Home Renovations Activity Set to Take Off

Tuesday, October 18th, 2016
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The newly released winter 2016 edition of the Renovations Roundup report provides market-leading insights and analysis into latest developments in Australia’s home renovations market.

That particular market was worth over $30 billion during the 2015/16 financial year.

The renovations market is an unusual beast in many respects. While Australia is currently enjoying its largest and longest upturn in new home building activity (involving over four years of growth which has taken new dwelling starts to over 230,000 per year), the renovations market wilted for a two-year period between 2011 and 2013 before embarking on a hesitant recovery.

The divergence of new home building on the one hand and renovations activity on the other highlights the fact that these two segments of residential building may respond differently to changes in the operating environment. The experience of the past five years suggests that new home building responds much more quickly to interest rate reductions than renovations demand, and that the inability of consumer sentiment to gain traction has held renovations activity back far more than new home building.

However, more positive trends seem finally to be emerging on the renovations side. Official data for the June 2016 quarter indicate that the pace of recovery in the renovations market is accelerating. Preliminary results indicate that the volume of activity rose by 3.5 per cent during the June 2016 quarter, equivalent to an increase of 4.4 per cent on the same period 12 months earlier. This represented the second consecutive quarterly increase and the fastest pace of growth since the first quarter of last year. During the year to June 2016, renovations activity is estimated to have totalled some $30.93 billion in value, which is 4.6 per cent higher than during the previous year.

However, some caution needs to be applied to interpreting the official data. The results of the September 2016 renovations market survey indicate that the majority of renovators (51 per cent) did not perceive any major improvement or deterioration in market conditions over the past year. It is worth pointing out, though, that a significant minority (38 per cent) of respondents did indeed experience improvement, compared with just 11 per cent who felt that conditions in the renovations market worsened.

The future course of renovations activity will be shaped by quite a mix of factors. The origins of the increasingly robust recovery can be traced back to the acceleration of dwelling price growth in key markets like Sydney and Melbourne over the last few years. Higher dwelling prices have allowed homeowners to finance larger renovations jobs through the use of relatively low cost home equity loans, which has helped boost activity particularly with interest rates at such low levels.

Strong dwelling prices also have the effect of bolstering household confidence, making them more comfortable in engaging in large big-ticket expenditures like major renovations work. Another phenomenon which is affecting the Sydney and Melbourne markets is that higher house prices have made the cost of moving house too prohibitive for some households. This has resulted in those same households initiating major renovations works instead. The healthy labour markets in both cities, particularly Melbourne, have also been instrumental in bringing about improved renovations market conditions.

Just as dwelling price increases tend to favour renovations demand, falling prices make conditions much more difficult for renovations market operators. Currently, Perth and Darwin are being affected by this difficulty with households’ ability to tap into home equity much more limited in such markets. To a lesser extent, the renovations markets in South Australia, Tasmania and the ACT have been obstructed by fairly limited growth in dwelling prices over recent years.

Perhaps the single biggest challenge affecting the renovations market in all states and territories is the significant shrinkage in market turnover over the past year. This has seen the number of transactions in established houses fall by 17.8 per cent nationally in the year to June 2016. This matters because the new owners of older houses tend to initiate renovations work reasonably quickly after purchasing. The big falls in market turnover during the past year are suppressing demand from this quarter.

Despite the reasonably favourable direction of renovations activity, much more growth will be required if a return to 2011’s peak in activity is to be achieved. Renovations reached $34.01 billion during the 2011 calendar year, but the current calibre of activity is still about nine per cent below this high point. More positively, however, we do seem to have left the worst days behind with activity now 7.5 per cent higher than the low point back in 2013.

Renovations activity increased by 4.7 per cent in 2015, the strongest calendar year performance since 2010. In 2016, that activity is projected to grow by three per cent, with the pace of expansion slowing to 1.4 per cent in 2017. Growth is expected to pick up to 2.4 per cent in 2018 with a further 2.4 per cent increase forecast for 2019.

Overall, the volume of renovations activity is anticipated to increase from $31.38 billion in 2016 to $33.37 billion in 2019, an overall expansion of 6.3 per cent. As we move into the 2020s, renovations activity is going to be helped all the time by the steady increase in the number of detached houses of prime age for their first major renovations job. This is likely to place a floor under the demand for renovations activity over this period.

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