Housing construction productivity: Can we fix it?
Research paper
This paper examines productivity growth in the housing construction sector, with the Commission’s estimates telling a story of decades of poor performance. It provides policy directions for improving construction productivity by reducing regulatory burden, streamlining and speeding up approval processes, supporting innovation and improving workforce flexibility to help turn the dial on this persistent policy challenge.
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Reversing 30 years of poor productivity growth can help fix housing affordability
Decades of falling productivity in housing construction have restricted the supply of new homes and contributed to increasingly unaffordable housing, research from the Productivity Commission (PC) reveals.
A new report, Housing construction productivity: Can we fix it?, details how productivity in the sector has fallen well behind the broader economy, and provides seven reform directions for governments to help make homebuilding more efficient.
The PC’s new estimates of physical productivity in housing construction show that we are completing half as many homes per hour worked as we did in 1995.
A more comprehensive measure that controls for quality improvements and increases in the size of housing (gross value added per hour worked, or labour productivity) has declined by 12%.
In contrast, labour productivity in the broader economy has increased by 49% over the same period. To put this ‘productivity gap’ in perspective, had labour productivity in the broader economy moved in line with the housing construction sector then average incomes in Australia would be about 41% lower than they are now.
‘Too many Australians, particularly younger Australians, are struggling to afford a home in which to live,’ said PC Chair Danielle Wood.
‘Governments are rightly focused on changing planning rules to boost the supply of new homes, but the speed and cost of new builds also matters. Lifting the productivity of homebuilding will deliver more homes, regardless of what is happening with the workforce, interest rates or costs,’ said Ms Wood.
A complicated and slow approval process, lack of innovation, a fragmented industry dominated by small players (the average residential building firm employs less than two people), and difficulties in attracting and retaining workers are all issues that have dragged on productivity, the report finds.
‘There is no single thing to blame for this poor productivity performance. But there are steps that governments could take to remove or ease regulatory bottlenecks and encourage innovation in an industry where the way we build homes has barely changed,' said PC Commissioner Julie Abramson.
The report outlines seven reform directions, focused on four main areas.
Governments should consider establishing coordination bodies to speed up the development and construction process and address delays. There should be an independent review of building regulations. Barriers to the development and uptake of new building techniques (such as modular housing) should be addressed. And finally, we need a national approach to occupational licensing to boost workforce mobility.
‘The sheer volume of regulation has a deadening effect on productivity. If governments are serious about getting more homes built, then they need to think harder about how their decisions unnecessarily restrict housing development and slow down the rate of new home building,’ said Ms Wood.
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- Preliminaries: Cover, Copyright and publication detail, Contents, and Acknowledgments
- Executive summary
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1. Australia’s housing challenge
- 1.1 Housing supply in Australia
- 1.2 The role of productivity
- 1.3 The role of this report
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2. Productivity in Australian housing construction
- 2.1 The nuts and bolts of housing productivity
- 2.2 Dwelling construction productivity is falling
- 2.3 Measurement error cannot explain persistently low productivity growth
- 2.4 Lacklustre construction productivity is an international issue
- 2.5 Construction productivity has not always been sluggish
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3. Why is productivity poor?
- 3.1 Construction is complex and subject to ‘cascading failures’
- 3.2 The construction sector is fragmented
- 3.3 Low levels of innovation
- 3.4 High regulatory burden
- 3.5 Workforce and employment issues
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4. How to improve housing construction productivity
- 4.1 Improve the regulatory system that governs housing
- 4.2 Promote innovation
- 4.3 Improve workforce flexibility and supply
- Appendices
- A. Public consultations
- B. Measuring dwelling construction productivity
- C. ABS quality adjustments in residential construction
- D. International comparisons
- References
Printed copies of this report can be purchased from Canprint Communications.
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- The financial performance of 86 government trading enterprises (GTEs) providing services in key sectors of the economy - including electricity, water, urban transport, rail, ports and forestry - is presented in this report. In 2006-07, these GTEs controlled about 2.8 per cent of Australia's non-household assets (valued at $192 billion) and accounted for around 1.7 per cent of GDP.
- Overall, the profitability of GTEs increased by 36 per cent in 2006-07, with mixed results across sectors. Profitability increased in the electricity, urban transport and ports sectors, but declined in the rail, water and forestry sectors.
- For sectors recording a profit improvement, much of this derived from the performance of a single GTE in that sector (between 41 per cent and 63 per cent of increased profits).
- Profitability also varied among GTEs:
- profits declined for two-fifths of GTEs
- fourteen GTEs (of which five were in the water sector) reported losses.
- Just over half of monitored GTEs failed to achieve a return on assets above the risk-free rate of return in 2006-07. This implies that an even greater proportion did not earn a commercial rate of return (which would include a margin for non-diversifiable risk).
- Twelve GTEs (14 per cent) failed to achieve a positive return on their assets.
- The poor financial performance of many GTEs underscores a long-term failure to operate these businesses on a fully commercial basis, in accordance with Competition Policy Agreements.
- In total, GTEs made dividend payments to owner governments of almost $4.4 billion in 2006-07. In addition, income tax and tax equivalent payments totalled $1.8 billion.
- Contrary to stated policies, not all governments have identified all existing Community Service Obligations (CSOs). Also, governments are generally not reporting funding for CSOs in a transparent manner. Almost no information is reported on the costs of meeting CSOs.
- Inadequate funding for provision of CSOs affects a GTE's financial performance and can result in inadequate or misallocated investment, price increases for non CSO services, and/or lower quality service provision.
- Poor profitability can lead to inadequate investment and asset maintenance, which can in turn reduce the future profitability of GTEs. Without a return to commercially sustainable operations, this cycle can persist.
