A somewhat feisty debate has developed about what happens now and in the near future with renovations in Australia. The conventional view is that when dwelling construction activity declines, spending on alterations & additions (alt-adds) increases.
However, as we've often pointed out at HNN, we are not currently living in conventional times.
One factor that seems difficult for many to acknowledge is that the Reserve Bank of Australia (RBA) is determined to bring the inflation rate down to something under 3.0%. That means slowing the economy, and part of slowing the economy is slowing the rate of value growth in the housing market, as this represents inflationary consumption.
This struggle with inflation is something of a global condition, and includes the US, much of the EU, and the UK. One important contrast with economies such as the US is the rate of productivity growth over the past few years. To quote from a US Bureau of Labor Statistics press release dated 6 June 2024:
Nonfarm business sector labor productivity increased 0.2 percent in the first quarter of 2024, the U.S. Bureau of Labor Statistics reported today, as output increased 0.9 percent and hours worked increased 0.6 percent. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the same quarter a year ago, non-farm business sector labor productivity increased 2.9 percent, the largest four-quarter increase since the first quarter of 2021, when the measure increased 5.9 percent.
Meanwhile, in Australia, according to a summary from the Australian Bureau of Statistics (ABS) for March quarter 2024 national accounts:
Labour productivity was flat. Output per hour worked was largely unchanged compared to the previous quarter and the March quarter 2023. Overall, we worked similar numbers of hours as the previous quarter, although hours worked in government-supported industries like health, education and social assistance grew faster.
Productivity is important because it represents the best "exit strategy" for inflationary economies. If you can make more for less, you gain growth without the creation of scarcities, and growth is likely to be channelled towards activities with higher productivity. Overall, that tends to be deflationary for prices.
Poor productivity growth narrows the options available to the RBA. It is perhaps worth remembering that in mid-2008, with the consumer price index (CPI) indicating that inflation was up around 4.5%, the RBA set interest rates at over 7.0%. What seems to have wiped this from collective memory is that from December 2011 through to March 2021 - just shy of 10 years - inflation as measured by the CPI remained below 3.0%, and from December 2014 to December 2019 it was mostly below 2.0% as well.
Given this history, current interest rates could easily be somewhere around 6.0%. The reason such aggressive interest rate rises are not in play is that the Australian economy overall is not doing well. That relates to the gross domestic product (GDP), which grew at just 1.1% quarter-on-corresponding-quarter for March 2024 - the continuation of a slide that started in December quarter 2022, and well below a desirable rate.
In close to simplistic terms, looking after the economy can be seen as something like looking after a lawn. If you put on lots of fertiliser (economic stimulus), the grass (economy) grows, but so do the weeds (inflation). If you put on weedkiller (higher interest rates) to get rid of the weeds, then the grass will also start to die. What works (somewhat) is a combined weed-and-feed supplement (productivity).
However, that weed-and-feed supplement seems to be in short supply in Australia. At the moment the only way forward for the RBA is to continue to apply the weedkiller in judicious amounts, so that the grass, though affected, does not actually die out.
A second factor at work is that since 2020 Australian society has come to - culturally - place a higher value on housing. The extreme COVID lockdowns were something of a shock, and it will likely be another couple of years before people stop - at least unconsciously - planning for the next pandemic. In particular, that has reduced the attractiveness of multi-unit dwellings, and thus created an even tighter market for detached houses.
Given all this, it would seem evident that the convenient cycle of "house construction goes down, alt-adds go up" is unlikely to be as much a given as it was in, say, the 2010s.
The dwelling market
What is the current state of the dwelling market? Perhaps the best stats to look at are from the ABS dealing with capital city dwelling markets. In this case we're using periods that consist of the June, September, December and March quarters, so p2022 runs from June 2021 through to March 2022.
Median house prices
Let's start by taking a quick look at the median house price for capital cities.
Sydney
Melbourne
Brisbane
Adelaide
Perth
Hobart
Darwin
Canberra
To summarise these charts briefly, there are two separate trends evident. For Sydney, Brisbane, Adelaide and Perth, median house prices have continued to rise. For Sydney and Brisbane there was a decline in median values, or at least a flattening of growth, for p2023, but this has to some extent reversed for p2024. Both Adelaide and Perth show continued growth straight through both p2023 and p2024.
For Melbourne, Canberra, Hobart and Darwin, there was a similar slowdown in p2023, followed by further falls for p2024.
