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Market Dynamics Report Presents Sobering Outlook
On current trajectories, Australia faces the prospect of being consistently unable to meet demand for new housing, because of a persistent and growing gap between demand and supply of sawn softwood timber, in particular. Taking immediate action to establish new softwood plantations, Australia can mitigate the risk and increase its sovereign supply capability for its most critical and sustainable building resource, a new report for FWPA finds.
By no later than 2050, Australia will have:
- A population between 33.62 and 39.97 million people
- New housing demand around 259,000 dwellings per annum
- 5.175 million additional households whose demography will demand a marginally different housing mix to the current distribution of housing formats
- Sawn softwood demand of 6.507 million m3 per annum
- Almost 2.0 million m3 per annum higher than 2021
- Local sawn softwood production static at between 3.600 and 3.800 million m3 per annum due to constraints on sawlog supply
- An Implied Gap between demand and local production of 2.638 million m3 per annum, equivalent to 40.5% of total demand
Importantly, though other housing formats will grow at a faster rate, by 2050, free-standing houses will continue to dominate, accounting for almost 59% of all dwellings in Australia. The modelling finds that to 2050, the fastest growing housing format will be 2+ Storey Townhouses, growth of which will average a very strong 2.55% per annum.
Housing Demand by Type: Annual & Half Decadal: 2021 – 2050 (‘000 Dwellings per annum*)
Source: ABS, NHFIC & IndustryEdge research and estimates
* Annual average of the modelled outputs for the half decade (eight years 2022-30)
|‘000 Dwellings per annum||2022-30||2046-50||CAGR28||2050 Proportion|
|Townhouses (1 Storey)||9.46||10.34||0.32%||4.0%|
|Townhouses (2+ Storeys)||19.74||39.96||2.55%||15.5%|
|Flats (1 or 2 Storey)||2.60||2.59||-0.02%||1.0%|
|Flats (3 Storey)||3.56||2.59||-1.14%||1.0%|
|Flats (4+ Storey)||27.72||51.47||2.23%||19.9%|
Ultimately, it is this growth in housing that will drive demand for sawn softwood to at least 6.507 million m3 per annum before 2050. With current domestic supply trajectories presently locked in, the Implied Gap to be made up by imports is forecast to average 40.5% from 2046-2050.
To bridge the Implied Gap, Australia could establish as much as 468,000 hectares of additional softwood plantations, commencing immediately.
Implied Sawn Softwood, Sawlog and Plantation Gap: 2021 – 2050 (‘000 m3 & ‘000 Ha)
Source: ABARES, Omega Consulting & IndustryEdge
|‘000 m3 & '000 Ha per annum||2026-30||2031-35||2036-40||2041-45||2046-50|
|Implied Gap - Sawnwood ('000 m3)||499||1,055||1,529||2,066||2,638|
|Implied Gap - Sawlog ('000 m3)||1,061||2,245||3,253||4,396||5,612|
|Implied Hectares Required ('000 Ha)||88||187||271||366||468|
Ultimately, a continuing role for imports and an expanded softwood plantation estate and domestic production must each be part of the solution that will see Australia bridge the current gap between constrained local production capacity and future demand.
These are important considerations because plantations established today will not yield the bulk of their wood until very close to 2050.
Click here to download a copy of the report
Wages lift 2.6% year-ended June, still below inflation
Australia’s Wages Price Index lifted 2.6% year-ended June, rising by 0.7% in the June quarter, to deliver three successive quarters of growth. The highest annual wages growth rate since 2014 has been recorded, but in real terms, against inflation, average wages continue to go backward. That’s a productivity issue and one set to get worse as inflation bites.
The chart below provides pretty clear indication the downwards trend has been broken, but the decade of malaise on wages growth has not been erased.
In real terms – adjusted for inflation or spending power – Australia’s wages are in decline, or more specifically, continuing to decline. It is positive that wages increased in the private sector (2.7%) and the public sector (2.4%). The trajectory is right, but the pace is slow, especially with inflation running at 6.1%.
The next chart shows the stronger rise in private sector wages and the proportion of jobs in which there were wages increases in each quarter.
What the chart shows is wages increases across the private sector are going to a growing proportion of jobs – the June quarter data, compared to previous June quarters, provides that information.
That is welcome news, because a robust wages improvement in the economy would see sound increases spread far and wide. We are not there yet, but perhaps the corner has been turned?
