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From slump to bump

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Australians ramped up their renovations activity in 2020, helping to absorb some of the economic shock of the COVID recession.

Angela Lillicrap

Confidence in the Australian housing market has rebounded faster than originally anticipated. The combined impact of stimulus, the change in household behaviour and the resilience of the national economy are pulling the housing market forward. This will see detached home building make a significant contribution to the recovery from the COVID recession.

There were concerns that the economic shock could see Australia’s rate of unemployment reach north of 15 per cent. The current rate of unemployment remains elevated but improving with November falling back to 6.8 per cent.

All signs suggest that policy measures designed to encourage employers to retain workers and measures to stimulate employment in the building industry have been very effective.

The outlook for detached home building and renovations is now more optimistic than expected several months ago. The uplift is not simply due to HomeBuilder, although it was the catalyst for improving confidence. There has been an improvement in the economic factors that influence home building and renovations activity as well as structural changes in the demand for detached housing. 

The transition to working from home has allowed households to consider living in areas that previously would have been too far away. The lockdowns also made households acutely aware of the limitations of their home environment, which has seen housing preferences shift away from apartments and smaller dwellings to detached housing.

There was also a cohort of people from regional areas that did not move to the big cities this year for study and employment, leading to a change in the resident population. These changes have been a real boon for regional areas.

Ripe for a change

In August, HIA forecast a decline in renovation activity as the economy entered a recession and households tightened their purse strings. Recent data suggests that there has actually been a significant surge in renovations expenditure, and this is likely to continue throughout 2021.

During the COVID period, Australians diverted funds typically used for travelling and eating out to savings and renovating their homes. Australian households undertook significant precautionary savings this year, with the household savings ratio reaching a peak of 22.1 per cent in the June 2020 quarter, up from just 3.7 per cent a year earlier. 

This is the highest savings rate on record dating back to 1959.

However, the money isn’t sitting idle in bank accounts. For example, there has been an unprecedented boom in expenditure in hardware stores across the economy. Not all of this expenditure was on home improvements but retail expenditure at hardware stores, which typically covers lower value renovations activity such as minor kitchen and bathroom updates, decks and pergolas or DIY projects.

In the eight months between March and October, Australians spent 24.6 per cent more on ‘hardware, building and garden supplies’ than during the same period of the previous year. This jump was fairly uniform across the major states of NSW, Victoria, Queensland, South Australia and Western Australia (between +21.3 per cent and +28.4 per cent), with the Australian Capital Territory jumping by a standout 37.7 per cent (Tasmania and the Northern Territory had insufficient data for analysis).

Much of this additional expenditure on renovations has been at the expense of expenditure on tourism and ‘cafés, restaurants and takeaway food services’. Retail turnover overall is now 6.2 per cent up from pre-pandemic levels, while turnover in ‘cafés, restaurants and takeaway food services’ remains down by 15.2 per cent.

HIA Economics also anticipates that medium-sized renovations projects, such as new kitchen and bathrooms, will grow in 2021.

2021: the year of the renovation

HIA Economics also anticipates that medium-sized renovations projects, such as new kitchen and bathrooms, will grow in 2021. The restrictions on travel saw the number of established dwellings transacting in the market fall to record lows. These households have continued to age and still need to find new housing to meet their changing household dynamics. The catch-up from the delay in households, which are up- or down-sizing, could see a continuation of kitchen and bathroom renovations immediately before or after sale. 

This bodes well for a further increase in renovations expenditure in 2021.

Adding to this, the number of large-scale renovations projects, supported by the HomeBuilder program, are now expected to exceed 10,000. 

This surge in renovation activity will help support employment across the economy and occurs as we also see a strong volume of new homes commencing construction. This is driven, at least in part, by first home buyers as they make the most of a narrow window of opportunity to enter the market. This group is taking advantage of falling interest rates, slower house price growth, modest wage growth and the federal government’s First Home Loan Deposit Scheme.

While not specific to first home buyers, the Australian Government’s HomeBuilder program provides further opportunity for first home buyers to enter the new housing market. In some states, there are also additional incentives available to help first home buyers enter the market.

This cohort will also keep the renovations market ticking over for the next couple of years as they turn to upgrading their homes.

As with past recessions, the housing industry will support the economy out of this one. But like we saw after the GFC, this level of government expenditure comes with a cost, which is a likely downturn in activity in about two years’ time. At this point, the housing industry will need a strong national economy and strong population growth to help pull the housing sector forward.