For the majority of independent hardware retailers, renovations form a major channel of revenue. That could be from builders buying materials for major work such as outdoor decks, or home DIYers spending the odd $500 to $1000 to make cosmetic changes to their homes, or do some substantial renovations.
Renovations always require a degree of estimation. While we have very accurate statistics from the ABS for building approvals for renovations, these don't capture all the work that is done, as only a proportion of renovations require such approval.
Two wider ranging sources of information are also provided by the ABS. In the stats for National Accounts, there is an estimate of household expenditure, derived from household interviews. This includes statistics for "alterations and additions", as the ABS styles the category. Additionally, there are stats for new loans obtained by owner-occupiers of dwellings, which also includes a category for alterations and additions.
It's an interesting exercise to compare all three sources of information. Household expenditure is a quarterly category, which means we only have data reaching to December 2022. Lending, however, is data gathered monthly, which means we have data to March 2023, and building approvals - which is the most extensive data set - is also monthly. For building approvals we've also chosen to use the "normal" stats, which exclude renovations which result in the creation of dwellings.
We've arranged the data for lending and building approvals in trailing 12 months to March format. We refer to these ranges as periods, so the data for the period April 2020 through to March 2021 is referenced as p2021.
We've elected to deal only with the five major states, and have excluded Tasmania, Northern Territory and the Australian Capital Territory. The reason for this is that data from those smaller regions tends to be quite volatile, and can be influenced by a single project, making longer-term patterns difficult to find.
New South Wales
New South Wales (NSW) was one of the states most affected by COVID-19, and this shows clearly in its stats for renovations. Chart 1 shows the household expenditure estimates.
The upper graph, for actual values, indicates that the pandemic boost to renovations only began in the December quarter of 2020, but continued on then quite strongly through to December quarter 2022, reaching a record high in December quarter 2021. The lower graph which shows the percentage growth reflects this, with the highest growth levels in the March, June and September quarters of 2021.
Chart 2, which shows the value of loans by owner-occupiers for renovations tells a similar, though more nuanced story, with a bit of a surprise ending.
While the upper graph of actual values shows that p2022 is the breakaway dataset, p2023 comes close to equalling this. That said, there is a clear decline in loan values after the first interest rate rises by the Reserve Bank of Australia (RBA) in May 2022, though overall these values remain significantly higher than in the two pre-pandemic periods.
The big surprise is that at the end of p2023, where the loan values for February and March 2023 shift abruptly higher after the low in January 2023 - despite this being a period of high interest rates. The lower graph reflects these trends, showing the exceptional levels of growth in p2022. P2023 does go negative in November 2023, but it also recovers to close to zero growth in December, January and February, before dipping again in March.
Building approvals for alterations and additions (the ABS reference for renovations) confirm the loan data, as seen in Chart 3.
Building approvals for renovations not only climbed steeply after January 2023, they hit record highs for February and March 2023.
Conclusions
Probably what we're really seeing here is the collision between two patterns - the leftover influences of the pandemic and the newer influences of the increase in interest rates. The cultural and other influences of the pandemic have reset the overall investment in renovations to a higher level. The advent of higher interest rates has an influence as well, with families that might have considered moving to a new house, instead investing in renovations.
Victoria
While Victoria (VIC) was in many ways harder hit by COVID-19, with more and longer quarantine shutdowns, the effect of the pandemic on renovations was largely more muted.
Chart 4 shows the household expenditure estimates.
As the top graph for values shows, while the pandemic did generate a boost, the biggest effect was limited to the March and June quarters of 2022, breaking the usual season slump. Outside of that, the value assigned to the two immediately pre-pandemic periods were relatively close to those of the pandemic periods.
That's reflected in the lower graph, with a very strong dive in growth after the lift in interest rates in May 2022.
Chart 5 shows the value of loans by owner-occupiers for renovations.
At the top graph indicates, while the household spending estimates are nothing that remarkable, the loan values do show a clear difference between pandemic and pre-pandemic periods. Again, there is a noticeable downward trend post May 2022, but a surge that occurs in February and March 2023.
That is reflected in the lower graph, which shows just how outstanding p2022 was in terms of increased spending on renovations.
Chart 6 shows the building approvals for renovations in the state:
The most interesting feature of this graph is the result for March 2023. This is, in contrast to the data on the other charts, broadly flat from the February 2023 values. Historically, that's not unusual, as there is roughly the same result for both p2018 and p2019. Granted, this is also a high level historically - it is still above the March 2020 number, which marked the whole start of the pandemic change - but its contrast with both p2021 and p2022 is significant.
Conclusions
The strong increase in loan amounts despite only a modest boost in household expenditure on renovations indicates many families in VIC were taking advantage of low interest rates. That makes the resurgence of loans in calendar 2023 even more remarkable, and could indicate that there are very strong forces at work in VIC driving renovations.
While that is partially confirmed by the building approval numbers, that flat result for March 2023 could be the first harbinger of families rethinking their investments.
Queensland
Queensland (QLD) is somewhat closer to the NSW model than the VIC model when it comes to household spending on renovations. Chart 7 shows the familiar pattern of strong spending for p2022, but the drop-off in spending to p2023 is stronger than for NSW and VIC.