Whether it’s the recent report of the Productivity Commission (see the previous item) or the Jobs and Skills Summit (the item before that), the nation is debating how best to chart its future. People (labour resources) and how best to deploy them, are at the heart of that debate and wages are intrinsically linked.
As Michael Janda wrote for ABC News:
“In effect, that means workers took a 3.5 per cent real wage cut over the past year, as their pay packets were able to buy less goods and services than before.”
From a consumption perspective, wages growth drives capacity to pay increased prices for goods and services. If an economy has no wages growth it has no new financial capacity for its firms to deploy to make productivity improvements.
A long decade in which real wages growth has been difficult to find has coincided with very significant growth in mining sector profits in particular, as Richard Dennis from the Australia Institute told Janda commenting:
"What we've seen in Australia is a significant redistribution towards profit, particularly towards profit in the mining industry."
He presented this chart to underscore the point about the role of the mining sector in particular in the profit versus wages share debate.
However, if you take out the finance sector also, as a share of GDP, the non-mining sector’s profits have not moved much, as we can see below.
We need to consider this carefully, because this is not profit as such, it is the share of economic growth taken up by profits.
What seems to be occurring is that other than mining and finance, profits are about the same proportion of total income for the Australian economy, while wages are stagnant. However, if we seperate out the finance and insurance sectors, the most recent available analysis shows labour’s share of income (represented to most of us by the term ‘wages’) has been largely stable but has halved in the finance sector.
What all that means is that if average real wages are falling, there must be more people employed in those non-finance (and probably non-mining) sectors, presumably in firms or sectors that are not earning an increased share of national income.
To understand why that might be the case, read the previous item on productivity.
It is not our role to provide a solution to every conundrum, but Statistics Count can draw this much together: if the Australian economy is to grow at a stable and sustainable rate in future, it will need the value of consumption (goods and services) to increase consistently, requiring households to have more income from higher wages. The only pathway to that nirvana is productivity improvements.
Time to put the national thinking cap on.
Productivity the only way forward
Is there a more misunderstood and abused term than ‘productivity’? We doubt it. Regardless of the various abuses, productivity has been pretty much the main driver of economic advancement for Australia, especially over the 20th Century. As the Productivity Commission has described in a recent and major report, it is the ‘Key to Prosperity’.
Terms like ‘productivity’ conjure up different images to different people. Such is the abuse of the term, that it has become polarising for many. A dirty word for some, even. So, what is it really?
The Productivity Commission (PC) describes productivity as:
“…the process by which we learn how to get more from less: more and better products — new solutions to meet human needs, produced with less hours of work, fewer resources and a lighter environmental impact.”
We will go with that (it’s in their name after all, so they ought to know, right?), but note that as with anything important, the definition changes as the context of its application changes. The reference to a lighter environmental impact is a modern addition.
So ultimately, growth in productivity means achieving more outputs from the same or fewer inputs, and as the PC puts it, this:
“…is the only sustainable driver of increasing living standards over the long term. While economic growth based solely on physical inputs cannot go on forever, human ingenuity is inexhaustible.”
We could say productivity means working smarter, not harder.
As the PC puts it, the main driver of productivity over the last 200 years has been technological improvements. That’s the working smarter piece and has been a big driver for shifting people from poverty by providing simple goods in mass volume at lower prices and ever-improving quality, for example.
The benefits extend, as again the PC puts it:
“As goods and services become more affordable, people can work fewer hours and consume more; over the past 120 years, the economic output of the average Australian is up 7-fold, while hours worked have consistently fallen.”
So, we are good with productivity as a concept then and we are benefitting from it now and into the future.
Why talk about productivity then?
Well, because as Ross Gittins observed in The Age, over the last sixty years, our productivity improved at an average rate of around 1.7% per annum but slowed over the last decade to 1.1% per annum. That is about the same for other advanced economies.
One element of the PC report that Gittins unpicks is that improved living standards and reduced labour in manufacturing things has increased, we have had the time and money to shift resources into services where we employ around 90% of the workforce and about 80% of everything is produced.
That makes increasing productivity difficult – at least by traditional means like improving the application of technology. Technology works well for manufacturing but is not as good at doing so in the services sector. At least, not yet!
