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    Renovations market sees emerging signs of recovery

    Housing Industry Association

    The home renovations market represents a major segment of the overall residential building industry. There are several factors that drive different types of renovations – this note from Housing Industry Association discusses the impact of changing economic conditions, demography and housing preferences on renovations.

    Alterations and additions to residential dwellings can range from minor repairs through to major reconstructions. Consequently, it is difficult to explain fluctuations in activity levels across the entire sector. While there are sources of demand for renovations that are relatively stable over time and can therefore be easily anticipated, other sources of demand depend on economic conditions or demographic developments. Dissecting the various sub-components of demand provides useful insight and reveals that each segment of demand has a distinctive set of factors that influence activity levels.

    General Home Maintenance and Upkeep

    Probably the least glamorous part of the home renovations sector, general maintenance and home upkeep account for the largest share of expenditure on alterations and additions each year. While this type of work is characterised by a very large number of relatively low value jobs, the quantum of total work can be huge given that there are over nine million private dwellings in Australia, which all require regular maintenance. Demand for general maintenance is likely to be fairly stable and predictable over time since households generally undertake routine upkeep of their homes irrespective of the fluctuations in economic conditions.

    Expecting the Unexpected

    Unpredictable climatic events such as cyclones, flooding or bushfires can result in extensive damage to the housing stock within the affected areas, necessitating large scale reconstructions. The very unpredictability of these types of events makes long range forecasting of building activity stemming from such events impractical. In the wake of such events, affected areas typically experience a substantial uplift in building activity due to repair and reconstruction work. Demand in these situations is not likely to be highly dependent on economic conditions as most of the cost of reconstructive and repair work will be met by insurers.

    Rejuvenation and Modernisation

    Renovation in the natural course of time is typically undertaken to modernise an ageing home. While the major structural elements of the home generally have a long life, fixtures and fittings don’t last as long. Modernising a home will typically involve bringing the living space up to speed with contemporary trends and technologies. This can range from relatively minor cosmetic updates through to major structural works. HIA’s research shows that kitchens and bathrooms are typically replaced or updated around every fifteen years. Changes in the way households utilise living spaces has resulted in the homes built today having vastly different floor plans. For new homes, a floor plan with close integration of the kitchen, internal living spaces and outdoor living spaces has emerged as a desirable layout. The greater divergence between the way households utilised living spaces in the past and the way they do now is likely to be a factor that drives demand for renovations.

    Housing Densification

    Detached homes previously would typically have a large yard; however, over time it has become more common for the footprint of new dwellings to cover a larger share of the lot with a gradual decline in lot sizes. While households in older areas, where there are relatively small homes on large lots are inclined to expand the footprint of the home over a greater area with single storey additions, homes on smaller lot sizes may not find it viable to expand laterally and will have to make second storey additions to get more living space. The higher costs associated with second storey additions may mean it is more cost effective to move house than undertake major renovations in these areas.

    The composition of Australia’s new housing stock has changed over the last decade with a greater proportion of new homes being built in multi-unit developments. There is far more limited capacity for households to make major alterations or additions to these types of dwellings when compared to freestanding homes. However, as these homes age they too will require updating and will therefore generate demand for renovations, especially in the kitchen and bathrooms.

    The DIY Market

    There is an increasing trend to purchase homes to renovate with the objective of reselling the property for a profit. The growth in this part of the market has been aided by increasing aggregate home price levels during this period and some aspects of the tax system, namely the tax free nature of capital gains on the households’ principal place of residence. Changes in expectations around future home price growth are likely to have a major influence on the willingness of households to undertake renovation projects as profit making ventures. Factors that have an impact on transaction costs, such as changes to stamp duty rates, are also likely to have an impact on this type of activity.

    Baby boomers

    The baby boomer generation is either retired today or close to retirement. There is some evidence to suggest that many households undertake home renovations relatively soon after retirement, especially with access to their superannuation savings. Given that households in this group are typically well capitalised, they are likely to generate greater demand for larger renovations. They will also most likely continue to reside independently in their own home longer than previous generations thanks to longer life expectancy. Insufficient capacity in the residential aged care sector as well as changing housing preferences of this segment are also additional reasons for the baby boomers to continue living in their own homes. Enabling older people to live independently in their own homes is likely to require alterations, which include incorporating ‘universal design’ principles.

    First Home Buyers

    Low levels of housing affordability among first home buyers lead to compromises at the time of purchase. Though they will eventually make alterations and additions over time to make it more appropriate for their needs, the financial constraints they face immediately after the purchase of a home will initially restrict demand for major renovations. Demand for renovations from this segment of the market should move in line with real income growth over the long term; however, in the short term demand is likely to be highly susceptible to fluctuations in line with movements in consumer confidence.

    Economic Conditions

    In most cases home renovations represent substantive discretionary expenditure for households; therefore, demand will be heavily influenced by factors that affect a household’s financial position and willingness to commit to major capital outlays. A number of factors will influence decisions, including job security; income and home price expectations; borrowing costs; and perceptions about the broader economic and political landscape. Many home buyers make modifications to their homes relatively soon after purchasing an established dwelling to adapt their home to their specific needs.

    Expenditure on ownership transfer costs is a reliable indicator of changes in the volume of property transactions. Ownership transfer costs comprise of professional charges incurred when acquiring property, including fees paid to lawyers, architects, surveyors, engineers and valuers, and commissions paid to estate agents. There is a very strong correlation between expenditure on alterations and additions and expenditure on ownership transfer costs.

    Current Market Conditions

    Despite shaky consumer sentiment, leading indicators of demand for larger renovation jobs (requiring council approval and valued over $10,000) suggest contemporary market conditions are improving. There was an 8.2 per cent increase in the aggregate value of renovation jobs approved during the March 2014 quarter. From a strictly statistical perspective, this takes the value of approvals to a level that is only 1.2 per cent above the level recorded in the corresponding quarter a year earlier. Seasonal factors mean the value of lending for renovations jobs in the March quarter is generally always lower than the preceding December quarter and this year was no exception. The value of lending in the March 2014 quarter was 5.3 per cent lower than the December quarter. However, more importantly, the value of lending in the March 2014 quarter was 5.2 per cent higher than the in March quarter a year earlier.

    After dropping to decade lows in 2013 there is huge upside potential for renovations activity. While consumer confidence has been relatively subdued, low interest rates and home price appreciation are two important factors in favour of a recovery. The official statistics covering the March 2014 quarter finally provides confirmation that some of the potential has been realised. After a slow start to the 2013/14 fiscal year, renovations investment has now posted two consecutive quarters of growth through to the March 2014 quarter. This provides some confidence for HIA’s forecast of 1.0 per cent growth in the total value of renovations investment in 2013/14 to around $28.6 billion. Momentum is expected to build over the following years with growth of 1.2 per cent, 2.3 per cent and 2.5 per cent in each of the three years through to 2016/17. This profile would see renovations investment once again exceed $30 billion. 

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