ABS Building Approvals stats to October 2021

Urban and ex-urban approvals

The COVID-19 pandemic has - it is believed - increased house approvals and decreased non-house approvals, while boosting building in regional areas. We look at the stats to see what has happened.

One of the major concerns around the COVID-19 pandemic is determining the duration and nature of the changes it has wrought.

Some changes are evidently "temporary". For example, when it comes to supply chain issues for building supplies, though these will likely take until Q1 of calendar 2023 to sort out, they are unlikely to have any lingering effects.

Other changes are more permanent, such as the ongoing concern with vaccinations, which will last over the next five to six years. A third category, and one likely to dominate the longer pandemic recovery period, has to do with relatively large changes that live on after the pandemic, but in a reduced form. One example would be working-from-home (WFH).

The COVID-19 pandemic has certainly affected the housing market and construction market in a range of ways. It's unclear at the moment how long-term those effects will be. Australians can be quite confident that the current high rate of growth in the price of housing will retreat, with many suggesting the second half of calendar 2022 as the most likely time period - though it is less certain if the market will see prices fall, or by how much if they do.

A major house market trend has been a shift from multi-unit dwellings, such as apartment buildings, to detached houses in some major markets. Will this trend be completely reversed, with Australia reverting to the same mix of the two evident in 2017 and 2018, or has the market been structurally changed?

Somewhat associated with that trend is for many urban dwellers to move to ex-urban or regional areas. While this was instigated by a desire to escape from locked-down inner-city areas to less constricted areas, there is some suggestion it may continue as a trend - particularly with WFH making longer commutes much less of a problem.

We can get some idea of how these two trends are tracking at the moment by looking at the Australian Bureau of Statistics (ABS) Building Approvals stats. In this series of HNN charts, we've used the ABS stats to work out the number of approvals in ex-urban/regional areas, and used the existing ABS stats for the "greater city" areas of state capitals. By dividing these into stats for houses and for non-house dwellings, we can track the dispersal of building approvals across the four categories that result: houses and non-house for urban areas, and houses and non-houses for ex-urban/regional areas.

To start with, however, it is best to look at some more basic statistics, which outline the recent building approval stats state-wide for houses and non-houses as a monthly time series. These are presented in Chart 1:

As all these charts have the same scale, with a maximum value of 8000, one initial fact is that there are more approvals issued for Victoria (VIC) than for New South Wales (NSW). It is seems that VIC has had more building approvals than NSW through the pandemic period. In fact, since March 2020, NSW has had 50066 house approvals, and 47,662 non-house approvals, for a total of 97,728, while VIC has had 76,489 house approvals and 35,402 non-house approvals for a total of 111,891, or 14.5% more than NSW.

These stats also reveal a trend that is visually evident as well, that NSW has proportionately more non-house approvals than VIC. For NSW, 48.8% of approvals are non-house, while for VIC the number is 31.6%.

New South Wales

Chart 2 shows the breakdown of data for NSW.

The top chart (A) shows the contribution regional and urban approvals make to the overall total when you sum approvals for a 12-month period ending in October. This is closely linked with the middle chart (B) which shows the percentage change between those 12-month periods.

As HNN has commented in the past, this shows a high peak for the 2016 period. While there is a small increase in urban house approvals for that period, the major contribution is from approvals for urban non-house approvals. Chart B shows the highest growth rate for urban and regional non-house approvals was in the 2015 period.

Interestingly, the next low-point for approvals were the 2019 and 2020 periods, with sharp negative growth for the 2019 period, followed by near flat growth for urban approvals, and negative growth for regional approvals. The 2021 period then brings a sharp turnaround to that, with urban non-house approvals growing at a higher rate than urban house approvals.

Finally, the bottom graph (C) shows the month-on-corresponding month growth rate for these four measures from October 2018 to October 2021. What is notable here is that the number of approvals for urban non-house becomes very volatile after September 2020, with sharp upwards spikes in October 2020, from April 2021 to June 2021, and for September 2021. There is a similar spike for regional non-house approvals from March 2021 to June 2021. In house approvals, the only notable strong peak of growth rate occurred in December 2020.

Comparing the proportions of each category for the periods from 2017 to 2020 with the 2021 period, urban houses gain 0.3%, urban non-houses lose 3.8%, regional houses gain 2.7% and regional non-houses gain 0.8%. That would indicate that urban houses retained their appeal, while urban non-houses lost some appeal, which was transferred mainly to regional houses, and to regional non-houses to a lesser extent.

