Why Australia needs an infrastructure boom

Posted: July 3, 2013 in Urban planning
Tags: ,

The Australian economy is at a crossroads. The mining boom is starting to fade, and this provides a great opportunity for a new boom in housing construction to take its place. But to do this, governments need to follow up with an infrastructure boom. This is why.

First, the mining boom is not over. Metals prices will remain high for many years to come, and Australia will benefit from exporting its resources. Nor is the mining investment boom, the expansion of the industry through the construction of new mines, over. But mining investment has peaked (see graph below). And it has peaked in 2013, earlier than the 2014 date it was previously expected to peak at.

The mining investment boom is projected to have peaked in early 2013. Click to enlarge. (Source: RBA Chart Pack)

The mining investment boom is projected to have peaked in early 2013. Click to enlarge. (Source: RBA)

The mining investment boom is difficult to understate. Capital expenditure on mining in 2013 is about 10 times what it was a decade ago in 2003, and now comprises more than half of all investment in Australia. Meanwhile, all other investment in 2013 is less than twice its levels in 2003.

Mining investment has increased dramatically, and is 10 times as big as it was a decade a go. Click to enlarge. (Source: RBA)

Mining investment has increased dramatically, and is 10 times as big as it was a decade a go. Click to enlarge. (Source: RBA)

It is this investment boom that has led to such strong economic growth, and which has employed so many Australian workers. Actual mining itself today employs only 2.3% of the Australian workforce (despite mining generating about 10% of national income), and this level of employment is after it more than tripled in the last decade. But many more Australians have been employed during the investment phase: engineers, construction workers, tradies, etc. As a result, both “construction” and “other business services” (which combined now account for almost a quarter of Australia’s workers) have seen the strongest proportional increase in jobs outside of the mining industry.

Employment by industry, using the year 2000 as the base year. Mining has seen a big proportional increase, but off a very low base. Click to enlarge. (Source: RBA)

Employment by industry, using the year 2000 as the base year. Mining has seen a big proportional increase, but off a very low base. Click to enlarge. (Source: RBA)

A post-mining investment boom peak Australian economy therefore has to answer 2 questions. First, where is increased demand going to come from to pick up the slack from falling mining investment? Second, where are all of the workers employed during the mining boom going to work now that the mining investment boom is winding down?

The obvious answer, it would seem, is housing construction. Australia’s supply of housing stock has failed to keep up with demand since the mid 1990s. Up until that point, the rate of growth in number of dwellings was about one percentage point above the rate of growth in the population. (This has been because the number of households grows faster than the size of the total population – families tend to be smaller, meaning more households for a given level of population, while single occupant households continue to grow in popularity.) However, in the mid 90s the spread between these two growth rates disappeared, and during the second half of the 2000s the population was growing at a faster rate than the growth in new dwellings.

Growth in dwellings has traditionally outpaced growth in population. These growth rates began to converge in the mid 1990s. Click to enlarge. (Source: RBA)

Growth in dwellings has traditionally outpaced growth in population. These growth rates began to converge in the mid 1990s. Click to enlarge. (Source: RBA)

The convergence of these two growth rates could be due to average household sizes stabilising. For example, many young people are choosing to stay living with their parents longer, leading to less demand for single occupancy households. This would be demand driven – less demand for more housing, so less is built. But the reality is that housing prices have grown strongly since the mid 1990s, which suggests that it is actually supply driven – insufficient new housing leading to higher prices and thus people choosing to live in larger households to spread the cost of higher housing costs. In other words, the stabilisation in household sizes is a result of insufficient housing supply, rather than the cause of insufficient housing demand.

House prices have increased strongly and consistently since the mid 1990s. Click to enlarge. (Source: RBA)

House prices have increased strongly and consistently since the mid 1990s. Click to enlarge. (Source: RBA)

Housing construction would simultaneously provide the required demand for investment that the mining industry currently provides, while also providing employment to those with the same skills that the mining investment boom currently employs. But for this to work, governments everywhere must provide the necessary infrastructure to cope. That means, among other things, more roads and more rail. And, given the lack of funding available to state governments, this also means the federal government needs to provide assistance in the form of funding. And not just for roads, like Opposition Leader Tony Abbott wants, it needs to be for urban commuter rail too.

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Comments
  1. david poole says:

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