Writing in the Australian Financial Review, Jon Davies, the CEO of the Australian Constructors Association advised that it was productivity more than migration and training that would make a difference to the future of building in Australia. He pointed to some ‘labour side’ factors that potentially fall more into the domain of industrial relations (not unrelated, but if the workforce is diminishing progressively, maybe not the main game). However, he also pointed to opportunities to improve project procurement and approval processes to avoid regulatory duplication.
That is an example of an opportunity to improve productivity that relies on using less resources by streamlining processes and doesn’t rely on technology. Davies does call on Government to take the lead on those improvements in its building procurement. Fair enough, there’s a role for government, but the hard yards will be done in the construction supply chain where the work actually gets done, we suspect.
The focus on supply chain improvements is important.
It is true, as Ronald Mizen alluded in the Australian Financial Review, that the focus of these reports is Government and public policy. The PC was commissioned by the Treasurer to report on productivity, so that seems sensible. Mizen quotes the Chair of the PC, Michael Brennan:
“We have to look for new opportunities to drive productivity growth, including reviewing our policy levers and the industries where we concentrate our efforts.”
Brennan’s signal is the emphasis will be on productivity in services.
This is the first in a series of reports from the Productivity Commission. If they are anything like the opening report, the coming reports will be very useful for the economy of the future.
The initial report can be downloaded here.
Employment, labour and skills reach the summit
Australia’s unemployment rate dropped to a remarkable 3.4% in July 2022, as all the indications are Australia has reached – and potentially exceeded – the primary definitions of full employment. Labour supply has serious implications for the economy, so its little wonder as the unemployment rate plummeted, the nation’s leaders summited.
The Jobs and Skills summit has just concluded, and while the dust must settle for analysis to be complete, there are some big take-outs that point to the dire state of labour supply for Australia.
First, the skilled migrant intake will rise by 35,000 people per year to 195,000 people per year, commencing immediately. We hear the posturing about this being a short-term measure, but Australia lost around 350,000 migrants over the pandemic. This measure will last a decade or more, if we are any judge.
Second, pensioners will be able to work and earn more before losing any of their pension or associated rights. That’s good news, but it’s a relatively minor concession to the bleeding obvious and there are still some bureaucratic loopholes through which retirees will have to leap.
It’s important to note there were other initiatives that seemed to have a high enough level of support to ensure they are implemented. Some we’ll cover briefly in the item on wages in this edition of Statistics Count.
The two points above are important because they go fundamentally to the question of labour supply, which is operating under extremely straitened conditions right now.
In the first chart we can see the unemployment rate continuing to motor its way down to the current level of 3.4%, with 473,600 people unemployed.
In a slightly perverse indicator of the limits of economics, though the unemployment rate dropped, the number of people in employment also fell, taking the participation rate down to 66.4%, which is still incredibly high, as the chart below shows.
How does that happen? Employment fell 40,900 people as about 87,000 people left full-time jobs and about 46,000 entered part time jobs. Some of those people who left work were not ‘in the labour market’ during the month, so the number of people in work or seeking work actually fell. That’s a labour supply problem right there.
As we reach full employment, these slightly perverse outcomes will be more common – a stressed system will respond in peculiar ways.
Let’s compound the ‘system under stress’ scenario by observing the number of people underemployed (those either unemployed or seeking more hours) fell about 37,000 people and the underemployment rate dipped to 9.4% as we can observe here.
It follows that if the number of people seeking additional work has fallen, the nation is probably working more hours on a per capita basis than during the pandemic. And lo and behold, that is the case, with the trendline pointing up, as we can see below.
This is interesting data to ponder, because it shows the average number of hours worked is rising but is well off the crazy heights of the pre-GFC.
What is occurring is more people are getting work at the moment, and on average we are working a little more, but we still have a demonstrable and agonising labour shortage. What’s going on with that?
That’ll be the long tail of the pandemic, rearing its nasty head again. The impact of the third wave of COVID 19 (though it seems more a punch than a wave) was particularly harsh in July, as we can observe below and as Georgie Moore Long observed in the Australian Financial Review in August.
Moore Long reported Treasury as estimating in 1H22, Australia lost 3 million productive work hours to COVID 19, with the example being June when around 31,000 people per day called in sick due to COVID 19!
There is no sugar coat here. A full employment economy brings benefits, it brings stresses, it brings strange data and eventually, via migration, improvements in productivity and some more innovative thinking on labour supply, it brings relief.
