Forecasting in the post-COVID world remains difficult. Paradoxically, that's partly because the influence of COVID-19 itself is rapidly waning. What we've been left with is a confusing picture where the aftereffects of COVID intermingle with changed global dynamics for commerce.
For example, it has become evident that the supply chains we knew pre-COVID are, for the most part, not coming back. 2023 was supposed to be the year we saw that return progress, but instead we've seen a range of new circumstances – including global unrest, notably in Russia/Ukraine and Israel/Gaza, but also in the economies of China and several south-east Asian countries. All that has been topped up with ongoing climate-driven disasters and stress, including the real threats of fire and flood in Australia.
What has defined hardware retail throughout calendar 2023 (so far) has thus been what economists refer to as the supply-side, rather than signals originating in the demand-side.
In the past, when supply chains were super-charged, the struggle was getting people to buy what could be supplied. Today, there are many willing customers, and the restraints are all about providing them with the goods. This does create price rises (as restraints on supply echo some of the effects of increased demand), but it also creates switching behaviours, not only between products, but between types of demand as well.
The housing market is one area where we can clearly see these influences play out. Chart 1 shows data from the Australian Bureau of Statistics (ABS) Total Value of Dwellings report for Brisbane, Sydney and Melbourne. It maps median prices to number of transactions for established houses.
As marked on the chart, the tipping point in terms of a decline in the number of transactions is March quarter 2022.
Chart 2 shows the lending rates in Australia as provided by the Reserve Bank of Australia (RBA).
Lending rates began to rise sharply in May 2022, up 21 basis points, followed by a rise of 45 basis points in June 2022, and ongoing increases thereafter.
What stands out in these charts is that they show relative purchase price stability for houses, despite a very strong – indeed, historically unique – increase in the actual cost of home ownership through interest rates rises.
Economists expected a sustained decline in prices. Instead what happened was that the number of transactions declined, but prices did not.
As the housing website Domain commented in an article from 3 November 2023:
The lift in auction listings is driven by prices close to new records and improved property market conditions, motivating sellers to list. However, the recent performance of [declining] clearance rates seem to indicate a more balanced market.
The prices charted above are for established houses, rather than new builds. Part of what drives the evident market confidence, where house sellers are less inclined to reduce prices to secure sales, is the awareness that new house construction (the ultimate supply-side of the housing market) continues to struggle. Supply constraints continue, but more importantly the industry has demonstrated it lacks the capacity to grow in terms of scale and/or productivity.
The renovation situation
It has become something of an "old saw" of hardware retail that when the housing market goes into decline, sales for renovations – "alterations and additions" (alt-adds) in the ABS lexicon – pick up. Of course, no market is ever that perfect, but it's made a nice line for the CEOs of both Wesfarmers' Bunnings and Metcash's Independent Hardware Group to trot out for investment analysts – with some justification.
Looking at the market situation described above, it is arguable that FY2022/23 should have produced stimulus in alt-adds. The drop in transactions coupled with the persistently high house prices and steadily increasing interest rates should have seen more families opt to improve, not move.
The difficulty is that actually tracking alt-adds through stats is not an easy task. There is no single, fully reliable source of data on alt-adds available from the ABS (or anywhere) – but we can, by combining several, arrive at some kind of reasonable overview.
One of the most useful sources is from the ABS national accounts data. This is where the government gets its numbers for gross domestic product (GDP), and a range of other fundamental measures as well. One part of this dataset is household consumption, and this includes data on alts-adds, which is gathered via a surveys.
It's best to see the national accounts data in contrast with one of the most popular sources of alt-adds data, which is building approvals. The main advantage of the approvals data is that it is very accurate, as it relies on approvals that have been registered with state and territory governments. However, these approvals only capture alt-adds that take place above a set dollar value, which means that the large number of smaller alt-adds are missed.
The national accounts data does capture alt-adds of all sizes – but is captured via survey data, that is then extrapolated, making it less accurate. That said, however, when dealing with an organisation as capable, professional and ethical as the ABS, while the numbers captured by the survey may not result in absolutely accurate data, they will be reliable in relative terms – in other words, they will accurately capture fluctuations.
Next there is the lending data, which provide a view of the loans taken out by homeowners to finance alt-adds. Again, this captures only a proportion of all alt-adds, but understanding the propensity of homeowners to take out loans is useful.
Finally we come to one of the more difficult statistics from the ABS, for building work done. The first two datasets to pay attention to are for work commenced and work completed. These both relate to the total cost for a project. When work commences, that total cost is recorded, and when work completes the total cost is again recorded. HNN adds its own simple, derived stat to this, which is just work commenced minus work completed, which gives a general sense of "loading".
