lose again.
It will be just like Ireland!!

We will build houses and sell them to other people who build houses for a living.

What could possible go wrong?
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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Shadow
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Veritas
17 Jul 2014, 12:59 PM
It will be just like Ireland!!

We will build houses and sell them to other people who build houses for a living.

What could possible go wrong?
In Ireland the boom ran for many years before eventually resulting in a glut.

Posted Image

In Australia the construction boom really only kicked off a couple of years ago and is just now hitting record high levels.
Edited by Shadow, 17 Jul 2014, 01:16 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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Drgonzo
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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

architects dont design houses Shadow and your assumptions that rising house prices will lead to a construction boom are questionable.

all rising house prices do is inflate the value of existing homes. this is what the RBA wants because it makes people "feel richer" and spend more money.

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Dr Watson
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Drgonzo
17 Jul 2014, 02:08 PM
architects dont design houses
What do they do?
The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt — Bertrand Russell
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Massive
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Drgonzo
17 Jul 2014, 02:08 PM
architects dont design houses Shadow and your assumptions that rising house prices will lead to a construction boom are questionable.

all rising house prices do is inflate the value of existing homes. this is what the RBA wants because it makes people "feel richer" and spend more money.

affordable more freely available land would be a huge help IMO ... say land cost half as much: people would go out and build new, bigger houses - which will employ more people and they will have room in their budget to buy more stuff to put inside their houses.

As someone who worked as an architect, i dont think i would ever cheer on high priced housing as cause for a boom for the profession. From where I stand having more people with better access to cheap land, to build the homes they desire is what generates activity moreso than a rush in values. Not having to lock capital in the land purchase frees up room to spend elsewhere which is win, win for client and consultant.
Dr Watson
17 Jul 2014, 02:17 PM
What do they do?
they CAN design houses, and many small practices do ... but its a niche market - IMO. Most of the housing market is run by project home developers / building designers who run on bulk.
Edited by Massive, 17 Jul 2014, 02:30 PM.
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Veritas
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Shadow
17 Jul 2014, 01:15 PM
In Ireland the boom ran for many years before eventually resulting in a glut.

Posted Image

In Australia the construction boom really only kicked off a couple of years ago and is just now hitting record high levels.
Well seeing as you maintain that there was no bubble in Ireland before 2002, all the building should have been in line with fundamentals.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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