It is also interesting to note that while both NSW and VIC saw a degree of unseasonality in the spending patterns, those patterns remain strong for QLD, with spending gradually increasing through the year.
As the lower graph indicates, while 2021 was a strong year, 2022 saw spending levels drop back close to pre-pandemic averages.
In terms of lending for renovations, QLD is quite individual, as shown in Chart 8. Loan levels were elevated above those of p2022 in p2023 until December 2022.
While the lower graph clearly shows that p2022 was responsible for most of the growth, p2023 remained in strong positive growth until November 2022. And, again, there is the kick upwards in spending on loans, though for QLD this is confined to March 2023.
When it comes to building approvals, there is something of an echo of the VIC result, with the growth in value of renovation approvals flattening out between February and March 2023 as shown in Chart 9.
There's historical support for this as a pattern, shown for p2018, p2019 and p2020. Even so, given the exuberance of both p2021 and p2022, this could mark a change.
Conclusions
The big question is, why weren't loans for renovations more affected by increased interest rates earlier in p2023? This could be because cultural changes, such as work from home (WFH) have had a stronger impact on QLD. It's also possible that there are hidden boosts to the QLD economy, resulting from the return of both domestic and international tourism that buoyed the spending.
South Australia
In terms of household spending on renovations, much of the effect of the pandemic seems to have been on altering seasonality in South Australia (SA) , as shown in Chart 10.
There is a curious meeting point shown in the top graph in the December quarter, where not only do the pandemic years intersect, but also 2018 as well. Both 2021 and 2022 show high levels of spending through the other three quarters. As the lower graph illustrates, that growth was, once again, largely the result of a bumper 2021 setting high levels for 2022 as well.
As Chart 11 shows, lending followed a slightly different path.
Noticeably, loan values remain high for December, as shown in the upper graph. There is a steep decline in January in p2022 and p2023, followed by an immediate rebound. Loan values do decline post May 2022, but they recover early, in October 2022.
The lower growth graph for lending is atypical for this series, with sharp peaks and low valleys throughout p2022.
Looking at building approvals, four months in p2023 set all-time highs, including for the "down" month of January, as seen in Chart 12.
While approvals did not reach the hyper level they did for March 2022, March 2023 came in a very decent second on the historical scale.
;Conclusions
As with QLD, SA is likely experiencing a range of very individual patterns that are affecting its renovation market. One factor that may be at work is that, as house prices in SA did not rise as significantly as those in NSW, VIC and QLD, there remains much more room for growth in this market, encouraging further investment in dwellings.
Western Australia
As the state least affected by the COVID-19 pandemic, Western Australia (WA) shows some traits similar to the other states, but also atypical behaviour, as seen in Chart 13.
Household spending shown in the upper graph is, surprisingly, somewhat below that for pre-pandemic years for much of the time. As elsewhere, 2021 manages to show strong growth, but only manages to hit 20% in the June quarter of 2021, remaining below 10% for the rest of that year. Even more unusual, spending for 2022 falls strikingly low, equalled only by spending during the first three quarters of 2020.
Yet, despite that, spending on loans does manage to soar, as seen in Chart 14.
It's perhaps best to start with the lower graph, which shows an over 200% boost in loan values for June 2021. That's partly a reflection of a smaller market, but it remains astounding. As the top graph shows, for both p2022 and p2021 there have been very high loan values relative to the past. And, again, there is the kick upwards in March 2023, despite high interest rates.
Building approvals for renovations in WA, it turns out, deliver something of a wild ride, as seen in Chart 15.
It's interesting that there are two points of convergence, in both October and January. Outside of those two months, both p2022 and p2023 trended very high, though p2023 was somewhat more muted in both February and March.
Conclusion
Here again we're seeing something of a disconnect between loans taken out for renovations, and the numbers indicated by both the national accounts and building approvals.
Analysis
One thing we could suggest is that there is somewhat less mystery around why the RBA chose to increase interest rates in May 2023. If the RBA Board were looking at similar figures to these, and seeing the boost in loans, despite high interest, that would have caused some grave concerns. One difficulty with entrenched inflation is that, as it discounts the value of the currency, it also discounts the value of interest on loans. It's likely this kind of sharp kick up in March 2023 was interpreted by the central bankers as being a possible sign of that trend. Also, of course, building approvals for renovations continue at a high rate in most states.
What can be expected from renovation activity for the rest of the year? It does seem very likely that at some point in the near future, there is going to be a downturn. At the very least that could happen post-January 2024, with level hitting their seasonal low, and not quite making it back up to current levels for the rest of the year.
Outside of that, the fate of the renovation market could mostly relate to the ongoing struggle for supply of goods. It supply constraints remain, there will be an ongoing increase in interest rates, and at some point this will hit lending for renovations.
One thing to bear in mind about this is that, while various construction bodies complained about the RBA lifting rates, the revue of the RBA did not only not correct that, it set the RBA up to pay even less attention to the housing market. Where in the past RBA decisions did take into account conditions in the housing market, for example, the bank now has a mandate to almost entirely ignore them, and to concentrate on the core economy instead.