The third dataset is for actual work done during a quarter. This is very useful in judging how well the construction industry is faring at any particular moment, but it does also rely on survey data estimates, so, like the national accounts data, it might not always be definitively accurate, but it does reliably provide a sense of fluctuations.
Taking all that data together, we can derive, state-by-state, a sense of what is happening with alt-adds. And that will, hopefully, give us some insight into the current state of the overall industry, and hence what we can expect in hardware retail.
In this series, we will be looking at the five major states. We are developing a series specifically for Tasmania, the Australian Capital Territory and the Northern Territory. In assembling these stats we realised that, given their smaller size, and highly unique nature, we needed to provide additional statistics to really make sense of these smaller, but very important markets.
New South Wales
New South Wales (NSW) continues to be the state with one of the most robust markets for houses in Australia. However, we are likely to see that shift somewhat over the course of the current financial year.
To begin with the national accounts for current prices in alt-adds:
This shows a familiar story: there is a stone increase in expenditure in December quarter 2020, and then this continues progressively through to March quarter 2023, with June quarter 2023 slightly below June quarter 2022.
Next, it's helpful to look at the building approvals for alt-adds that do not result in a new dwelling being created:
These are for the period from October to September, which we refer to with a "p" prefix, so p2021 would be the period from October 2020 to September 2021.
This echoes the national accounts pattern, with increased levels of approvals from September 2020. The results for p2023 do show more volatility – generally towards the upside – than is p2021 and p2022, but the three periods are mostly in range.
We're including the generally smaller category for alt-adds that create dwellings because we think this is something to watch over the coming years.
The pattern here is a general low-level of activity, along with one or two anomalous spikes, usually relating to very large renovation projects on major buildings.
The stats for lending directed at alt-adds projects show a slightly different pattern than that of approvals.
The value of loans begins to increase in February through April of 2021, then increases dramatically in May and June 2021. From November 2021 through to August 2022 new highs are reached in value, but, except for October, all of p2023 underperforms p2022, albeit only marginally in three months.
Looking at the number of loans, there is also interesting activity:
The over-performance of p2022 is more marked. Also, while the value of loans for May through September almost converged for p2022 and p2023, in numbers p2023 had significantly fewer loans, indicating the loans that were taken out had a higher value in p2023 than p2022.
Building Work Done
With the building work done stats, the commenced data is some of the most important as it represents the uptake of projects. To outline these clearly, we provide chain values along with regular values.
Chain values are a statistical measure, where the dollar amount does not directly relate to the cost of the projects, but is adjusted to provide a measure of the level of activity. They are adjusted to filter out most of the effects of movements in inflation and supply prices.
This chart does show some interesting activity. There was an acceleration in activity starting in December quarter 2020, and continuing through to March quarter 2022, with a peak in June quarter 2021. However, from June quarter 2022 through to June quarter 2023 the trend has returned to that of the pre-pandemic years.
This is something of a contrast for the non-chain values for building work commenced.
Here we can see that FY2022/23 remains somewhat elevated above the pre-pandemic years, and much more in alignment with FY2021/22 in particular.
Building work completed is also interesting.
Here we see two almost mirror symmetrical lines for FY2021/22 and FY2022/23. FY2021/22 somewhat underperformed for its December and March quarters, while FY2022/23 over-performed for those same quarters.
We can see the results of that in the chart for Work-Loading.
The loading for FY2021/22 reaches a peak in the December quarter, and there is a low for this eight-year series in the March quarter of FY2022/23.
Driving these numbers is the actual value of work done during each quarter.
Starting with March quarter 2021, there is a substantial increase in the value of work done, right through to the end of FY2022/23.
If there is a single clear sign that NSW is into its post-pandemic phase in construction, it's the high volume of completions for alt-adds, a consequence of the high value for quarterly work done.
Coupled with that transition is likely a transition slightly away from alt-adds that are related to house sales – both the pre-sale and the post-sale bump – and a shift to a market more driven by "improve, not move".
What needs to be figured into this, of course, are the continued increases in interest rates. While there has been speculation from the more "populist" writers on economics at some news organisations that these increases are "meaningless" – as they are aimed at reducing demand, when inflation is largely driven by supply at the moment – it is evident that they are targeted at preventing the current nascent house price bubble from getting worse.
Also, while it is true that higher interest rates have a minimal impact on spending on "essentials" such as food, they do impact not only non-essential spending, but also encourage behavioural shifts. For example, petrol might be an essential purchase to some, but petrol usage, for many, is a choice. The lower rates of public transport post-pandemic indicate there is room for lower rates of consumption.
As it seems highly likely rates will reach around the 4.9% level by the end of the current financial year, they will begin to affect spending on alt-adds as well as houses. That effect will be increased if house buyers are ultimately discouraged from their purchases, and/or switch to alternative markets (non-urban and multi-dwelling). In a market where house prices enter some decline, spending on alt-adds will likely fall.