Victoria

Chart 3 shows the breakdown of data for VIC.

The top chart (A) shows the contribution regional and urban approvals make to the overall total when you sum approvals for a 12-month period ending in October. This is closely linked with the middle chart (B) which shows the percentage change between those 12-month periods.

The first striking difference with NSW is that regional non-house approvals are very small proportionally. At their peak, for the 2021 period, they amount to only 1630, which is 28% of the same approvals for that period in NSW. The situation is reversed for regional houses, however, with Victoria for the 2021 period having 25% more approvals than NSW, at 16,868.

Secondly, rather than reaching a peak, building approvals have more of a plateau high from the 2015 period through to the 2018 period, but, like NSW, have a moderately steep dive in the 2019 period.

Thirdly, where the 2021 period for NSW was one of growth for all four categories, for VIC there are widely divergent results. Urban non-house dwellings show a steep rate of decline, while urban houses grow strongly. However, it is both regional houses and non-houses that show the strongest growth - though, as indicated above, the regional non-house approvals remain relatively small in number.

We can see how that situation plays out monthly in the bottom chart (C). Regional house growth begins to accelerate in July 2020, and reaches a peak in March 2021, which is also the peak for urban house approvals. Only in August 2021 do both house categories go into decline, though approvals for urban houses manages to recover in October 2021.

Urban non-houses do show growth for July 2020 to September 2020, but then go into negative growth through to March 2021, before declining to hit a 14-month peak in June 2021. Regional non-house approvals remain highly volatile (partly due to their small numbers versus the other categories) from October 2020 onwards, but mostly on the upside.

Looking at the composition stats, comparing the four categories for the 2017 to 2020 periods against the 2021 period, urban house approvals rose by 5.6%, while urban non-house approvals fell by a significant 13.4%. Regional house approvals rose by 7.1%, and regional non-house approvals climbed by 0.7%.

Essentially this indicates that urban non-house dwellings were sharply reduced, while both urban and regional house approvals grew, and even regional non-house approvals ticked upwards.

Queensland

Chart 4 shows the breakdown of data for Queensland (QLD).

The top chart (A) shows the contribution regional and urban approvals make to the overall total when you sum approvals for a 12-month period ending in October. This is closely linked with the middle chart (B) which shows the percentage change between those 12-month periods.

Many characteristics of the QLD chart A seem something like a blending of those from NSW and VIC. Where NSW has a sharp peak in approvals and VIC a plateau, QLD has a ledge of two periods, for 2015 and 2016. In fact, there is an interesting interplay between the four categories of approvals. Looking at approvals for regional houses, these show an over 20% growth rate for the 2012 period, followed by five subsequent periods to 2017 of very low growth. Negative growth takes over for the 2018 and 2019 period, before a return to almost zero growth for 2020, and then a spike to close to 50% growth for 2021.

Regional non-house approvals follow a similar pattern: steep growth in the 2013 period, followed by fluctuation around zero growth to the 2018 period, steep negative growth in the 2019 and 2020 periods, then a sharp upwards growth for the 2021 period.

Urban house approvals saw peak growth during the 2014 period, followed by four periods of growth between 5% and 11%, through to the 2018 period. The 2019 period saw sharp negative growth, then a return to 8% growth in 2020, followed by a surge to over 40% growth in 2021.

The real "wild card" in the QLD approvals story, however, is the approval growth rate for urban non-house dwellings. These surged in the periods 2013, 2014 and 2015, recording growth rates of 51%, 42% and 61% respectively. The number of approvals in this category went from 5788 in the 2012 period to 20,004 in the 2015 period, an increase of 250%.

For the next five periods, through to 2020, growth in approvals was volatile, spiking down to negative 48% and 38% growth, before returning to negative growth of around 3%. Only in 2021 did growth go strongly positive again, exceeding 20%.

Chart C shows the month-on-corresponding-month growth from the October 2018 period through to the October 2021 period. Approvals for urban houses and regional houses can be seen to be somewhat related through this timespan. There's a period of negative growth through to the November 2019 period, followed by essentially flat growth through to the July 2020 period. Growth accelerates from the August 2020 period through to the August 2021 period, with growth in regional houses outpacing that of urban houses, showing a peak in the periods for February and March 2021.

