Economic Analysis of the Australian Housing Industry Report, T1 2019

This report provides an economic analysis of the Australian housing industry, examining its background, market structure, and key economic factors. It delves into the influences on demand and supply, including population growth and interest rates, and discusses the concept of elasticity. The rep...Read More

Australian Housing Industry 1
Economic analysis of the Australian Construction Industry
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Australian Housing Industry 2
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

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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).

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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 Company Value of
constructs
awarded in 2018
($ million)
Dominant
Sector
1 Lend Lease Group 4,936 Engineering
2 Thiess Pty Ltd 2,876 Engineering
3 Brookfield Multiplex 2,505 Commercial
4 BGC Group (Australia) Pty Ltd 1,608 Commercial
5 Leighton Contractors Pty Ltd 1,552 Residential and
Commercial
6 Watpac Australia Pty Ltd 1,440 Commercial
7 John Holland Pty Ltd 1,382 Residential and

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Commercial
8 Downer EDI Works Pty Ltd 1,115 Engineering
9 Parkview Group (Australia) Pty Ltd 980 Residential
10 Hansen Yuncken Pty Ltd 912 Residential
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).

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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).

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The change market demand for new dwellings can be presented diagrammatically as shown
below.
200 500
350 400
400 320
550 260
600 180
150 200 250 300 350 400 450 500 550 600 650
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

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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-

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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.