Building Bonus for some, $1.1bn heartbreaker for others

WORK started on about 51,300 dwellings in Western Australia in the 10 quarters following the announcement of state and federal housing stimulus schemes in 2020.

Only 33,600 were finished in that period, according to the Australian Bureau of Statistics.

The gap between those two figures is more than a number; it represents heartache for young families waiting on their first homes, and financial ruin for some builders and subbies.

Source: Australian Bureau of Statistics

While there’s been substantial public debate about whether this constitutes a major policy failure, few are willing to accept responsibility for the sugar rush and crash in the industry.

In WA, the bill for the federal HomeBuilder stimulus and state Building Bonus will be as much as $1.1 billion, using estimates from the state budget.

Business News has obtained correspondence from major lobby groups to the Department of Premier and Cabinet during the period before those announcements in Autumn 2020, providing an inside view to the thinking behind the state stimulus scheme.

They show an industry desperate for support, gripped by fears of what Premier Mark McGowan would later refer to as a “valley of death”.

They also show the industry’s top lobbyists were wide of the mark in predicting what might happen next.

The state’s Master Builders Association wrote to (then treasurer) Ben Wyatt in early May 2020, saying 70 per cent of its members had reported an average 40 per cent decline in their pipeline of work.

The MBAWA called for a $40,000 grant, scaling down to $30,000 after six months; both numbers much higher than the $20,000 that later became government policy.

“The industry is extremely well-positioned with a skilled workforce to deliver significant value to the community,” MBA said in the letter.

The industry group also said consumers had started to return to display homes and villages following an easing of COVID restrictions at that time.

The Urban Development Institute of Australia WA wrote to Mr McGowan in late March calling for a $20,000 construction bonus to run until the end of 2020.

The institute said 15,000 home starts were forecast for the 2021 financial year, although expected the number would be much less.

“[T]he maximum state investment of this option is approximately $225 million,” UDIA said in the letter.

The Housing Industry Association had perhaps the bleakest predictions of all lobby groups at the time, claiming builders had cut their workforce by 20 per cent through to May, with that number to rise to 44 per cent by August.

“We face a crisis right now and need urgent action to save jobs and livelihoods,” the industry body said, warning the pipeline of projects would run out within six weeks.

HIA argued the industry’s cash-flow profile meant businesses would not be eligible for JobKeeper, as the reduction in revenue would be delayed compared to retailers and others.

In a March email, HIA had led the charge asking for a boost for homebuyers.

“Such an incentive should be clearly defined and limited in time period to stimulate consumer activity and shovel-ready projects in the second half of this calendar year,” HIA said.

“Crucially, this type of incentive must be tied to ‘slab down’, rather than to settlement of land, in order to trigger the vital job-creating activity needed.”

Cath Hart, John Gelavis and Tanya Steinbeck represent the industry. Photos: David Henry, Gabriel Oliveira

None of the documents obtained by Business News show any analysis of the potential impact of these stimulus proposals on demand, workforce, materials, or the state’s economy.

However, the state government undertook modelling on the impact of its stimulus, a spokesperson said, with the documents deemed cabinet in confidence.

When asked, UDIA and MBAWA did not provide their modelling to Business News, while former HIA executive director Cath Hart, now at REIWA, did not respond to an enquiry.

Regardless, the industry groups got their wish.

Over just a few days in June 2020, both the federal and state governments announced stimulus for new home construction, HomeBuilder ($25,000) and the Building Bonus ($20,000).

Added to the first home buyer grant and stamp duty concession, the state said as much as $69,000 could be available for WA first home buyers.

That was almost a quarter of the average cost to build a house in WA at the time.

However, not everyone felt the state government had made the right call.

“It was Ben Wyatt’s Building Bonus,” one person familiar with the process told Business News.

They said it was developed in the then treasurer’s office without proper consultation.

Mr Wyatt did not respond to a request for an interview.

Another industry source suggested the state and federal governments had not been effectively communicating before announcing the two stimulus packages within days of each other.

By the end of the next month, however, troubles were already appearing.

Visits to display homes had more than doubled, according to an HIA media release from July 24 2020, and new home sales were up 211 per cent month on month.

HIA said it had sought changes to the state’s Building Bonus scheme to “scale up capacity in a way which is safe and sustainable”, with shortages of plumbers and concreters already looming.