The approval growth rate for non-house dwellings tend to be more volatile. For urban non-house, from October 2018 through to June 2020 the growth trend is largely negative, except for a strong spike up to 120% growth in October 2019. In July 2020 the growth trend goes positive through to August 2021, though there is a strong negative spike of negative 40% in October 2020.

The approval growth for regional non-house dwellings is the most volatile. It remains mostly negative through to October 2020, then begins a period of overall positive growth, though there is a strong negative spike down to -48% in January 2021, followed by a strong upwards spike to over 700% growth (from 100 approvals in March 2020 to 817 approvals in March 2021).

Applying the composition analysis to QLD for the 2017 to 2020 periods against the 2021 period, the overall proportion of urban house approvals grew by 3.3% to be 38.2% of the total. Regional house approvals also grew by 2.8% to make up 31.6%. Urban non-house approvals fell by 5.0% to make up 17.5%, and regional non-house approvals fell by 1.1% to provide 12.7% of the total approvals.

The dominant shift, then, is from non-house to house approvals, with also a smaller shift to some more regional house approvals.

South Australia

After the somewhat hectic volatility of the QLD approvals, South Australia (SA) seems relatively calm and predictable. It is necessary to note that in terms of one category, regional non-houses, the raw numbers are so small - fewer than 70 approvals in a 12-month period from 2013 onwards - that percentage measures of growth are less meaningful.

Chart 5 shows the breakdown of data for SA.

The top chart (A) shows the contribution regional and urban approvals make to the overall total when you sum approvals for a 12-month period ending in October. This is closely linked with the middle chart (B) which shows the percentage change between those 12-month periods.

SA shows a sharp dip in approvals to the 2012 period, followed by a rise over the next two periods to reach a peak in the 2014 period. There follows some shallow fluctuations through the 2018 period, then two slightly more substantial declines in the 2019 and 2020 periods, before a sharp increase for the 2021 period.

The underlying growth trends, as shown in chart B show high growth in the 2013 for urban non-house dwellings, at 55%, then slowing but ongoing growth in this through to the 2016 period, a bump upwards in the subsequent period, then four periods of decline through to the 2021 period.

Urban house approvals show growth rates above 16% for the 2013 and 2014 periods, followed by a negative growth rate of around 9% in 2015, a recovery to a positive rate of 10% in 2016, then four periods of very modest growth through to 2020, followed by a sharp increase in the 2021 period to over 40% growth.

Regional house approvals show a peak of 20% growth in the 2014 period, followed by six periods of negative to flat growth through to the 2020 period. Then there is a sharp uptick in growth, to over 75% for the 2021 period.

As was remarked above, the regional non-house approvals are very small, and difficult to track statistically. Perhaps what is of most interest is that there were 248 approvals for the 2011 period, and 101 for the 2012 period. After that, approvals remain under 70, except for the 2016 period, which had 76.

Looking at chart C for the month-on-corresponding-month approval growth rates for the timespan between October 2019 and October 2021, we've had to exclude regional non-house category, as several months have zero approvals, which makes growth rates less useful.

The chart shows the growth rate for non-house urban approvals to be quite volatile, with three major peaks over 150%, and two minor peaks over 30%. The urban house category shows a largely positive growth rate from May 2019 onwards, and then goes strongly positive from November 2020, returning to a negative rate only in October 2021.

The regional house growth fluctuates but is more negative than the urban house growth rate through to September 2020 when it goes strongly positive, peaking at 150% for February and March 2021. By October 2021 it has returned to be close to zero.

Looking at the changing composition by comparing the four categories for the 2017 to 2020 periods against the 2021 period for building approvals in SA, the urban house approvals grew by 8.9% to reach 65.7% of the total approvals. Regional house approvals also grew, by 4.5% to make up 18.4% of all approvals.

Urban non-house approvals fell significantly, down by 13.2% to make up just 15.6% of approvals, and regional non-house was down 0.2%, making up only 0.2% of all dwelling approvals in the state.

This clearly shows a very strong shift towards houses and away from non-houses, as well as a significant increase in regional house approvals.

Western Australia

Western Australia (WA) is, like SA, something unique when it comes to building approvals. Like SA, the numbers for regional non-house approvals are too low to really derive much statistical sense from them.

Chart 6 shows the breakdown of data for WA.

The top chart (A) shows the contribution regional and urban approvals make to the overall total when you sum approvals for a 12-month period ending in October. This is closely linked with the middle chart (B) which shows the percentage change between those 12-month periods.

