Aussies spent more on home renovations last year than in any other period since the 1970s.
In fact, according to Australian Bureau of Statistics building approvals data, the value of alterations and additions approved hit a staggering $12.49 billion in 2021, surging 35% compared to the year before.
In a recent Article, Eleanor Creagh, Senior Economist for REA shared her insights:
"Home renovations boomed nationwide as people spent more time at home during Covid, combined with government grants, ultra-low loan rates, and improved household savings.
Many of these projects were supported by the Federal Government’s HomeBuilder program, which rolled out in June 2020 to support the construction industry through the pandemic.
The scheme provided cash grants for those eligible to encourage new builds and Renos.
For some, the constrained supply of properties for sale in 2021 would also have added to the impetus to renovate and upgrade their current home, overselling and looking for a new property.
And others may also have unlocked substantial equity gains accumulated through the pandemic as property prices surged, in order to fund renovations."
The value of residential alterations and additions approvals reached an all-time high in August 2021
Renovation activity surged in August 2021, with the value of work done hitting a record in the September quarter of 2021.
Across the states, the largest uptick was seen in New South Wales, where the value approved rose 40%.
This was closely followed by Victoria, up 37%, then South Australia and Queensland, up 34% and 32% respectively.
Ms Creagh said:
"Residential works drove a huge amount of construction activity in Australia last year, supported by record-low interest rates, alongside government support.
According to the ABS, the total value of residential building work done Australia-wide rose by 4.8% in 2021, after slipping 6.7% in 2020 and 7.5% the year before."
But there's now a significant shift
With the rising inflation and construction costs, increasing interest rates along with a moderate demand to buy, renovation activities are being pulled back off at high levels.
Of course, a shortage of building materials, supply chain disruptions and soaring costs have hit the construction industry.
And as much higher construction costs bite, renovation activity has slowed and approvals have declined.
Ms Creagh explained:
"In June 2022, the value of alterations and additions approved was 14% lower than the record level seen in August last year.
The value of total building approved fell 4.7% in June to now sit 8.2% lower year-on-year, in seasonally adjusted terms.
The value of non-residential building drove the decrease, falling 6.1% after a strong May result.
The value of total residential building approved fell 3.7%, comprising a 3.9% drop in new residential building and a 2.2% decrease in alterations and additions.
In cumulative terms, the value of residential building approvals has fallen 9% in the first six months of this year compared to last."
Input prices for construction continue to rise
According to the ABS, input prices for construction continue to rise, increasing 17.3% over the past 12 months.
This is because commodity prices have boomed, global freight costs have soared, and a surge in demand coupled with supply chain disruptions have seen the cost of raw materials like timber and metal products skyrocket amidst shortages.
Ms Creah further explained:
"Labour shortages have even further driven up building construction costs, with the data showing house construction prices rose 6% in the June quarter – the strongest rise since the start of the series in 1996.
The effect of rising interest rates, cost inflation, and uncertainty is evident across home builders.
Consumer confidence has slipped with rates rising and inflationary pressures rising.
Coupled with industry challenges and significant increases in construction costs, there will be fewer people looking to renovate and less demand for new builds.
Access to trades has also become a hurdle.
There are long lead times for workers.
These factors are likely to continue to weigh on the residential construction sector."
What's ahead?
Manufacturing and logistics strains have begun to normalise.
Construction cost increases are likely to ease, though off a high base, as demand moderates.
Price rises could peak this year and moderate in 2023, but prices would still be elevated without a significant pullback.
Ms Creagh finally said:
"Analysis of the top LGA regions for renovation spending in the 12 months to June 2022 shows the most dollars were poured into renos in Queensland LGAs, and largely inner city or affluent areas with high housing values.
Most of the more affluent urban areas also have a high percentage share of renovations relative to total building activity.
This makes sense even in the context of the HomeBuilder subsidy being in play given it wasn’t targeted at lower-income households, but rather was broad-based support for the industry.
In contrast, the lowest value renovations are in thinly populated LGAs with expanses of uninhabited land, like parts of Western Australia, Far North Queensland, and the Northern Territory."
Looking at these data with most areas with little new development where residents are renovating existing properties, or in regions with less building activity.
Although, we must remember this data from the ABS only shows alteration and addition activity, which requires approval.
Source of charts and commentary: REA Insights