Overall, Victoria (VIC) stands in somewhat stark contrast to NSW. There is a range of circumstances that saw COVID-19 have a more severe impact on the state, and that impact has carried over to some extent to its post-COVID-19 economy as well.
The first half of FY2022/23 carried on some of the exuberance of the final quarter of FY2021/22, but this ended in the second half of FY2022/23, with alt-adds as measured in national accounts essentially tracking the previous year.
That said, the rate of expenditure remains far above the pre-COVID and early-COVID rates.
Building approvals not creating dwellings shows a slightly mixed aspect. While most of p2023 closely tracks p2022, there is a breakout at the end of the period for September 2023, posting a strong decline over both p2022 and p2021.
For building approvals creating dwellings, there is some noticeable activity for p2023, but this is less than that for p2021 and p2022, even without the anomalous boost in May 2020.
For the most part the value of lending for alt-adds in p2023 trails that of p2022 – the most notable exception being the final month of the period, September 2023.
As with NSW, the number of loans in the latter half of p2023 declines more sharply than the value, indicating a shift to fewer loans of higher value.
Unlike NSW, however, the decline in the number of loans is quite sharp, falling far below the level for p2021 in the final six months.
Building Work Done
Perhaps the most significant number for VIC is the result for building work commenced measured as chain values, which shows a very low result for June quarter 2023. Is is the lowest such number for the past eight financial years.
The result for regular work commenced values at the end of FY2022/23 is not quite so dire, but it does reflect something of a slowdown, coming in below FY2020/21 and FY2021/22.
As with NSW, the work completed values show a sharp upward arch through FY2022/23.
That arch provides a work loading value that stayed in the negative region for the last three quarters of FY2022/23.
A major contributor to the decrease of work loading is the high value of work done in the quarter, especially during the first two quarters of FY2022/23.
It is fairly clear that, in contrast to NSW, VIC seems to be heading into a more uncertain time when it comes to alt-adds. That said, the overall levels appear to be higher than those before COVID-19.
It's notable that VIC has seen a lower resurgence in house prices over the past year, though this does seem to be accelerating. To some extent that could mean the state will be less affected than NSW if interest rates do continue to rise through the financial year.
However, there are distinctly fewer indications that the "improve, not move" effect is much in evidence.
It is often tempting to approach Queensland (QLD) as something of a hybrid of NSW and VIC, but it's clear from these numbers this is really not the case.
In terms of national accounts, spending on alt-adds has been for the most part slightly elevated in FY2022/23 over FY2021/22. That's important, because FY2021/22 was considerably higher than FY2020/21.
QLD is quite unique in terms of building approvals, with p2021 being the peak period, and p2022 underperforming that period for 10 of 12 months. P2023 manages to outperform p2022 for all but two months, and even outperforms p2021 during May and June 2023.
QLD is also quite different from NSW and VIC when it comes to alt-add approvals that seek to create new dwelling. There is substantial activity in this sector through p2021, p2022 and p2023. P2023 was especially active from February 2023 through to September 2023.
While the value of loans for alt-adds in QLD has declined for p2023 over p2022, overall this still remains at a high level, continuing to outperform p2021.
Unlike NSW and VIC, there does not seem to be a shift to fewer higher value loans, with the number of loans closely tracking the value.
Building Work Done
As with the other states, the chain value for work commenced is somewhat interesting. For QLD this has retreated in FY2022/23 below the level for the previous two financial years, and close to the pre-COVID values.
In regular value terms, there is a close convergence between FY2021/22 and FY2022/23, and only slight variance from FY2020/21.
Work completed for alt-adds in QLD shows a steep rise in the second half of FY2022/23.
That in turn has seen the work loading enter negative territory, after spending all of FY2020/21 and FY2021/22 in positive territory.
That has been a result of the combination of a steady rate of work commenced, and the higher level of work done in the quarter.
One difficulty in analysing QLD is its diverse geographical and demographic makeup. Where VIC is very much all about Melbourne, and NSW remains dominated by Sydney (though with growing regional centres), QLD has Brisbane, and then a large coastal region that mingles high-value and low-value areas.
One aspect of the state's market might be ongoing growth in alt-adds that create dwellings, as it moves to increase density in some of its regional areas. That, along with a general move to improve existing dwellings, could continue to drive activity, even if rising interest rates cause house prices to stall.
While we wouldn't describe the alt-adds situation in South Australia (SA) as "rosy", it certainly seems overall to be positive.
While the extent of growth has tapered slightly for June quarter 2023, the national accounts figures overall show steady and constant growth in alt-adds expenditure since March quarter 2021.
Approvals alt-adds not creating dwellings for p2023 tended to follow the previous two years closely, but with reduced volatility, mostly on the downside.
Interestingly, as with QLD, SA has shown higher levels of alt-adds creating dwellings, especially in p2023.