Unlike the other states profiled above, the peak in building approval for WA was assisted by an increase in approvals for urban non-houses, but the determining fact was an increase in urban house approvals. In the 2013 and 2014 periods, these showed a growth rate of 40% and 18% respectively. After the 2014 peak, the growth rate for these approvals went negative for five periods, recovering to 15% in 2020, and then hitting 75% in 2021.

For regional house approvals, these showed growth to 30% in the 2013 period, then went into negative to flat growth for the next seven periods, before surging by 100% in the 2021 period.

Urban non-house approvals produced strong growth for 2012 to 2015, then remained negative for five periods, before recovering to 30% growth in 2021.

Chart C shows how these changes played out on a month-on-corresponding-month basis from October 2018 through to October 2021. Growth rates for both urban house and regional houses remained slightly negative through to July 2020, then climbed. Regional house approvals reached a peak of 250% growth in February 2021, and urban house approvals reached a peak of 200% in March 2021. Both fell back to a slightly negative growth rate by September 2021, then went strongly negative in October 2021.

Looking at changes in building approval composition by comparing the four categories for the 2017 to 2020 periods against the 2021 period, the two biggest changes were an increase in urban houses in terms of proportion of overall approvals, and a decrease for urban non-house approvals. The former grew by 7.5% to 71.3% overall, and the latter fell by 8.8% to 13.6%.

Regional house approvals grey by 1.5% to 14.6% of approvals overall. Regional non-house approvals fell by 0.3% to 0.5% overall.

The primary shift illustrated is from non-house to house approvals, with regional house approvals now ahead of urban non-house approvals.

Analysis

There is one more set of charts it will be helpful to look at to complete the overview and analysis. These charts look at the ratio of ex-urban (regional) to urban building approvals for all the states for 12-month trailing periods to October.

The top chart shows the ratio of ex-urban to urban house approvals, and the bottom chart shows the ratio of ex-urban to urban non-house approvals.

For the top chart, perhaps the biggest surprise is how high ex-urban house approvals were as a ratio of urban house approvals for QLD. It wasn't until the 2017 period that urban house approvals were higher than ex-urban ones. Since 2018, ex-urban approvals have settled to around 80% of urban approvals.

To a lesser extent the same holds true for NSW, though what this a does is to reveal one problem with these statistics. Really the ABS stats are for not just ex-urban areas, but areas outside of Sydney. Given the number of large towns in NSW (such as Newcastle), the "ex-urban" number is going to encompass a number of urban areas, making it partially a measure of dispersion and decentralisation as well.

For VIC, it's interesting to see that the ratio reached a high of 50% in 2012, hit a low of under 40% in 2017, then grew slightly through to 2021 to a new high of 53%. While the pandemic gave it a boost, it's also true that the trend was on the upswing.

Both WA and SA show a trend of a convergence around 20%, with a slight uptrend for the 2021 period.

Looking at the bottom chart for non-house approvals, this shows some less predictable trends. QLD indicates a level of volatility, though there has been a general upwards in the ratio of ex-urban to urban non-house approvals since the 2017 period. NSW shows the ratio reaching a low in the 2016 period, the lifting to a high of around 25% in the 2019 period, before drifting back closer to 20% for both 2020 and 2021. The other three states show a convergence around 5%, though Victoria shows an uptick for the 2021 period to around 9%.

While the influence of the pandemic is there to see in the lift in the ratio for the 2021 period, yet that lift is, in general, well within the range established by past periods.

The question is, of course, what is going to happen when we add another period or two onto not only these charts, but the other charts as well.

It seems it is most likely that some states will see a more permanent change, others will quickly revert back to a pre-pandemic pattern, and still others will respond to shifts in the states that have been more affected by the pandemic.

It's quite likely, for example, that VIC is going to see an ongoing shift. Regional houses will likely continue to be more popular, though the growth rate in approvals may slow to just 2% or 3% a year over the next five years. Non-house approvals for both urban and regional areas will likely continue to be flat for two to three years, but will inevitably pick up in the face of future pressures.

In contrast, HNN does not see NSW being affected as much. We expect to see it revert to 2018/19 numbers over the next two years.

For the other states profiled here, QLD, SA and WA, it's likely that ongoing immigration from NSW and VIC will play a role in determining their building approvals. For example, we can expect that arrivals from VIC will insist on houses, while those from NSW will consider both houses and apartments. So much of how they are shaped will depend on these external influences.