An anxious economy awaits a labour replenishment.
Engineered Wood Product imports: a conflicted and current topic
The following content was prepared by IndustryEdge and supplied to its subscribers in late August
Australia's imports of engineered wood products were valued at AUD170.9 million for the first half of 2022. Laminated Veneer Lumber (LVL) accounted for 38% of the total and for most of the additional 32% described as 'Other' engineered wood products. Almost all the value was in softwood LVL, originating in China and the Russian Federation.
As the months progressed, engineered wood product import values rose sharply higher, peaking in May 2022 at AUD36.6 million. June was similar, but modestly lower. The product delivering the significant growth has been LVL and to a lesser extent, some of the joist products, like I-Beams.
Importantly, for an industry struggling with supply challenges, the value of engineered wood product imports is pause for reflection. The simple reality is Australia currently relies on imports to meet the market's demand for wooden posts and beams. That reliance is evident across all the products detailed below, but nowhere more so than for LVL, where we estimate as much as 80% of supply is imported.
Wood Market Edge online subscribers can click here to login to their subscription, download and interrogate the data in detail, which includes cubic and square metre data for some products.
Australian EWP Imports by Main Type: 1H22 (AUD million)
Source: ABS derived and IndustryEdge
|LVL Hardwood (Tropical)||0.9|
It is always of concern when import reliance is very extensive. It is even more the case when the imports are from countries where supply is challenging, to put it mildly.
Unsurprisingly, the majority of EWP imports are delivered from just two countries. China (30%) and Russia (21%) dominated Australia's EWP imports by value over the first half of 2022. We can expect the Russian supply to unwind fairly quickly, thanks to its war on Ukraine and the declaration its supply is 'conflict wood'. That situation is unlikely to change in the near term.
Chinese supply will continue into the second half of the year, supplemented by an expanding supply from the USA. The chart here shows the value of engineered wood product imports, by country.
Australian EWP Imports by Country: 1H22 (AUD million)
Source: ABS derived and IndustryEdge
The value of EWP imports is significant in its own right, however, the immediate interest should be on the extent to which the integrity of the domestic construction supply chain is dependent on imports that are fragile and not especially reliable. There is no doubt Australia needs imports of products it does not make, of which it makes an insufficient volume and for efficiency purposes.
As a distant nation, labouring under a perpetual 'tyranny of distance', the current situation with EWP imports demonstrates the risks of over-reliance on those imports. Little wonder there are vigorous and renewed efforts to produce more EWPs in Australia, and to secure more reliable supply lines.
Sawn softwood import explosion saves FY22
The role of imports of sawn softwood has never been clearer than in 2021-22, Imports rose a massive 64.8% to a record 923,471 m3, helping to meet the surge in demand for sawnwood. The level of imports is one remarkable factor, but the speed at which the increase came – and the price – are the truly remarkable factors.
The headline data can be seen in the chart below, showing the rapid rise in imports and the even faster rise in prices, with average prices peaking late 2021 and returning to near record levels at AUDFob808/m3 in June 2022.
In the face of runaway demand, the supply response from importers has been overwhelmingly positive, with only two of the raft of major supplier nations experiencing any wind back of shipments. Shown below, the decline from New Zealand is understandable in the face of their own boomtime, and the reduction in Russian supply is easily explained as a consequence of Russia’s war on Ukraine.
After a year or more where Australia played secondary market status to the explosive US market, the settling of the US housing market has freed up volume and provided the opportunity for the Australian supply to be supported even more significantly by importers.
Shipments from Germany rose almost 150% to dominate the market (22.1% of total volume) with Sweden doubling its contribution (14.4% of total volume). Lithuania tripled its shipments to account for 12.3% of the market, New Zealand supplied 11.0% and Estonia 10.4%. The top five suppliers – ably supported by others – delivered 70.2% of total imports in the last financial year.
By port of destination, as the chart below shows, imports to all Capital Cities in Australia rose, with the exception being the small volumes shipped to Port Kembla.
At least on an ‘import codes’ basis, we can also discern a ‘top 5’ which between them accounted for 74% of total imports. All are structural grades., with the charts and tables below providing the basic information for each grade.
The last year, all these ‘grades’ have been a little bit special for the Australian economy and the housing supply chain. Without them, what would have happened?