Lending for alt-adds showed steady upward progression through p2021, and then became more volatile in p2022. It has been a little less volatile in p2023, tracking overall between the two previous periods.
While there was a shift to higher average value loans at the end of p2022, that seems less the case for p2023.
Building Work Done
As with the other states, the chain values for building work commenced do signal a decline in real value for FY2022/23, especially in the final quarter.
In simple value terms, there is also something of a decline for June quarter 2023, back to values for June quarter 2021. That said, the values remain well above those pre-COVID.
Value of building work completed for SA remained at pre-pandemic levels through to September quarter 2021, and returned to those levels for March quarter 2022, before lifting again in the next quarter. However the levels have remained high throughout FY2022/23.
That behaviour has seen the work loading fluctuate as well, though the definitive shift is far into negative territory for June quarter 2023.
The work done per quarter values show that the alt-adds industry has been progressing to deliver an ever-increasing level of value.
The sharpest brake on alt-adds spending for FY2023/24 is likely to be a slowing economy, as the post-pandemic stimulus wanes, and state-wide growth returns to levels closer to 1.0%. There are some early signs of that in the alt-adds stats, but it likely that growth will continue through to the end of March quarter 2024.
That shift to slower growth could very well see a further shift in alt-adds, as spending moderates, but remains supported by the past years of growth.
One of the distinguishing characteristics of Western Australia (WA) is that it has experienced housing booms in the past, largely driven by mining development.
The national accounts figures for alt-adds shows that demand in FY2022/23 was generally above that for FY2021/22.
Unlike in other states, alt-adds approvals for non dwelling creation have remained somewhat closer to past levels. There is also a great deal of volatility, especially for p2023.
For p2023 the stats reflect five eight-year highs, mixed in with four three-year lows. As that indicates, the trend is more positive than negative, especially since May 2023, but it remains unclear.
In approvals for alt-adds creating dwellings, WA – like SA and QLD – shows a surprising amount of activity, especially post June 2023.
Lending represents a clearer picture, with the value of loans for alt-adds reaching six-year highs during p2022 and p2023. That is more evident in the second half of p2023.
With the number of loans for p2023 going below those for p2022, even as value increases, it is clear WA also experienced a period of fewer loans be granted, but for higher amounts. The peak period for reduced value loans would have been March 2022.
Building Work Done
There is no other state which has quite the startling results for building work commenced chain values as WA.
What is indicated here is that the chain value – the basic throughput – for commencements fell to a very low level during FY2022/23. It is substantially lower than in the two preceding financial years.
The stats for standard values do not show quite that break, but they do show a substantial decline from FY2021/22 to FY2022/23.
Work completed for alt-adds presents, however, somewhat the reverse picture, with FY2022/23 substantially outperforming the two prior financial years.
That has contributed to a lower work loading, though this does remain historically high.
Work done per quarter for FY2022/23 does outperform the two previous years.
The situation for alt-adds in WA remains somewhat unclear. The very low value for chain values of building work commenced could indicate that this sector is under more stress than other stats indicate. Approvals for alt-adds seem good, but that depends if the optimism expressed post May 2023 is really justified.
Of course what makes WA so unique is that its overall economy is directly dominated by the export of commodities, which fluctuates strongly. This is likely to be as much a determining feature for calendar 2024 as interest rate rises.
The dominant sensibility running through most of these stats is that the alt-adds market is undergoing some kind of a change. The post-pandemic currents that have been driving it through FY2021/22 and FY2022/23 are fading out. Rising interest rates are likely to see the property market start to fade, and it is simply unclear whether that will translate into greater activity in alt-adds.
HNN's current estimation is that we are likely to see some expansion of the alt-adds market as the housing market fades in calendar 2024. However, we expect that market growth to develop in certain very narrow areas. One such area we have identified (through the use of additional sources) is for decks.
One reason for this is that we've identified some shifts that indicate a move towards in-home entertaining, especially outdoors. We think this shift will be boosted by features that make decks usable for something close to nine months of the year.
We also see a move towards the installation of simplified security systems. These would fill the space between the doorbell-with-a-camera and walls bristling with CCTVs. The new systems will be small and discreet.
While there are major economic shifts likely to occur throughout calendar 2024, the market will also be very responsive to what it sees as good value propositions which help homeowners to improve the quality of their experience of their homes. By the end of 2024, we think this trend will help to usher in the first real wave of integrated smarthome appliances, driven in part by better more integrative communication protocols.
In short, it's understandable that over the past three years the hardware retail industry has seen real growth, but it has also lost something of its sense of direction. The externalities, including COVID-19 – as well as the societal and governmental reactions to it – have been overwhelming. But we are moving now into a period where shifts will be less deterministic, and where the market will change based as much on internal feedback.