Westpac: Buoyant construction sector will help economy grow

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The Westpac Bank’s latest quarterly overview anticipates the economy perking up this year on the back of strong commodity prices and a busy construction sector.

But it will feel the pinch from reduced migration, and cooling in the housing market.

The overview notes that the residential construction sector has been a major contributor to economic activity and employment in recent years, with activity in the sector continuing to boom in the face of last year’s Covid-19 outbreak.

The bank expects home building levels to remain strong over the next few years, with a significant amount of work already in the pipeline.

However, approaching the middle of the decade, it expects that the current period of very strong residential building will give way to a period of more moderate activity, in large part due to the changes to migration and housing market policies.

With the borders closed, home building levels are now well above what’s needed to keep up with population growth.

Shortages that developed over the past decade are being rapidly eroded, and even when the borders eventually reopen, slower population growth means we’ll need to build fewer houses than would otherwise have been the case.

The weaker outlook for house prices will also have a dampening impact on residential construction, although this drag is likely to be more modest.

New builds remain exempt from the extension to the bright-line test, and may have other tax advantages over purchasing an existing property (for instance, the Government may allow interest costs on new builds to be tax deductible for a limited period). 

The weaker outlook for house prices also signals downward pressure on land prices, which are a key hurdle for many housing developments.

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