Housing costs are a bigger policy headache than energy

While energy prices have suddenly grabbed the, um, imaginations of political commentators, and the vexed issue of whether a global energy price spike caused by the biggest war in Europe in 75 years is a broken promise by Jim Chalmers, there are nastier problems in this week’s inflation figures for the September quarter.

Specifically, housing construction costs.

New dwelling prices rose 3.7% in the quarter alone, for an annual rise of over 20%. The 3.7% was actually a fall from the June quarter, because the residential construction sector started weakening under the lash of RBA rate rises.

“High levels of building construction activity and ongoing shortages of labour and materials continue to drive higher prices for new dwellings. Although the rate of price growth eased somewhat this quarter compared to the highs seen in recent quarters, in annual terms, the series recorded the largest rise since it commenced in 1999.”

What’s worrying is that prices were still going up even when building approvals have come down more than 24% from their peak in March 2021, while housing loan approvals are — unsurprisingly — down more than 12% over the year to August. Usually, falling demand would put downward pressure on costs, but even now builders with fixed-price home building contracts are demanding more money from clients and threatening to stop building if they don’t get it.

And there should be a big fall in the cost of imported timber (even allowing for the weaker Australian dollar). Canadian and US timber companies are cutting production and laying off staff because of falling demand from the North American home building sector.

Even though we get a lot of timber from New Zealand and Asia, the US and Canadian industries exert a lot of pricing pressure globally. The average US lumber price is US$422.50 per thousand board feet, compared with a year or so ago when the likes of Bunnings were complaining about prices US$1500, or in February this year when they were about US$1300.

Rents went up too, at a faster pace than in the June quarter. Major cities other than Sydney and Melbourne saw rents rise by 5.6%, the highest level in a decade.

That meant, when combined with big gas price rises pushing up utilities costs, that housing costs overall rose 10.5% in the year to September, by far the biggest rise of any group in the CPI.

That rents are going up while the cost of new dwellings is going up points to an invidious problem: we don’t have enough housing, but building dwellings at the moment is very expensive.

And the comparative softening of construction cost pressures in the September quarter is something the government is keen to change — this week’s budget made a virtue of the 40,000 social and affordable homes the government plans to build, along with the nebulous “housing accord” that promises 200,000 homes a year.

None of those homes will start construction immediately — this is five-year plan stuff. But it reveals the distinction between the problem of energy prices — the product of external events, and a decade of policy failure by the previous government — and the problem of housing construction costs, where there are some external factors but much of the cause is our own ongoing demand, and moderating that demand is not a serious policy option — especially when we’re planning for more than 230,000 arrivals from overseas a year.

High construction costs resulting from supply chain issues and labour shortages are exactly the reason why state governments are slowing major infrastructure investment, something the federal government has now joined them in doing, with its reprofiling of infrastructure spending — a decision that also reflects an attempt to fix up the mess left by Scott Morrison’s tendency to announce first and worry about actual delivery later.

But on housing, it’s full speed ahead, with politicians, the construction and development industry and investors agreeing we need to be building more homes as quickly as possible.

Perhaps the government’s plan to make housing policy more coherent, including reestablishing a national housing supply council, can tackle the issue of how we accelerate residential construction without accelerating inflation even more. For young people looking to buy a newly built home, answers can’t come soon enough.