Renovation ready

Kitchen and bathroom renovation could outstrip the demand for new builds.

Author

Geordan Murray

There are nearly 10 million homes in Australia and every single one has at least one kitchen and bathroom. Only a small portion of these homes undergo a renovation each year but this still accounts for a big share of work for the kitchen and bathroom industry. In fact demand for kitchen and bathroom renovation has the potential to be considerably bigger than demand from the new home market.

There were 215,000 new homes built in 2017, one of the strongest years on record. Each new dwelling would contain a kitchen and findings from the HIA–GWA Kitchen and Bathroom Survey indicate that there were on average 2.11 bathrooms in each new dwelling. This means the new home building market required 215,000 kitchens and 453,650 new bathrooms in 2017.

In order for kitchen renovation jobs to exceed demand from the new home market, only 2.15 per cent of dwellings would need to update their kitchen each year. A higher percentage of bathroom renovation jobs could be required to match demand from the new home market since older homes tend to have fewer bathrooms than new homes built today.

It seems logical that adding a bathroom to an older single bathroom home would be a popular type of renovation but HIA survey findings indicated that this type of job accounted for only around six per cent of bathroom renovation jobs.

Given that renovation jobs are typically done on kitchens and bathrooms aged between 10 and 20 years, we can deduce that considerably more than 2.15 per cent of homes have kitchens or bathrooms (or both) updated each year.

To exceed demand from the new home market, only 2.15 per cent of dwellings would need to update their kitchen each year

While the number of dwellings and the age of kitchens and bathrooms is indicative of the size of the market, other factors influence the level of renovations activity each year. In previous housing cycles demand for renovations generally moved in sync with demand for new homes.

Something is different this time around.

The level of investment in new homes has increased by more than 40 per cent since 2013, whereas investment in renovations has increased by only 7.4 per cent. This divergence between the renovations and home building markets is not due to any deficiency in the renovations market.

A unique combination of factors has delivered the exceptional boost to the new home building figures. This includes the concerted effort of state governments to deliver more housing to meet the needs of a growing population, more apartments in existing urban areas and unprecedented demand from domestic and overseas investors.

The majority of dwellings are owner-occupied and much of the remaining housing stock consists of homes owned by the household sector and supplying the private rental market. The factors that have boosted the new home market only have a peripheral impact on a household’s willingness to undertake a home renovation.

The condition of a household’s balance sheet (now and the expectation for the future) is the biggest factor influencing decisions relating to home renovations. When households feel confident in the prospect of real growth in household income or a rise in real household wealth they are likely to be more inclined to spend on things that improve their standard of living, such as home renovations.

Renovations activity is forecast to grow by 1.9 per cent in 2018/19

In this regard, the stubbornly low rate of growth in wages has caused some households to put off renovations but the solid growth in home prices over the last few years in the east coast cities delivered a boost to the wealth of homeowners and prompted additional work.

If demand for our exports continues to rise and GDP grows as expected then we should start to see an increase in wage growth from the end of this year. We hope that this will then lead to increased confidence and security of employment and eventually more money flowing into new kitchens and bathrooms. On the other hand there is a risk that the recent softening of home prices could gather momentum and cause households to be more cautious in their purchasing and banks more cautious in their lending.

While the new home market peaked in 2016 and is now trending down, we are moderately optimistic about the outlook for kitchen and bathroom renovations. The 2017/18 year got off to a rocky start but it looks like the mood amongst households has improved during 2018.

The preliminary indication of renovations activity in the March 2018 quarter suggests activity lifted by around five per cent during the quarter. Based on leading indicators HIA expects that renovations investment in 2017/18 will total $33.18 billion. Renovations activity is forecast to grow by 1.9 per cent in 2018/19, by 2.8 per cent in 2019/20 and by 3.4 per cent in 2020/21.

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