Our home-building industry is going nowhere fast

You may think that a newly built home or unit looks pretty swish. But what no one’s noticed until now is that our home building industry is clapped out. Gone to pot. It’s going nowhere fast. While most of our industries have improved greatly over the past 30 years, the housing industry hasn’t. If anything, it’s getting worse.

As I’ve mentioned before, now that the ever-worsening affordability of home ownership has reached a crisis point, our politicians – federal and state – have finally started taking affordability seriously.

It’s such a tough problem it will only be solved by fixing all the bits of the system that aren’t working as they should. So, for the first time in living memory, it occurred to someone – someone in Treasury, I suspect – that maybe we should take a quick look at the home building industry to make sure it’s ticking over OK.

The recent report by the Productivity Commission has revealed that the musclebound blokes in shorts and work boots – and their bosses – have yet to be introduced to the lovely Miss Productivity. They drive the latest monster SUV utes – all with names like the Bronco, the Wrangler, the Grunt, the BigOne and the BallScratch – but that’s where modernity ends.

According to the report, our home builders have clocked up “decades of poor performance”. It examined the whole building process, from site preparation and project management to the installation of fixtures and fittings.

Over the past 30 years, the productivity of the industry’s workers – the value they create per hour of work – has fallen by 12 per cent. This takes account of the increase in the size and quality of new homes over the decades. And this while all our other industries’ productivity improved by 49 per cent. The report calculated that, had all our industries performed as badly as housing, our average income would now be about 40 per cent lower than it is.

Of course, the industry’s productivity differs by housing type. Productivity in the building of actual houses has fallen by 25 per cent, whereas productivity in higher-density housing – building townhouses, units and apartments – has increased by 5 per cent.

The report admits the many reasons it’s difficult to make housing construction more efficient. For a start, you can’t pump out houses the way you produce cars on an assembly line. Each one has to be built at its own location; locations can be different, and there are many different sizes and styles of houses.

As well, house building is sequential; everything has to be done in a certain order. You can’t polish the floors or put down the tiles until the roof’s on, for instance. So, if there’s a delay in completing a particular stage, all the subsequent stages have to wait.

Then there are significant safety and quality issues to be considered. The plumbing must be of a standard that doesn’t disrupt the sewerage system; the electrical work must minimise the risk of electrocution; in these days of global warming, homes should be built with energy efficiency in mind; does its location mean the place needs to be cyclone-proof? And that’s before you get to houses built on a floodplain.

Next, unlike most industries, there’s been little pursuit of economies of scale. Housing construction is one of our least concentrated industries. The combined market share of the largest four firms is only about 12 per cent. Not exactly Woolies and Coles or Qantas and Virgin, eh?

The average firm in the home building industry has only two employees. Everyone’s a subcontractor. Even so – or perhaps because of this – the industry struggles to attract and retain skilled workers. Apprenticeship commencements and completions have stagnated. Training pathways can be restrictive and inflexible. And the higher density housing builders have to compete for skilled workers with big construction companies building expressways and suchlike.

What stands out, the report says, is the housing industry’s lack of innovation. Few of the industry’s bosses put much effort into searching out and trying new ways of doing things.

To be fair to the industry, however, it does have to do battle with a huge load of government regulation of its affairs. The local government development and construction approval process can be cumbersome, with inexcusable delays in issuing approvals.

Regulation can stretch the timeline for an apartment complex or new housing estate out to 10 years or more, the report says. Often, only a small part of this is time to actually do the building work.

The report identified four ways that government regulation reduces productivity. First is the sheer volume of regulation, with all three levels of government getting in on the act. The national construction code – which should have been a great means of reducing overlap and overload – has been allowed to grow to more than 2000 pages.

Second, approval processes can be unduly slow and poorly co-ordinated. Third, there can be inconsistencies between the levels of government, creating unnecessary confusion, duplication and delay.

And finally, excessive, unthinking regulation can discourage and even prevent innovation, deterring businesses from finding better ways to do things.

Now, I’ve long been sceptical of business lobbies demanding we get rid of “red tape”. Too often, what they’re really saying is, “I should be free to make my own decisions on how safe this needs to be and how it will affect the neighbours and the natural environment. I need to create jobs and make profits now, and we’ll worry about our grandkids later.”

But by the same token, government departments are monopolies and misbehave accordingly, making unreasonable demands and putting through approvals in their own sweet time.

So, if we want a lower-cost, faster-finishing building industry, we must wake up and put a huge amount of effort into rationalising our regulation of the industry while insisting the bureaucrats get approvals processed without unnecessary delay. Never again should we ignore the industry’s performance.

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Construction industry a honeypot that capital and labour fight over

Don’t fall for the bogeyman theory of our troubled major constructions industry: its union has gone rogue, been infiltrated by criminal elements, and must be cleaned out, so life can return to normal. There’s much more to it than that.

But first, let’s be clear. I’m trying to explain the phenomenon, not make excuses for thuggery and lawbreaking – even if perpetrated by the union movement, with successive Labor governments pretending not to have noticed.