Playing into all of this are also the general influences on the housing market. It seems fairly certain that 2022 will see some kind of a slowing in these markets, and 2023 will likely see prices retreat, as interest rates become more of a concern. The real question is what comes afterwards, in 2025 or so.

That is likely to be shaped by a range of urban concerns. Sydney and Melbourne in particular, will face a reduction in daytime population as more workers WFH; for the first time they will need to think of workers as a market segment to be catered to, rather than taking them largely for granted. One of the major challenges facing Melbourne is that it will have no choice but to introduce increased density of dwellings in its inner-city areas, which will lead to a possible devaluation of real estate.

While these are difficult problems, they typically present solutions that can be worked out over time. That is a far cry from the emergency measures that have been implemented in the face of the COVID-19 pandemic, which have exacted such a heavy cost from both society and from individuals.

statistics

ABS hardware retail sales to October 2021

Sales lift at the end of 2021

While the second quarter of calendar 2021 showed sales slump, sales from August to October 2021 have showed growth.

The Australian Bureau of Statistics (ABS) has released its stats for retail sales through to October 2021. For the hardware industry, it has become very clear that the full impact of the COVID-19 pandemic boost has diminished. Yet what remains surprising is that overall sales have yet to revert back to the pre-pandemic levels of 2019.

Overall sales

Chart 1 shows the cumulative values of hardware retail sales across Australia. (The statistics omit both the Northern Territory and Tasmania as the ABS does not supply times stats of these regions at this time.)

The increase in sales across Australia for the 2020 period over the 2019 period is a considerable 16.38%, while the increase for the most current period, 2021, over the 2020 period is 4.25%. The state with the highest gain was New South Wales (NSW), which recorded an increase of 7.54%, or $507 million, for a total of $7237 million. In second place was Queensland (QLD) with an increase of 6.85%, or $322 million, for a total of $5030 million. Western Australia (WA) saw a gain of 4.83%, or $113 million, for a total of $2434 million.

The Australian Capital Territory (ACT) managed an increase of 2.01%, or $9 million, for a total of $476 million. South Australia (SA) gained 0.45%, or $6 million, to record a total of $1402 million. In last place, with a loss of 0.40% was Victoria (VIC), losing $26 million, for total sales of $6467 million.

Sales growth trends

Chart 2 maps out the sales growth over the past decade for hardware retail sales.

One of the useful aspects of this chart is typically to trace whether regional or national influences are affecting each state's results. In this chart there is yet another affirmation that the impact of the pandemic itself outweighs almost every other influence. However, it is also clear that the pandemic is having a different impact on each area of Australia. In particular, we can see that both NSW and QLD are doing better than VIC.

Month-on-month growth trends

Chart 3 shows the month-on corresponding-month growth trend over the past two years for hardware retail sales.

This chart shows that by the end of the first quarter of calendar 2021, comparative sales were trending quite heavily downwards, with SA - for example - getting below 20% negative growth, and VIC coming close to that with 18% negative growth.

However, rather surprisingly, what seems to have happened is that the "magical" last four months of the year kicked in again - perhaps combining with the lifting of many COVID-19 restrictions - and sales actually began to grow again as compared to 2020. NSW is leading the way with 13.5% growth in October 2021, while VIC showed a loss of 0.7% in growth for the same period.

Analysis

The hardware retail industry, despite struggling with supply chain issues for lumber and other materials, has continued a strong performance through to October 2021. That said, however, the second quarter of calendar 2021, which saw sales return to 2019 levels, could be a better predictor of the future than the good performance in the final quarter of 2021.

In particular, signs are that demand is slackening behind supply on dwelling markets, and with every passing quarter the possibility of a rise in base interest rates increases. Yet on the positive side, there is more than enough construction work in the pipeline to last through 2022, and into the first quarter of 2023 as well.

statistics

ABS building work done stats

ABS reports to the September 2021 quarter

While the patterns of construction work vary between the states, the overall pattern that emerges is an ongoing response to the pandemic. Renovation construction continues to trend upwards, while construction on multi-unit dwelling continues to decline.

The Australian Bureau of Statistics (ABS) has released statistics for construction work done through to the September 2021 quarter.