The skills shortage quickly materialised.

Job vacancies for electricians jumped from 182 positions in May 2020 to peak at 748 in WA two years later, according to federal data.

When asked by Business News if the stimulus had been excessive, industry representatives stood by their position from 2020.

They say the industry was already in a severe state even before COVID.

“[W]e were faced with an unknown pandemic and the potentially devastating consequences for our economy if the property and construction industry simply ground to a halt,” UDIA chief executive Tanya Steinbeck said.

“Faced with the same circumstances, without knowing what lay ahead, we would still call for a stimulus.”

She said tight deadlines for milestones such as putting slabs down should have been lengthened and made more flexible, however.

The lack of labour capacity in the sector at the time had been a big challenge, one which UDIA had been working to alleviate with the state government.

“Could we have foreseen the trebling or quadrupling of new land and housing sales in the space of just a few weeks following introduction of the stimulus?” Ms Steinbeck asked.

“I don’t think anyone could have predicted that.

“We need to think about what would have happened if no action was taken to keep the industry moving forward in a growth trajectory.

“We are talking hundreds and thousands of job losses and millions, if not billions, of losses for our economy.”

But the two options – tripling sales or the valley of death – aren’t mutually exclusive.

It’s also possible that appropriate controls could have been put in place to ensure the stimulus did not add to demand excessively.

On that front, the Property Council’s national recovery plan had called for a $50,000 grant for homebuyers, limited only to the first 50,000 purchasers across the country.

MBA WA executive director John Gelavis did not directly respond to questions from Business News asking if lobby groups had fully considered the consequences of their proposals, or why risks weren’t identified.

But he did say the state government worked with MBA throughout the pandemic, and builders had worked hard to support their clients.

Builders had dealt with factors beyond their control, including price rises, material shortages, labour limitations and border closures, Mr Gelavis said.

Global demand for timber, cement, steel and other metals had eclipsed supply and caused materials cost inflation to be at the highest level since 1975, he said.

In its audit of the national partnership for the HomeBuiler scheme, KPMG said the stimulus had partly contributed to overheating in the industry, driving up demand for materials, land and labour.

Unpredictable?

The housing rocket boosters were not the first stimulus packages to go awry.

The Rudd government’s second tranche of spending following the GFC attracted plenty of controversy, with a royal commission into home insulation (pink batts) and debate about school halls.

There was an upswing in housing commencements during the same period, according to the National Housing Finance and Investment Corporation.

Completions were delayed compared to home starts, according to the corporation’s market report for the 2022 financial year, which said the most recent delays across the country were like previous housing booms.

While not a stimulus package, WA has its own historical example of a spending program that had problems: the Barnett government’s solar feed-in tariff scheme.

In his 2018 special inquiry into government programs and projects, John Langoulant said the response to the solar subsidies had exceeded expectations.

He could equally have been talking about the housing stimulus released two years later.

“The unprecedented uptake meant that it was not affordable,” Mr Langoulant said of the Barnett-government program.

The program was expected to cost $23 million over four years, but hit $66 million, and then was projected to crack $533 million over its life.

Grattan Institute senior associate Joey Moloney said home construction grants made for good retail politics but not necessarily great economics.

“HomeBuilder shouldn’t have happened, it’s just bad policy,” Mr Moloney said.

“I don’t think we needed to stimulate the construction industry.

“There were better stimulus measures.”

He said cash transfers were more direct, worked faster, and gave recipients choice.

“A program like HomeBuilder, it concentrates your demand stimulus into one sector,” Mr Moloney said.

“If that sector can’t absorb that, you’re seeing the kind of problems you’re seeing over the past few years.”

Supply shocks had reduced the industry’s ability to cope, he said, while demand had been brought forward.

University of Western Australia senior economics lecturer Michael Palmer said he expected the stimulus had contributed to inflationary pressure.

“Any market distortion does create incentives to change behaviour,” Dr Palmer said.

When seeking to renovate his property in 2020, he noticed several quotes came in just above $150,000, which was the minimum to qualify for HomeBuilder’s renovation subsidy.

“I honestly feel there’s a bit of rent seeking going on,” Dr Palmer said, referring to businesses lifting prices well above costs to extract higher profits.

For the state’s builders, it has been a case of moving from one market extreme to the other.