The renovation boom is over. We’ve finally reached the point where renovation activity is back to levels more consistent with underlying demand.

And yet, we’re still expecting record levels of activity.

Home improvement during the pandemic

Before the pandemic, the underlying demand for renovations was more closely related to the age of Australia’s dwelling stock – as homes get older, they need repairs and renovations. However, the pandemic created a new desire for greater space and amenities in one’s living environment, given how much extra time people spent at home.

Several temporary pandemic policies helped drive the recent renovation boom, including the HomeBuilder grant and record-low interest rates. Households also accumulated a war chest of pandemic savings due to being unable to spend on usual travel, entertainment and dining out expenses.

We believe some of the boom represented a permanent step-up in demand for renovations. After all, more than 10 million dwellings in Australia were built before the pandemic, many of which still won’t have the amenities we have come to demand.

So, there’s likely to be a lot of activity sustained. But for now, actual renovation activity around the country is back within the estimated range of underlying demands, which implies equilibrium.

This is good news because we don’t often get to say that a boom is over while activity is still expected to remain higher than anything seen before the boom. The forecast horizon, including the trough, is stronger than anything seen before the pandemic.

Activity will be supported by the ongoing pandemic desire for space and amenities and the ongoing ageing of Australia’s dwelling stock. There was a surge in homes built in the early-to-mid-1990s that is now reaching the 30-35-year age bracket, where significant renovations tend to be undertaken.

Also, the new housing market has even greater affordability constraints, making renovations more appealing.

Rising house prices give existing homeowners more home equity – the ‘wealth effect’ that makes them more confident to undertake renovations, and increase the potential selling price of their home, should they ever wish to trade up or downsize.

Then, of course, there are ongoing repairs from extreme weather events.

All these factors work in the same direction – supporting renovation activity at near-record levels. At the same time, new home building sinks to decade lows in the largest markets and mounts only a modest recovery in the coming years.

The largest projects

The elevated level of renovation activity has been especially true for the largest projects – that require approvals or external finance.

Approvals for renovations are still up by around 40 per cent on pre-pandemic levels, and lending for renovations is more than double pre-pandemic levels – with recent months reaching new all-time highs.

The smaller projects are likely driving overall declines – these are what people did during the pandemic as part of the home improvement trend, such as kitchens, bathrooms, electronics, entertainment rooms, home offices and backyards.

Those smaller projects are being completed, having their scope reassessed, or are being delayed or cancelled because of build costs, interest rates and recent additional government taxes and regulations.

The recent Victorian land tax hikes for investors, for example, may make landlords delay or cancel plans to upgrade or renovate their tenanted properties. The latest changes to the Victorian construction code will not only inflate the construction costs for any new renovation project but also call into question whether the renovation will meet the new standards.

All these costs and uncertainties could contribute to the decline in total renovation activity, especially in Victoria. This would be hitting the bottom line of the builders who are more exposed to the average Australian running low on savings and borrowing capacity and are more cost constrained.

However, the larger projects – for people with the savings, assets and borrowing capacity to afford them – are still going strong.

There are likely to be other factors, such as household wealth, at play here, not just the age of the dwelling stock, in determining the volume of renovation activity by region. But people clearly still want to improve their homes like they did in the pandemic. So, it’s entirely possible that the easing of labour shortages and continued affordability constraints in new housing will actually re-accelerate renovation activity across the country.

This will be something to watch closely.

First published on 9 September 2024