Economic Analysis of Australian Construction Industry
Verified
Added on  2023/01/17
|9
|3130
|43
AI Summary
This paper examines the performance of the Australian housing industry from an economic perspective. It discusses the industry background, market structure, factors influencing demand and supply, and the impacts of events on the industry.
Contribute Materials
Your contribution can guide someone’s learning journey. Share your
documents today.
Australian Housing Industry1 Economic analysis of the Australian Construction Industry by Student Name Class & Course Professor University The City & State Date
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
Australian Housing Industry2 Table of Contents 1.0.Introduction.................................................................................................................................3 2.0.Industry background.................................................................................................................3 3.0.The market structure of the industry....................................................................................4 3.1.The characteristics of the industry.........................................................................................4 3.2.The market leaders in the industry........................................................................................4 4.0.Demand, supply and Elasticity in the housing industry.................................................5 4.1.Factors that influence demand of housing...........................................................................5 4.2.Factors that influence supply of housing..............................................................................5 4.3.Demand elasticity for the housing industry...........................................................................6 5.0.Impacts of an event on the industry..........................................................................................6 5.1.Fall in house prices..................................................................................................................6 5.2.Fall in price and the market demand and supply.................................................................6 5.3.Effect of the event on the market price and quantity..........................................................6 6.0.Conclusion...................................................................................................................................7 7.0.List of References......................................................................................................................8
Australian Housing Industry3 Economic analysis of the Australian Construction Industry 1.0.Introduction The housing/ construction industry is a significant contributor to the Australian Gross Domestic Product (GDP). The performance of the industry is influenced by numerous market/ economic factors. Falling rates of interests and a rising population have positively contributed to the growth in the industry. On the other hand, decreasing affordability of mortgages have forced consumers to shift their preferences towards apartments. The increasing trend of foreign investors exiting the market because high construction costs also reduce the demand for houses. These factors cause a fluctuation in the performance of the industry(Basil, 2019). This paper examines the performance of the Australian housing industry from an economic perspective. The paper is divided into several sections. The introductory section examines the industry background. The second section evaluates the industry's market structure. The third section discusses factors that influence the demand, supply, and elasticity in the market. The fourth section investigates a critical event that has impacted the performance of the industry in the recent past. 2.0.Industry background The construction industry is rated among the most significant contributors to Australian economic growth. The industry grew by 9.3% in 2018. It is expected that the rapid growth of the industry will increase the industry's share of the GDP, increase revenue and create more employment opportunities(Smith, 2019). Several factors influence the performance of the industry. a)The 1.6% annual population growth rate increases the demand for new residential and commercial houses. The population is caused by a 62% overseas migration and 38% natural births. b)The demand for new constructions is high in urban areas. Melbourne and Sydney house 40% of the nation's population. c)The construction industry contributes to 8% which is equivalent to $134.2 billion of Australian GDP. The investment in the industry is expected to grow in value, productivity, and size(McGowan, 2019). d)The number of active projects increased by 2% in 2018 and is expected to continue growing in the next five years. The growth is fuelled by effective, efficient and innovative technology. e)The employment growth rate grows by 3% annually. Approximately 1.1 million people are employed in Australia in a different capacity. Seventy-four thousand seven hundred twenty-five people are employed on a full-time basis. f)The industry has invented a construction software which has helps to save over $25 billion annually. g)The demand for commercial houses is expected to grow by 9.3% per annum in the next five years. The annual demand for new business constructions stands at 44,310 nationally with a higher demand in Sydney and Melbourne. h)The construction industry is rated among the largest contributors of the Australian economic growth. The industry grew by 9.3% in 2018. It is expected that the rapid growth of the industry will increase the industry’s share of the GDP, increase revenue and create more employment opportunities. The performance of the industry is influenced by several factors(Cartwright, 2018).