Anyone who remembers the exploits of Eddie Obeid in NSW knows Labor has form when it comes to turning a blind eye to illegality. Like the ACTU, Labor does need to clean up its act. And as always, lawbreaking should be punished.

Like every prime minister, premier, politician and union secretary in the country, I’ve long known that the construction union engages in thuggish, often illegal behaviour (see three royal commissions below). When my superannuation fund merged with the huge construction industry fund, I moved my money elsewhere.

But if it’s just a matter of Labor governments failing to punish the crimes of their union mates, ask yourself this: how come the Liberals haven’t fixed it? John Howard had almost a decade to do so, but the Australian Building and Construction Commission he set up in 2005 didn’t get far in the seven years before Labor abolished it.

Likewise, the Abbott government’s re-established commission didn’t get far in the seven or so years before the Albanese government re-abolished it last year.

This problem’s been around for at least 40 years. The Hawke government deregistered the Builders Labourers Federation in the 1980s, but that didn’t work. Liberal federal and NSW governments have set up three royal commissions – in 1992, 2003 and 2015 – to no avail.

All of which should make you wonder why it’s so hard to fix such a seemingly simple problem. Could it be that the Libs aren’t fair dinkum either? Could it be that the big construction companies aren’t all that fussed about their union’s bad behaviour?

If so, could it be that they’re not privately pressing the Libs actually to fix the problem rather than just score political points against Labor?

We’re hearing about small contractors who aren’t game to stand up to union bullies for fear of retribution. I don’t doubt it’s true. But the construction companies running the show are huge. I don’t believe that, if they really wanted to rid themselves of union thugs, they lack the brains or the wherewithal to make it happen.

Remember too that when it comes to industrial relations, it’s always the unions that look bad, never the employers. That’s because the world is run by bosses. When everyone does what the boss tells them to, there’s never a problem.

But when the workers form a union to challenge the boss’s decision to pay them peanuts – or to run worksites where you could lose your life – it’s always the union that’s making trouble. It’s always greedy workers who strike and make you walk to work, never intransigent bosses. The media almost invariably fall for this characterisation.

We’re hearing that the rogue union’s disruptions and success in extracting excessive wages and conditions have forced up the cost of big city buildings, railways and motorways. It may look that way, but I’m not sure that it’s true.

Nor am I persuaded by the claim that high wages in the construction sector have flowed through to home building, and so explain why it’s so hard to afford to buy a place. This is a tricky way of claiming that employed carpenters, sparkies, plumbers, tilers and all the rest are grossly overpaid. Bulldust.

And Peter Dutton’s attempt to link union thuggery to the cost-of-living crisis is laughable. Whatever the union’s doing to construction costs, it’s been doing for 40 years, not just the past two.

Next they’ll be telling us the bullying will force the Reserve Bank to raise interest rates again.

But consider this thought experiment. I reckon that if Anthony Albanese could wave a wand and remove all union presence from the construction industry, the effect on the cost of major constructions would be minor.

Why? Because, although the untrained don’t know it, and some economists seem to have forgotten it, the biggest single message of conventional economics is that market prices aren’t just set by the cost of production – supply – but by the interaction of supply with demand.

If it’s true that a rogue union’s demands have been able to push up the costs of constructing office towers and all the rest quite excessively, how come employers have had no trouble passing those excessive costs on to their customers?

Partly because the union has imposed the higher cost on all the businesses in the industry, but mainly because any outfit that wants a city building, or government that wants a motorway, has no choice but to pay up. When economists say that the demand for the output of the construction industry is highly “price inelastic”, that’s what they mean.

But why can the industry get away with high costs? Why do its customers have no choice but to pay? Two reasons. First, the industry enjoys “natural protection”. That is, you can’t import office blocks.

Second, the industry is dominated by a just few big companies. It’s an oligopoly. It lacks effective competition between the local players.

Point is, magically remove the unions and none of that changes. If so, why would the big companies lower their prices? Why wouldn’t they keep charging the prices they know the market will bear?

Not enough people understand the unions’ role in the economy and how they go about advancing their members’ interests. The mistake is to imagine that the bosses represent capitalism, whereas the unions represent anti-capitalism.

No. Union bosses are capitalists too. The true contest is between the representatives of the two main “factors of production”: capital and labour. So unions are an integral part of the modern capitalist system. They’re a countervailing force that helps keep the system in balance.

Take out the unions, and capital ends up with almost all the money, and the households whose income comes from selling their labour have very little. In which case, the capitalists have no one to buy their products. Unions save the capitalists from their own excesses.

But get this: the unions are rogue capitalists who try to beat the real capitalists at their own game. The most successful capitalism comes from finding a business where it’s possible to make super-profits (in the jargon, to earn “economic rent”).

Turns out that’s also what the most successful unions do: find an industry whose circumstances allow it to earn super-profits and then demand a generous share for the workers. Guess what? A good example of an industry earning economic rent is construction.

And my guess is that the construction industry oligopoly finds it quite convenient to have a union that goes around bullying smaller businesses. Why? Because what they’re doing is policing the industry’s “barriers to entry”.

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