Nimble housing sector hangs tough as economy grinds down

Our political leaders continue to impress upon us that it is difficult to look too far ahead when dealing with such a contagious virus as COVID 19. Having reached zero cases on 9 June in Victoria the expectation was the worst was behind us. However, at the time of writing, here in Melbourne we have gone into full Lockdown with many parts of the economy closed and daily case numbers peaking in the 700’s. By comparison elsewhere in Australia a number of states have not experienced any cases of community transmission for several weeks which is great news.

This uncertainty continues to overshadow the economic outlook. The Treasurer’s economic update on 23 July, 2020 provided sobering reading with further detail provided in the RBA statement of monetary policy released 7 August, 2020.

Our political leaders continue to impress upon us that it is difficult to look too far ahead when dealing with such a contagious virus as COVID 19. Having reached zero cases on 9 June in Victoria the expectation was the worst was behind us. However, at the time of writing, here in Melbourne we have gone into full Lockdown with many parts of the economy closed and daily case numbers peaking in the 700’s. By comparison elsewhere in Australia a number of states have not experienced any cases of community transmission for several weeks which is great news.

This uncertainty continues to overshadow the economic outlook. The Treasurer’s economic update on 23 July, 2020 provided sobering reading with further detail provided in the RBA statement of monetary policy released 7 August, 2020.

Fig 1

Compared to the previous RBA forecasts the expectation is for slightly smaller decline over the next 18 months but slower recovery through FY22. Of significance for our industry the Treasury forecasts have dwelling investment declining in FY20 by -10.00% with a further hit in FY21 of -16.00%.

These are big numbers putting us in uncharted territory.

However, there are a lot of moving parts and a lot to play out in terms of public policy and the shape of the recovery. Federal and State governments and our key institutions including the RBA and trading banks have all been active. Programs such as JobKeeper and HomeBuilder are providing needed assistance.

This is flowing through to the economy where the current available data is showing our industry is hanging tough. The FWPA softwood data series for June indicates solid timber sales and prices holding up.

However, the growth is not just about structural timber for housing. In the face of current challenges the industry has been agile in expanding sales in non-structural areas as can be seen in the following comparison table.

Softwood Timber Sales 12 month year-ending

Source: FWPA Softwood Data Series

This is an interesting development as packaging and exports are driven by different market dynamics to domestic housing. While Outdoor Domestic (eg treated decking) and Fencing are associated with the tail-end of the building process or the renovation market.

This is a good outcome when combined with structural sales where moderate growth in volumes and stable prices have been experienced. As can be seen in the follow graph weighted average prices for the Eastcoast structural timber grouping were up slightly for the quarter at +0.1% with the structural treated grouping up +1.9%. 

Fig 2

To go straight to the dashboard and take a closer look at the data, click here.

This might seem counter intuitive given the macro-economic picture which is unfolding. Traditional drivers for our industry such as household formation rates have been impacted by the slump in net migration and growing unemployment. However, the level of liquidity being pumped into the system is making a big difference. The scale of this can be seen in the economic update with the contrast of public and private final demand.

Source: Treasury, Economic Update 23 July, 2020

This level of support is having an impact. Early indicators such as the HIA monthly survey of new house sales for the Top 100 Builders for June was 6,477 sales well up on the 12 month average of some 4,500 sales. Other lagged indicators such as building activity measures for the March quarter which include some COVID 19 activity are also holding up. In the March quarter houses under construction were stable at 57,149 while housing starts during the period were 25,523 a slight increase of +1.3% on the previous quarter. Supporting that activity across the sector is high levels of Alterations & Additions with the value of work done in the March quarter being $2.33 billion up 2.1% on the previous quarter.

The big question is can this continue? The determining factor here will be work in the pipeline. Builders have a done a good job in pulling forward projects. This has meant houses under construction while lower is still above the low point experienced during the GFC. Initiatives such as HomeBuilder are making an immediate contribution by backfilling the pipeline of work.

To see if this current boost is sustainable, we will need to keep an eye on housing approvals over coming months. A logical extension of these policies would be direct spending on social housing. Although this requires a longer timeframe to implement it would address at a macro level the shortfall in demand from the decline in net migration. As with all matters economics - time will tell.