Chart 1 shows these stats for Australia as a whole:

The top graph shows the trailing four quarters to the September quarter. The general characteristics this reveals is that while there was a contraction in the four quarters to the September 2020 quarter, this only returned the level of work down to that of 2015, maintaining a level above $70 billion. Also, the recovery from that dip in the four quarters to the September 2021 quarter has not been particularly high.

Looking at the second, middle graph on the chart, this shows the percentage change based on trailing four quarters to September. Other residential, which is mostly multi-unit dwellings, fell steeply in an over 15% decline in the four quarters to September 2020, continuing the previous decline for the four quarters to September 2019. New house construction also fell, but only to a level close to 6%. Alterations & additions (essentially, renovations), however, actually went up by a modest 2% or so.

For the four quarters to September 2021, both new houses and alts & adds showed strong growth, with houses reaching 12% growth, and alts & adds over 16% growth. Other residential, however, declined at a lesser rate, but still continued to fall.

Finally, the bottom graph, shows the quarter on corresponding quarter percentage change for these three construction types. For houses, it's notable that growth was negative beginning in the March 2019 quarter through until the June 2020 quarter. It is only in September 2020 that growth begins, then accelerates though the next three quarters.

For alts & adds, there is a contraction in the March 2020 quarter, and then consistent growth through to the June 2021 quarter, followed by slowing growth in the September 2021 quarter. For other residential, this goes into negative growth in March 2019, and that continues through to the September 2021 quarter.

New South Wales

Chart 2 shows theses stats for New South Wales (NSW).

The top chart shows that NSW experienced a steep decline for both the trailing four quarters to September 2019 and September 2020. Most of that decline, however, is evidently due to a contraction in the other residential category. The mild recovery evident for the trailing four quarters to the September quarter 2021 is mostly made up of growth in new houses and alts & adds.

The middle chart, which shows the percentage change for the above numbers, shows that after relatively strong growth through to the four quarters ending in September 2018, other residential entered into a steep decline through to the four quarters ending in September 2021.

New houses followed other residential down, though not quite so steeply, but then recovered with strong growth through the four quarters to September 2021. Meanwhile, alts & adds followed the other construction types down in the four quarters to September 2019, but then returned to neutrality in 2020, and showed the strongest growth of all construction types in the four quarters to September 2021.

The bottom graph shows the percentage growth rate on a month to corresponding month basis. For other residential, this entered negative growth territory first in the December 2018 quarter, and reached around 30% negative growth in the September 2019 quarter. The decline slowed, with it almost reaching flat growth in the September 2020 quarter, before falling through the subsequent quarters to the September 2021 quarter, with negative growth of close to 24%.

Growth for new houses to some extent followed other residential down, but at a delay of one quarter, going negative in the March 2019 quarter, stabilising at a 15% decline for the June 2019, September 2019 and December 2019 quarters, before reaching its sharpest contraction in the March 2020 quarter. It recovered at that point, but only reached positive growth in the December 2020 quarter, to peak at over 25% growth in the June 2021 quarter, before a decline for the September 2021 quarter.

For alts & adds, there has been overall less negative growth since the March 2019 quarter, recovering to almost flat growth for the December 2019 quarter, then growing strongly from the June 2020 quarter onwards, to reach a peak growth of over 40% for the June 2021 quarter, before retreating to 20% growth for the September 2021 quarter.

Victoria

Chart 3 shows theses stats for Victoria (VIC).

The top chart, in comparison to that of NSW, shows a relatively mild dip in the four quarters to September 2020, but also indicates that there has not been, overall, a recovery in the four quarters to September 2021. The state did not see that great a contraction in other residential activity, while both new houses and alts & adds show some improvement.

The middle chart, which maps out these changes in percentage growth terms, shows a lower level of overall volatility as compared to NSW. Growth in new house construction activity has been positive from the four quarters to September 2015, and saw only a mild contraction of around 2% in the four quarters to September 2020, recovering to around 8% growth in the four quarters to September 2021.

Similarly, the work done on alts & adds has fluctuated in a narrow band of growth and contraction to slightly less than 5% in both directions. It's also notable that it did not take off even in the four quarters to September 2020, growing at just under 5%, and increased growth only marginally in the four quarters to September 2021.

Other residential, however, has shown a higher degree of volatility. Surprisingly, it has remained in positive or neutral territory from the four quarters to September 2012 through to the four quarters to September 2019, but has fluctuated to over 20%. This has been followed by a steep dive during both 2020 and 2021.