Australian Housing Industry4 3.0.The market structure of the industry 3.1.The characteristics of the industry The structure of the Australian construction industry can be examined using features such a barrier for new entrants, level of competition, number of players and sectors. The industry has two levels of operations based on the barriers for a new entrant. The first level comprises of small firms that experience a low level of the barrier(Scutt, 2018). The entrant barrier for small companies continues to drop because of specialized subcontractors, and a large number of small firms. How the contractors operating in the small firms level lacks the capability and specialty of handling large projects(Dufty-Jones, 2016, p. 143). The second level of operation comprises of large firms. Construction works at this level of operation are offered based on technical capacity, track record, and financial capacity. Considering the risks associated with operating at this level makes it hard to new entrants because companies have to manage their ability to deliver. Therefore, there are few companies/contractors with both the financial and technical expertise to deliver(McGowan, 2019, p. 53). The level of competition in the Australian construction company is monopolistic. The industry comprises of less than ten large companies operating in the national level and a thousand small and medium companies operating in the local markets in Australia(Wang, 2018, p. 62). The small and medium companies operate specific types of constructions. The companies have developed a close relationship with clients who offer them repetitive jobs and referrals. Therefore, small and medium-sized companies fit the perfect competition model. Contractors depend on labour based jobs doe concreting, bricklaying, framework, and steel fixing. Lastly, large companies in the industry enjoy monopoly at the national level(Bardhan, 2011, p. 91). The industry is divided into three sectors namely engineering, residential building, and non- residential constructions. The engineering sector comprises of bridge and road constructions, processing plants, and oil and gas pipelines — the residential building sector focus on the residential housing market. Lastly, the non-residential sector engage in the development of commercial houses such as hotels, factories, offices, shops, and educational facilities (Tomlinson, 2012, p. 87). 3.2.The market leaders in the industry There are at least 71,000 listed building and construction companies operating in Australia. Over 97% of these companies work in the small and medium level of operation. Based on the 2018 financial year, the top ten companies in the industry based on size are. Listin g Name of the CompanyValue of constructs awarded in 2018 ($ million) Dominant Sector 1Lend Lease Group4,936Engineering 2Thiess Pty Ltd2,876Engineering 3Brookfield Multiplex2,505Commercial 4BGC Group (Australia) Pty Ltd1,608Commercial 5Leighton Contractors Pty Ltd1,552Residential and Commercial 6Watpac Australia Pty Ltd1,440Commercial 7John Holland Pty Ltd1,382Residential and
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
Australian Housing Industry5 Commercial 8Downer EDI Works Pty Ltd1,115Engineering 9Parkview Group (Australia) Pty Ltd980Residential 10Hansen Yuncken Pty Ltd912Residential 4.0.Demand, supply and Elasticity in the housing industry 4.1.Factors that influence demand of housing Population and Interest rates are the leading factors that influence the demand for housing in Australia. a)Population Population growth causes an increase in the demand for housing. The resident population increases by approximately 250,000 annually. This population requires residential houses to live in and commercial houses to operate their business. Therefore new dwellings must be constructed to meet the demand created by this population. The international migrants rent homes for several years before purchasing a permanent resident. This creates a new demand for rental properties per annum. A reduction in the population growth caused by social and economic factors also reduce the demand for new houses(Paris, 2017, p. 56). b)Interest rates Interest rates influence the cost of capital which plays a critical role in the cost of constructing houses. The interest rate of a mortgage has reduced from 17% in the early 19090s to 6.8% in 2018. Financial deregulation has increased the competition between the financial lenders causing a further reduction of the interest rates charged on borrowers. The decline of the mortgage interests doubled the ability of potential house owners to serve their loans. Generally, an increase in the interest rate reduces the ability to help loans and hence lowering the demand for new housing. On the other hand, a decrease in the interest rate increases the demand for new houses(Lindeman, 2010, p. 91). 4.2.Factors that influence supply of housing Several factors influence the supply of new housing. First, Land use and planning restrictions reduce the ability of building and construction companies to build new companies. For example, the Australian government has restricted the building of houses on the green-belt land in the Urban Centers(IBP Inc., 2012, p. 93). Second, the local population in some areas prefer to in spacious neighbourhoods. Such a population would oppose the construction of new houses in the locality that would lead to congestion. The opposition of the local population is slowly pushing contractors from central business districts towards the outskirts of urban Centers which are not fully developed (Pettinger, 2017). Third, annual revenue/ profitability realised from investing in new houses also influence the level of supply. Contractors build more homes during the boom when the demand is high while the construction cost is considered to be relatively low. Advance in technology also increases the supply of new homes. Construction software contributes to the reduction of cost of construction leading to more supply of houses(Chocolate, 2017).
Australian Housing Industry6 4.3.Demand elasticity for the housing industry The elasticity of demand is an economic concept which analysis how the demand for a product is influenced by the changes in factors such as price and income. Price elasticity of demand examines how to change in price influence the demand for a product or service. Likewise, income elasticity of demand examines how to change in income influence the demand for a product or service(Kokemuller, 2019). a)Price elasticity of demand in the housing industry Price elasticity of demand in the housing industry is influenced by the availability of houses, the need for home buyers, availability of substitutes, and interest rates loans. The price elasticity of demand in the industry is highly elastic. The changing size of the household influences elasticity. Many people can afford houses when the price is lower. Young adults move from their parent homes to buy or rent their houses. On the other hand, many people cannot afford houses when the price increases. Young adults who left their parents' homes when the price was lower will come back(Kokemuller, 2019). b)Income elasticity of demand in the housing industry Change in income also influences the demand for new houses. There is a positive correlation between an increase in revenue and the demand for new houses. The demand for new dwellings grows with a rise in real income. Therefore the income elasticity of demand is very elastic. Income elasticity varies with the type of housing property. For instance, luxury houses have the highest elasticity(Kokemuller, 2019). 5.0.Impacts of an event on the industry 5.1.Fall in house prices The price of houses in Australia fell significantly in 2018. The prices are expected to fall even further in 2019. The Melbourne and Sydney housing markets were the worst affected by the fall in price. The price of houses in Sydney and Melbourne markets fell by 9.9% and 8.4% respectively. The two markets are expected to fall further by 3% in 2019. The price fell nationally by 6.5%. The trend in price is has a direct impact on the affordability and profitability of the housing industry(Scutt, 2018). 5.2.Fall in price and the market demand and supply As mentioned above, the fall in the price of houses influences the market demand and supply. Many Australian will have the ability to buy or rent houses because of the increased level of affordability. Second, the profitability enjoyed by contractors/ investors would fall. Investors would be discouraged from investing in the industry until the prices increase again. The market demand would increase while the market supply would decrease(Cartwright, 2018). 5.3.Effect of the event on the market price and quantity Fall in price favours house buyers and harm house constructors. Fall in price means that consumers will now afford houses that they would not afford three years ago. Investors want valuable returns for their investments. The lower the house prices, the lower the interest investors have in the market. Few houses will be constructed if the cost of construction does not drop. Therefore, the market price of houses will continue reducing. Likewise, the quantity of houses supplied in the market will decrease(Cartwright, 2018).