Transfers of established houses
The ABS stats for the number of transfers of established houses (excluding new builds) gives an overview of market activity.
Sydney
Melbourne
Brisbane
Adelaide
Perth
Hobart
Darwin
Canberra
Looking at these charts from the perspective of comparing the number of transfers from p2023 with p2024, the first thing to notice is that with the exception of Darwin and Adelaide, the number of transfers for the most recent March quarter is below the number for March quarter 2023.
Broadening that regard to the entire p2024, Canberra, Brisbane, Hobart, Melbourne and Perth all show at least two quarters in p2024 where transfers were below those for the previous corresponding quarter. On the other hand, Sydney managed to set a seven-year high for transfers in September quarter 2023.
Conclusions
There is variance between the different geographical markets - as you would expect. Overall though, the alarming trend is that, despite the additional increase of 0.25% as recently as November 2023, higher interest rates, comparing p2023 with p2024, have become "normalised" in the markets.
To give some idea of just how "out of kilter" things are, we can look to a speech by the RBA's Jonathan Kearns, head of domestic markets, entitled "Interest Rates and the Property Market", which he delivered in September 2022. He stated:
In the April [2022] FSR [Financial Stability Report] we used a user-cost model to estimate that a 200 basis point [2.0%] increase in interest rates - which increases mortgage payments and so the cost of owning - would lower real housing prices by around 15% over a two-year period. While this 15% decline was commonly reported as being a forecast for housing prices, it was not actually a prediction of how much housing prices would change. Rather it was an estimate of how sensitive housing prices are to interest rates , assuming that all the other costs and benefits to housing don't change with interest rates.
Between April 2022 and September 2022 interest rates increased by 2.25% with little real discernible medium-term effect on house price growth in markets such as Sydney through to 2024. The reason for this likely rests with that last phrase by Mr Kearns, the caveat "assuming that all the other costs and benefits to housing don't change with interest rates".
As mentioned above, one factor that continues to dominate the housing market is the aftershock of COVID. Added to a period of very low interest rates, against a background of three decades of poor management of housing in most states, you end up with a housing market that is somewhat out of control.
The renovation market
How has all this played out in Australia's renovation market? As HNN has discussed in the past, measuring alt-adds is something of a difficult task. In this case, we're looking at three sets of ABS stats. The first and simplest is the stats from ABS building approvals, the original monthly data that relates to approvals granted through to May 2024.
The second set of stats is from the same basic series, but instead of original data, it is quarterly data for chain volumes. Chain volumes adjust for price differences (brought about by inflation and other causes). Chain volumes thus tend to provide a more "pure" reflection of demand.
The third is derived from the National Accounts stats relating to final state/territory demand. For those stats we're also using chain volumes.
NSW
Alt-adds building approvals original
While these charts tend to look both dynamic and confusing, in the end this chart shows that the value of alt-add approvals for NSW has been relatively stable over the past three periods. There was a decline of just 0.3% for p2024 over p2023, and an increase of just 1.6% for p2023 over p2022.
That said, the manner in which that value is delivered is radically different, with the noticeable spike in December 2021 probably a consequence of influences related to COVID lockdowns.
Equally, the activity for April and May 2024 (not covered by the other quarterly stats) is interesting as it suggests an increase in these approvals.
Alt-adds building approvals chain volume
Dealing with much of the same data (excepting April and May 2024), this shows a quite different outlook, with the value for approvals in p2024 falling somewhat below those for p2023, and p2023 very much below p2022.
Alt-adds national accounts chain volume
This shows roughly the same situation as the previous chart, though the increase from p2022 to p2023 is moderated, and the decrease from p2023 to p2024 is much larger.
Conclusion
As the Sydney market has shown ongoing increases in house values, this supports the legacy forecast that an active house market will see a decline in spending on alt-adds activities.
VIC
Alt-adds building approvals original
Again, while this chart looks slightly chaotic, p2024 is only 1.3% above p2023, and p2023 has lost just 1.0% on p2022.
Alt-adds building approvals chain volume
This shows the extent of the actual decline in alt-adds from the highs of p2022, though there is an uptick for p2024 for March quarter 2024.
Alt-adds national accounts chain volumes
Looked at through the lens of national accounts, there is far more synchronicity between p2022, p2024 and p2024. The decline for p2024 is also more marked, especially for December quarter 2023.
Conclusion
Here we see something of a contradiction to the legacy analysis of countervailing markets for houses and alt-adds. Even as the housing market declines, so too does the alt-adds market.