Looking at the third, bottom graph, which charts the month on corresponding month growth patterns, it's clear that COVID-19 has left its mark on these statistics. As the pandemic started in the March 2020 quarter, other residential immediately trends steeply downwards, alts & adds surge to 10% growth. New houses lags this slightly by three quarters, but for September 2020 reaches 8% growth. Then, as lockdowns continue, it falls to close to 3% growth in the June 2021 quarter. Then through to the September 2021 quarter new houses surge again, along with alts & adds.

Queensland

Chart 4 shows theses stats for Queensland (QLD).

The top chart shows a building activity peak that is shifted back to the four quarters ending in the September 2016 quarter, with the bulk of the peak made up of activity in the other residential category. As with NSW, there is a sharp dip in 2020, but this contributes to what is a four year fall in activity, back to the level of 2014. This is made up mostly of a decline in other residential activity, though it is joined by a decline in new houses activity, which starts in 2019. Meanwhile, alts & adds has increased steadily since 2017.

The middle graph shows the extent of some of these shifts. Its most outstanding feature is the shift in other residential, which shows strong growth from 2014 to 2016, then a series of volatile further declines through to 2020. Perhaps the biggest surprise is its return to reasonable growth in the four quarters to September 2021.

In fact, there seems to be something of a general inflexion point around the four quarters to September 2017, where all three categories have partially converged. At that point other residential begins its steep decline, new houses goes flat before declining for both 2019 and 2020, while alts & adds takes off for an over 10% growth, which it largely maintains through to 2020.

The three categories then act in concert once again for the four quarters to September 2021. Alts & adds hits growth of over 25%, new houses shoots up from negative growth of 9% to positive growth of 18%, and even other residential climbs from negative growth of 25% to positive growth of 8%.

Looking at the bottom graph, which shows a quarter on corresponding quarter growth rate, what is unusual is the high growth rate for work on new houses. This begins to accelerate in the September 2020 quarter, and continues a steep climb through to over 35% for the September 2021 quarter. Even other residential recovers from a negative 25% growth rate to enter positive territory in the September 2020 quarter, then continue to climb up to a 15% growth rate in the September 2021 quarter. Over the same period alts & adds stabilises its growth at between 25% and 30%.

Analysis

When it comes to the construction industry and the available stats in the wake of the COVID-19 pandemic, the question that keeps recurring is what kind of changes can we observe? Are we seeing temporary changes that are a direct response to immediate needs in the face of the pandemic, more permanent changes that will alter the structure of demand, or some kind of medium-term change, where homeowners are committing to something like a four or five year plan?

The two characteristics we can see clearly are an increase in activity for alts & adds, and a shift in the role that other residential construction is set to play. The significance, for example, of the recovery in activity for other residential in QLD is that this indicates the rejection of other residential in both NSW and VIC is highly COVID-19 related.

But perhaps the most reassuring element of the statistics is that, while the house price market is showing signs of performing in unexpected way for established residences, and while the construction activity charts might be touching the edges of historical conditions, they are still remaining within the bounds of previous performance.

In fact, what we are likely seeing here on the part of people contracting for construction is something that is really a medium-term plan at work. While economists and others are very concerned that the housing market is heading for an interest rate increase cliff, it's possible that these new homeowners have already factored that into their thinking.

Their overriding concern, in other words, is not finding the perfect timing to enter the housing market, but rather to take action that will provide against the possibility the COVID-19 pandemic will have long-lasting effects. In that case, the plan would be to buy the house, or pay for the house renovations, and simply endure a period of both higher interest rates and an apparent decline in house value.

statistics

ABS Building Approvals: Capital cities

Surprising resiliency in non-house approvals

The latest housing approval numbers confirm that, as predicted, the load on the construction industry is set to exceed its ability to supply dwellings.

The Australian Bureau of Statistics (ABS) has released its figures for Building Approvals to September 2021. In reviewing the actual number of approvals for Australia's capital cities, it's clear the non-house dwellings have proven to be surprisingly resilient.

Number of approvals

Chart 1 shows the graphs for the numbers of approvals in capital cities, based on the trailing 12 months to September.

The top chart, for houses, shows ongoing strong growth for greater Melbourne from October 2020 to September 2021. Surprisingly, growth for greater Sydney has been more subdued, and has even been surpassed by greater Perth, while greater Brisbane is not far behind. However, these other states did not experience the strong growth for both the year ended September 2020 and September 2021. Adelaide also shows strong growth for the final year.

