Housing disaster to "get quite a lot worse before it gets better", says Deloitte Access Economics

The latest Deloitte Access Economics Business Outlook forecasts real gross domestic product (GDP) growth of 1.7 per cent in 2024-25, although for the calendar year it will sit at just 1.3 per cent.

"Outside of the pandemic, that would be the weakest growth since the early 1990s recession," the report states.

"Cost of living pressures continue to crush household consumption, which grew by just 0.1 per cent in the final quarter of 2023.

"And even that level of growth was only made possible by Australia’s surging population. In per capita terms, household consumption fell 2.3 per cent over the year to December 2023."

So why is the outlook more promising? The report authors point to the impacts of moderating inflation and expected interest rate cuts.

"Meanwhile, changes to the Stage 3 tax cuts and real wage growth will lift household budgets, paving the road for a recovery in consumer spending," the report states.

"Looking beyond 2024, investment in Australia’s energy transition is expected to boost construction activity and lift exports in the long run, underpinning a longer term growth strategy for the Australian economy."

However, Deloitte Access Economics partner and report lead author Stephen Smith says the outlook for growth is clouded by fading business investment, a housing construction sector spinning its wheels, and a global environment that is uncertain at best.

"The case for lower interest rates is growing, but there is significant debate about the timing and extent of rate cuts. Our forecasts now include a first rate cut in November this year, based on an acknowledgement that a cautious RBA will likely want to see the September quarter inflation data, released in late October, before pulling the trigger," he says.

The group expects that economic headwinds will finally take their toll on the labour market in 2024, putting more than 100,000 Australians out of work and increasing the unemployment rate to 4.6 per cent by the year’s end.

"Labour market data released last week shows unemployment is on the rise again. We see the labour market as more of a concern and wage growth (and therefore services inflation) as less of a concern," Smith says.

"What is a significant worry, however, is the housing crisis. Australia has not been building nearly enough homes to keep pace with population growth. That’s been true not just since the pandemic but for many years prior to that.

"The 172,000 people added to Australia’s population in the September quarter of 2023 further increased housing demand, while in the same quarter only 44,000 dwellings were completed. Supply is failing to keep pace with population-driven demand let alone address the structural undersupply in the market."

Deloitte Access Economics forecasts population growth of 402,000 in 2024-25.

"The Federal Government’s target of building 1.2 million new homes over the next five years is ambitious, particularly given any increase in the pace of construction is off to a slow start.

"The number of houses under construction in Australia currently is around two thirds higher than the average seen over the decade prior to the pandemic. But this is not a good news story.

"That elevated level of activity represents a pandemic-induced backlog of half-finished homes, and partly explains recent low levels of dwelling commencements."

He says that the construction industry, held up completing existing projects, is struggling to move onto starting new builds.

"We expect that the pace of dwelling commencements and, subsequently, dwelling completions will pick up over the next 18 months, but it will be no short-term panacea.

"Correcting Australia’s housing disaster will take years and, unfortunately for many, will require higher house prices in the near term.

"“The cost of land, materials and labour will stay at higher levels, while recent insolvency rates suggest builders will need bigger profit margins if they are to deliver the significant lift in dwellings that governments and the community are crying out for. In all likelihood, this is a problem that will get quite a lot worse before it gets better."

In terms of states, Western Australia, Queensland and the ACT are expected to see GDP growth rates above the national average at 2.2 per cent, 2 per cent and 2 per cent respectively.

"In Queensland, growth will be supported by relatively strong population growth and solid commodity exports, while public sector demand is expected to drive economic growth in South Australia as modest population growth weighs on the outlook for private spending," Smith explains.

"Strength in domestic demand will offset a forecast decline in net exports, setting up Western Australia for accelerating growth in 2024-25, and growth is expected to rebound in Tasmania, but still trail other states and territories as low population growth limits private demand.

"Larger mortgages in New South Wales and Victoria mean rising interest rates hit households harder, though improving conditions towards the end of this calendar year, including tax cuts and the potential for interest rate cuts, will help to support demand."

He says the Northern Territory will return to growth as business investment is projected to ramp up in 2024-25, while the ACT will be buoyed by strong growth in public sector spending, combined with a rebound in household demand.