Article:

Homebuilder – the bigger picture for residential construction and the economy

19 June 2020

Hung Tran , Partner, Business Services |
Andres Reith , National Leader, Real Estate & Construction
Partner, Business Services
|

The Australian treasury has announced a Homebuilder grant for eligible owner-occupiers (including first home buyers) to build a new home or substantially renovate an existing home - in a bid to support the residential construction industry.

While met with some criticism, the Homebuilder package is a very welcome addition to the government’s response to COVID-19, when considering the ‘bigger picture’ of their economic response.

The construction industry plays an important role in Australia’s economy, given it represents 13% of GDP and also employs 1.4 million people. Typically, the construction industry is considered a lead indicator for the rest of the economy – it’s also viewed as the sector that will help Australia get out of the economic slump, off the back of COVID-19 and looming recession.

However, there are growing concerns across government, the industry and even the Reserve Bank, that the construction industry is under-threat once pipeline works end. What happens within the construction sector, will likely have a trickle-down effect to other parts of our economy, so ensuring its robustness is key.

Therefore, the aim of all the government’s construction initiatives are to provide support to various areas to enable the industry to continue a strong pipeline.

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Residential construction hardest hit

Residential construction has been impacted by COVID-19 more so than the rest of the industry. During lockdown, commercial and infrastructure construction continued (albeit slower) and was extended to include Saturday working hours.

Given the residential industry’s reliance on house sales, this has been the main reason why the residential construction sector has not weathered as well. In March, the Housing Industry Association released figures that showed house sales had declined by 23.2 percent, with many companies relying on JobKeeper to keep afloat. Aside from a rise in DYI home renovations and trips to the local hardware store, home renovations or new builds were largely put on hold. The industry cried out for government assistance.

One part of the approach

In May 2020, The Property Council of Australia put forward a 7 Point Plan for economic recovery for the industry. They identified several key initiatives to jump-start the economy including the real estate and construction sector. It’s welcoming to see the federal and state governments taking on board several of the recommendations already with the Homebuilder program clearly mirroring the Council’s first recommendation. 

The Homebuilder program is one part of the approach to boost the economy, with other packages being rolled out for various subsectors of the construction industry such as infrastructure, and also alongside the broader economic stimulus packages.

For example, the Prime Minister has announced an accelerated approval process for fifteen major infrastructure projects and additional funding to get smaller projects off the ground as part of a major deregulation drive. They have also pegged social housing as next in line for an economic response from the government. Further measures should be coming that are attractive to businesses, investors and taxpayers alike.

Who will benefit from the Homebuilder? 

Homebuilder takes a two pronged approach - one creates jobs, the other offers individuals financial support to boost residential construction subsector.

While a major criticism is that the eligibility criteria is too tight, its overarching intention is not to target individuals - this is merely a peripheral advantage. The basis of its design, is to support the residential construction industry and thereby kick-start Australia’s economy as we emerge from COVID-19 restrictions.

With more than 1 million people directly employed in the construction sector, and a further 440,000 jobs dependent on the sector, it’s fair to say that by boosting the residential sector, we will see both construction workers and related industries, such as architects, designers, removalists, furniture retailers positively impacted.

For homeowners, there will be a positive impact on those individuals who can obtain financial support for their home purchase or their extensive renovation. It could create the necessary consumer confidence to assist economic recovery more broadly.

On top of tight criteria, eligibility is also constrained by current conditions. At the moment, job security is top of many people’s minds. The government’s Jobkeeper payments have been instrumental in keeping thousands of people off the unemployment statistics but it remains to be seen what happens after September when the stimulus programs come to an end – further impacting on potential candidates for the grant. There may also be a reluctance to be in the market to buy, or an inability to access home loan funding.

Therefore, it remains to be seen how many Australians will apply for the government package - the government is banking on around 30,000 households applying and fulfilling the criteria. The federal government is confident that only a limited number of handouts are actually needed to trigger a rebound in the residential construction industry.

After all the federal and state governments have spent on Jobseeker, Jobkeeper and all the other smaller (no less meaningful) subsidy programs - we shouldn’t be too dismissive of another $680 million being put towards the economy in an effort to curb the impact of COVID-19 on the Australian economy.

Overall, there are a number of benefits for the grant. While it’s not perfect for everyone, it provides a great deal of impact for the residential construction industry and hopefully the Australian economy overall.

What it entails

  • The Homebuilder grant will provide $25,000 of funding to support building a new home or to substantially renovate an existing home.
  • The extent of the grant is time limited and subject to tight eligibility criteria. It is available for contracts signed on 4 June 2020 (date of announcement) and before 31 December 2020, with construction needing to commence within 3 month of contract date (extra allowance has been made for unavoidable delays such as building approvals, at the states discretion).
  • Eligibility is limited to Australian citizens with income less than $125,000 in the 2018/19 year ($200,000 for couples).
  • Project size is also limited to new home builds of less than $750,000 or extensive renovations of at least $150,000 to not more than $750,000 where the pre-renovation value of the home is less than $1.5 million.
  • The eligibility criteria appears very tight in terms of timeframes, means testing and asset valuations.
  • It’s not just for first home owners, first home owners can apply existing first home owner grants available in each respective state.

Things to keep in mind:

  • In terms of the extensive renovations, care must be taken not to carelessly overcapitalise on a property given the spending limits and the valuation cap.
  • Further limitations may be experienced in obtaining access to funding. Banks will no doubt be very careful in assessing their risk in lending in the current environment.
  • The strict eligibility criteria quarantines some states as a result of median house prices in some locations. This means some states will benefit more from the grant and its boost to residential construction.

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