Australian Housing Industry7 The change market demand for new dwellings can be presented diagrammatically as shown below. 200500 350400 400320 550260 600180 150200250300350400450500550600650 0 100 200 300 400 500 600 Qt Demanded in'000 Sources: (Author, 2019) 6.0.Conclusion The study has established several factors that influence the performance of the Australian housing/ construction industry. Both economic and social factors influence the industry. The industry is divided into three sectors namely engineering, residential building, and non- residential constructions. Although the industry has experienced positive growth in the past five years, the national market has posted a 6% price fall in 2018. The price is expected to fall further between 2-3% in 2019. The fall in price is likely to improve the affordability of the houses in the industry. Investors are interested in maximising their wealth. Therefore, investors will shy away from the market because of low profitability level. For example, the market has experienced the withdrawal of foreign investors who have lost trust in the housing industry. Some of the factors that influence the price and the performance of the industry include population growth, income growth, interest rates, availability of housing, and profitability. 7.0.List of References
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
Australian Housing Industry8 Bardhan, A., 2011.Global Housing Markets: Crises, Policies, and Institutions.New York: John Wiley & Sons. Basil, A., 2019.Australian Construction Sector May Decline Further Amid Slowing New Orders.[Online] Available at:https://en.businesstimes.cn/articles/108899/20190308/australian-construction- sector-may-decline-further-amid-slowing-new-orders.htm [Accessed 18 May 2019]. Cartwright, D., 2018.10 Statistics Defining the Australian Construction Industry.[Online] Available at:https://www.buildsoft.com.au/blog/10-statistics-defining-the-australian- construction-industry [Accessed 13 May 2019]. Chocolate, M., 2017.Performance of the Australian Property Market in 2017 – Year in Review.[Online] Available at:http://www.austexpatinvestor.com/performance-of-the-australian-property- market-in-2017-review/ [Accessed 4 May 2019]. Dufty-Jones, R., 2016.Housing in 21st-Century Australia: People, Practices and Policies. Sydney: Routledge. IBP Inc., 2012.Australia Country Study Guide Volume 1 Strategic Information and Developments,Sydney: Lulu.com. Kokemuller, N., 2019.How Does Price Elasticity Affect the Housing Industry?.[Online] Available at:https://budgeting.thenest.com/price-elasticity-affect-housing-industry-23106.html [Accessed 14 May 2019]. Lindeman, J., 2010.Mastering the Australian Housing Market.New York: John Wiley & Sons. McGowan, M., 2019.Sydney house prices fall at fastest rate in 20 years.[Online] Available at:https://www.theguardian.com/australia-news/2019/jan/24/sydney-house-prices- fall-at-fastest-rate-in-20-years [Accessed 14 May 2019]. Paris, C., 2017.Housing Australia.Sydney: Macmillan International Higher Education. Pettinger, T., 2017.Factors affecting supply and demand of housing.[Online] Available at:https://www.economicshelp.org/blog/15390/housing/factors-affecting-supply-and- demand-of-housing/ [Accessed 14 May 2019]. Scutt, D., 2018.Construction activity in Australia is crumbling at rates not seen for several years.[Online] Available at:https://www.businessinsider.com.au/australia-economy-property-market- construction-downturn-gdp-2018-12 [Accessed 14 May 2019]. Scutt, D., 2019.The downturn in Australian housing construction goes from bad to worse. [Online] Available at:https://www.businessinsider.com.au/ai-group-pci-housing-construction-remains-
Australian Housing Industry9 bleak-2019-2 [Accessed 18 May 2019]. Smith, A., 2019.10 big property market trends to watch for in 2019.[Online] Available at:https://www.finder.com.au/10-big-property-market-trends-in-2019 [Accessed 14 May 2019]. Tomlinson, R., 2012.Australia's Unintended Cities: The Impact of Housing on Urban Development.Ilustrated ed. Sydney: Csiro Publishing. Wang, J., 2018. Is the Australian housing market in a bubble?.International Journal of Housing Markets and Analysis,3(28), pp. 45-78.