QLD
Alt-adds building approvals original
The original data for QLD shows that new highs were achieved in six of the 12 months of p2024. That's despite the fact that median house values continued to increase. Overall, approvals for p2024 were 8.0% up on those for p2023, while p2023 were up 1.3% on p2022.
Alt-adds building approvals chain volume
In this case the chain volume measurements reflect the original data, with p2024 following a similar pattern to p2023, but at a higher value level.
Alt-adds national accounts chain volumes
There are broad similarities with the previous chart, but with an interesting lift for activity in the December quarter.
Conclusions
Again, this broadly supports the legacy view regarding countervailing markets.
SA
Alt-adds building approvals original
It seems evident looking at this chart for SA that p2024 was a year of high growth for alt-adds. Seven months show new highs, and one month matches the previous high. In fact, overall p2024 grew by 12.8% over p2023, while p2023 grew by 4.1% over p2022.
Alt-adds building approvals chain volume
In this case, the chart for chain volumes casts the previous chart's data in a new light. Overall for p2024 there was a 2.0% decline over p2023.
Alt-adds national accounts chain volumes
This chart essentially corroborates the previous chart, cancelling out the lift for December quarter 2024
Conclusion
Given the ongoing strength in the SA housing market, this again supports the legacy view that housing and alt-adds markets are countervailing.
WA
Alt-adds building approvals original
As this chart clearly indicates, alt-adds have grown significantly in WA. For p2024 the state grew by 31.4% over p2023.
Alt-adds building approvals chain volume
That picture of growth is moderated using chain volume measures, but it still remains significant, with p2024 growing by 17.4% over p2023.
Alt-adds national accounts chain volumes
National accounts using chain volume measures moderates this increase slightly, but still shows a breakaway December quarter 2024.
Conclusion
WA represents a different departure from the legacy view. The house market is flourishing, but so is the alt-adds market.
TAS
Alt-adds building approvals original
This shows a general increase for alt-adds in p2024 of 8.0%.
Alt-adds building approvals chain volume
This chart largely accords with the previous chart. Adjusted for chain volume, the increase in alt-adds for p2024 over p2023 remains around 8.0%.
Alt-adds national accounts chain volumes
Again, this chart broadly reflects the two previous.
Conclusion
The data for TAS broadly supports the legacy view. With a declining house market, alt-adds spending has increased.
NT
Alt-adds building approvals original
The sharp rise in October 2023 all but guarantees alt-adds for p2024 are above those for p2023. In this volatile market the increase for the 12 months is 27.9%.
Alt-adds building approvals chain volume
The chain volume measure is more clear, indicating p2024 outperformed p2023 outside of the December quarter.
Alt-adds national accounts chain volumes
The national accounts do show a more mixed picture, with p2024 underperforming p2023.
Conclusion
Darwin and the NT are difficult markets to understand. Both the performance of the overall housing market itself and alt-adds are somewhat mixed.
ACT
Alt-adds building approvals original
With alt-adds building approvals touching on seven year lows for seven of the 12 months, it's clear that this sector is performing below p2023 during p2024.
Alt-adds building approvals chain volume
This chart largely supports the conclusion above, but with unexpected strength in December quarter 2023.
Alt-adds national accounts chain volumes
This chart draws a very clear picture for underperformance for p2024 as compared to p2023.
Conclusion
With the ACT housing market in decline, this goes against the legacy view of how that market relates to alt-adds. However, as with NT, this is a highly volatile market.
Analysis
What these stats for alt-adds demonstrate is that this area is somewhat complex to understand and forecast at this point. It is certainly the case that the pattern which has dominated much the 2000s and the 2010s - of dwelling investment shifting between house building and renovations depending on market conditions - still has a major effect on the market.
However, it's also true that a range of other forces are likely at work as well, as in demonstrated by both VIC and WA, as well as the ACT. HNN would speculate that in some markets, expenditure on alt-adds has increased due to the ongoing surge in the housing market. At some point, the price of new houses becomes simply inefficient, and homeowners realise they can obtain the features of a new house on their existing property at a lower cost through alterations and additions.
Similarly, given high average house prices and increasing cost of living pressures, alt-adds have become the best coping mechanism for many homeowners. Economic uncertainty has enhanced the value of taking a more conservative approach.
All this means that alongside the behaviour in some markets of switching between the housing and alt-adds markets based on current prospects, there is an additional behaviour where when the housing market surges, the alt-adds market does as well - though to a lesser extent.