economics

Credit squeezing renovations

HIA Economics dives into kitchens and bathrooms activity for the next three years, offering insights into growth areas and the impact of the renovations market.

Author

Angela Lillicrap

Each year new housing adds around two per cent to the country’s existing housing stock. In the 2017/18 financial year, this equated to 229,740 homes. The record scale of the latest new home building cycle has clearly been hugely positive for the kitchen and bathroom industry.

Australia also has nearly 10 million existing homes – and depending on their age and size will likely generate a large volume of renovations activity for the kitchen and bathroom industry. HIA research indicates that there’s a strong link between the age of dwellings and the amount of renovations work that is undertaken on them. The nature of this relationship allows for predictions on the underlying or notional demand for kitchen renovations jobs, based on the number of homes within certain age categories. 

Estimated demand for kitchen renovations is projected to track horizontally for the next three years, with only a minor increase of 0.3 per cent forecast during 2018/19. Demand is expected to pick up in the 2021/22 financial year, with an increase of 1.7 per cent, bringing the tally to 151,990 kitchen renovations.

Estimated demand for bathroom renovations is anticipated to also remain relatively flat, increasing by a marginal 0.4 per cent over the next two financial years. It’s then forecast to increase by 0.7 per cent and 2.9 per cent in 2020/21 and 2021/22 respectively, to total 241,039 bathroom renovations.

In 2018, lending for renovations activity was valued at $3.7 billion. The latest HIA-GWA Kitchens and Bathrooms Report 2018/19 provides comprehensive forecasts and unique insight into this important sector of Australia’s residential building industry, and the wider economy. The report is free to members.

Does falling house prices mean decreased renovation activity?

As a response to falling home prices, there’s typically a reduction in the number of transactions occurring in the market while sellers hold off until market conditions have improved. Many renovation jobs occur around the time that a dwelling is transacted: either before it is sold to improve its value or once the new owners move in. 

The recent downturn in prices should result in a reduction in renovations activity. We have seen a substantial reduction in the amount of lending for home renovations, but other activity indicators are still performing strongly, which suggests this may not be the main driving force. 

A competing theory suggests that when house prices fall we should expect to see a boost in renovations activity. Households transact in the housing market to occupy housing with amenities that best meet the needs of the household. When prices soften, households lose confidence in the market and choose not to transact, but the objective of aligning the amenity of the home with the needs of the household remains. Instead of transacting in the market, more households choose to undertake renovations so they can improve the comfort of their existing property. The recent, and relatively strong, levels of renovations activity suggest this may be a more important driver of activity.

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Renovations bucket list

Australian renovators are planning to cook up a storm in brand-new kitchens, according to new findings from Brighter

Brighter, an initiative which looks at how Australians use natural gas, quizzed renovators about what renovation projects they would like to tackle in their homes.

With over a third of respondents aspiring to renovate their homes in the next two or three years, the Brighter research showed that the popularity of reality cooking competitions and celebrity chefs has had a strong impact, inspiring more consumers to redesign and renovate their kitchens. 

When asked to choose the rooms which made their ‘reno bucket list’, the kitchen and bathroom topped the list, with 42 per cent and 39 per cent of respondents, respectively, ready to make upgrades to those spaces in their homes. 

Renovators are also opting for natural gas connections in the home, particularly in the kitchen: a third would prefer to install a gas cook-top over an induction cooktop.

In comparison to electric or induction elements, a gas cooktop provides instant heat which is evenly distributed across the pan and the temperature can be controlled with a turn of the dial. It’s these features which make gas cooktops the preferred choice among professional chefs and consumers.

A new cooking experience, however, wasn’t just confined to the kitchen. Nearly 40 per cent of Australians planning to renovate their out-door area also intended to install a BBQ, either directly to the mains or with a gas bottle. 

For more information on the findings, go to www.brighter.com.au

Can renovations predict the end of the credit squeeze?

The credit squeeze has caused lenders to be more risk-averse. Despite record low interest rates, with tougher scrutiny on the individual borrowers’ ability to service the loan, borrowers are now finding it harder to get access to credit which previously would have been readily available. This has prompted households, who are sensitive to the changes in the lending environment, to either hold off intended renovations until they can get access to finance or to undertake smaller renovation jobs that don’t require finance.

Kitchen and bathroom renovations can be seen as a leading indicator of the availability of credit because they are likely to recover sooner than new home sales. The evidence shows that lending for alterations and additions is still in decline, so clearly the credit squeeze is not over yet.

However, once the market adjusts to the new lending conditions – which HIA expects will occur in the second half of 2019 – it’s expected renovations activity will surge in line with increased credit availability. Increased renovations activity will be visible before we see other material signs of the credit squeeze easing from other indicators. HIA will be looking at this data as an indicator of when new home sales and approvals recover.

On a positive note, those households who delayed renovations work due to credit pressures will likely cause a small jump in activity in 2019 as constraints are eased. The longer the credit squeeze continues, the greater the pent up demand for renovations will be. This will prove to be positive for the kitchens and bathrooms industry, though the impact will be small in contrast to the decline from new home building.

economics

Increased renovations activity will be visible before we see other material signs of the credit squeeze easing from other indicators

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