But there is one grade in particular worth a mention. Take a look at the chart and tables for the Roughsawn non-Radiata, >120cm2 - <450cm2 (4407.11.99.15). The almost four-fold increase in imports occurred just in the second half of the fiscal year and came with limited price increases. Remarkable! (and ignore the price spike in 2019 which arose for a tiny volume).
Softwood Sales Volume
Local sawn softwood sales were relatively steady in July, amidst capacity constraints and supply chain limitations. Year-ended July, total sales were 4.53% lower than a year earlier, totalling 3.067 million m3. July itself saw sales total 258.0 km3, down around 13.0 km3 on the prior month.
Following on from fires, salvage and supply chain challenges, the latest battle for all sectors in the Australian economy is labour. An economy and supply chain wide challenge is certainly a factor weighing on the capacity to get product to market.
The chart here shows sales easing from the year-ending peak of 3.2 million m3 recorded in mid 2021. Some market softness may be evident, for some grades, but there is no slowing the main use: structural softwood for dwellings.
There has been a decisive shift in balances in the total supply of sawn softwood from Australian mills, over the last two years. There is certainly total supply of structural softwood to consider, but the steep decline year-ended July in Structural <120mm (-9.8% to 641.6 km3) and Structural >120mm (-5.6% to 65.4 km3) has not been offset to the same extent by the continued growth in their treated siblings.
As we can see below, Treated Structural <120mm lifted 1.5% to 738.4 km3 and Treated Structural >120mm rose 10.8% to 72.0 km3.
What might be just as notable is the pressure on local sales of other grades. Among the larger volumes reported by processors, Packaging grades sales were 5.1% lower at 647.8 km3 and Outdoor Domestic sales were 0.9% lower at 317.9 km3 year-ended July.
The only other grade to put on some volume was ‘Ungraded’, up 3.1% to 271.6 km3.
It might be that sales data is demonstrating general system constraints. That’s a capacity challenge that will not be easily addressed while demand remains very strong. Product mixes will necessarily come under scrutiny as demand softens and it will be fascinating to see the market results of that over the next two years or more.
Housing finance falls sharply
June housing finance data saw the total value of loans fall 4.4% - the largest decline since the dark days of May 2020 as first home buyers were knocked down 10% to the lowest monthly total in two years. It is hard to escape the conclusion that for finance at least, the rout is on!
In June, the total value of loans fell to $30.97 billion, with the 4.4% decline sparing none of the participant groups. As the chart shows, loans to owner occupiers were down 3.3% by value, to investors by 6.3% and as above, the first-timers were pummelled out of their dream of a small piece of Australian suburbia (-10.0%).
We can be fairly sure the value of housing finance is yet to bottom out. If nothing else, sheer momentum looks likely to drag lending down. Even before the rate rises commenced, as we can see in the next chart, the value of loans was rushing lower.
That does not mean it’s all terrible out there. Interest rates are still relatively low historically and many households have plenty of buffer with which to work. We could argue that is why, as the third chart shows, there was growth in finance for newly built dwellings. The value of loans for that purpose were up 4.2% in June but are 7.1% lower than a year earlier.
Underscoring the decline in prices for existing dwellings, the value of loans for owner occupier and investor construction were up 7.3% and 17.0% in June, but their equivalent ‘Newly Built’ values were down 4.4% and 15.3% respectively. Whether builders, developers or others, the sale is on.
That is little wonder when we consider there could be $250 billion of low fixed rate mortgages due to be refinanced at significantly higher rates before the end of the year. The risk, as Jon Mott of Barrenjoey told the AFR’s James Thomson “indebted households could be facing a cliff”. The risk of sustained employment being outweighed by much higher interest rates (triple or more) and general household indebtedness could mean there are many households unable to refinance.
If that grim day arises, watch out for sharply lower house prices and very little money being around for new construction, at least for a time.
The counter to that is the shadow role of developers and ‘land bankers’ in controlling supply to maintain upward pricing momentum. As Ross Gittins observed in The Age in mid August, there is now a body of evidence demonstrating “…private land-bankers limit the regular release of land for developments in a way that ensures the market’s never flooded and prices just keep rising.”
Buyers may have their hands in their pockets, but the supply side could also be limited through a market trough. Perversely, this may mean that the trough is shallower than expected and shorter than might otherwise have been the case.