The middle chart shows the growth in non-house dwellings. A little surprisingly, for Sydney the fall to 2020 is less steep than in the previous year, while Melbourne shows an increase in numbers. For 2021, Sydney shows a steep increase in numbers while Melbourne virtually mirrors that move, reversing its previous gains. Brisbane shows ongoing mild gains through both years, while Perth shows a modest increase in number to 2021.

The bottom chart shows the percentage of total building approvals taken up by non-house approvals. While the Australian Capital Territory (ACT) shows the highest percentage overall, most of the states show a steady decline in the percentage since the year ending September 2017. For the most recent period to September 2021, only Sydney shows an increase in the percentage.

Percentage change in approvals

Chart 2 shows the percentage change in building approvals for the greater capital city regions.

The top chart shows the change for house approvals. The general pattern is for a flat or negative result for 2019, followed by a flat or gain under 10% for 2020, then a sudden acceleration for 2021. The gain for Perth is particularly unexpected, while both Sydney and Melbourne have gains of around 20%, and both Adelaide and Brisbane show gains of around 40%.

The bottom chart shows the same growth figures, but for non-house dwellings. The strong gain for Perth is reflective of the small base it had previously for this type of dwelling, while Sydney's sudden surge is unexpected. Brisbane shows moderately high gains for 2020, followed by further growth into 2021. Melbourne shows reasonable growth in 2020, followed by a strong plunge to negative growth for 2021.

Percentage change month-on-month

Chart 3 shows the month-on-corresponding month percentage change for building approvals across the greater capital city regions.

The top chart shows these figures for houses. It's interesting to note that it is not until September 2020 that the growth for Sydney starts to accelerate, before dipping down close to zero for March 2021. More recently, since June 2021, the growth rates for Melbourne and Sydney have been tracking very close to each other.

In terms of overall growth, both Brisbane and Adelaide have been performing strongly since September 2020, while Perth began strong growth in August 2020, then achieved an extreme high in February 2021, but has entered negative growth in September 2021.

The bottom chart shows the numbers for non-house building approvals. The chart omits all capitals except for Sydney, Melbourne Brisbane and Adelaide because the numbers for the other regions are so volatile on a month-on-month basis that they make no discernible pattern. The chart shows a strong peak for Sydney in October 2020, while Brisbane has a peak in December 2020 and Adelaide in January 2021.

Melbourne, however, shows a series of lows from September 2020 through to March 2021, followed by a recovery in June 2021, and then a retreat to negative growth by September 2021. The chart finishes with a very strong surge in approvals for Sydney, while both Brisbane and Adelaide end in negative growth.

Analysis

Analysing the housing at the moment is a very difficult task. That's largely because much of the market has adopted a short-term approach to investment estimates. While most economists see a market that must be set to collapse, that collapse will likely not take place for another two to three years, given the ongoing support for low interest rates from the Reserve Bank of Australia (RBA).

There are just so many questions around the ongoing growth in housing valuations. The situation is becoming so extreme, that it's possible to question whether investors are banking on government bailouts in the event of a collapse in prices - which would see less well-off Australians basically subsidising more well-off Australians who have made poor investment decisions.

The most worrying number is really the exceptionally high number of house approvals for the greater Melbourne region. There is a degree of unbalance to this.

Hopefully, as the country and the economy continue to open up, some of this irrational exuberance will dissipate, and over the next two years, as homebuyers see the end of fixed-rate three-year mortgages approaching, there will be some slowdown in the market.

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ABS stats: Hardware retail turnover

NSW outperforms, VIC lags a little

Turnover growth remains relatively robust, with past gains largely retained. The only puzzle is Victoria, which shows less resilience than other states, while New South Wales continues to be a leader.

The Australian Bureau of Statistics (ABS) has released stats for retail turnover to September 2021. While the explosive growth in hardware retail sales during 2020 has declined, the states have retained most of their gains in sales, and some have continued to grow at a surprisingly high rate.

As we are dealing with highly volatile data, the most relevant chart compares each month to the previous corresponding month, as shown in Chart 1.

As this chart illustrates, the reductions seen from March 2021 through to July 2021 turned more positive (except for the Australian Capital Territory), and then remained relatively stable from August to September 2021. For September 202, Australia overall saw an improvement of 2.8% over the pcp. Western Australia (WA) posted the highest gain for the month, of 9.9%, followed by South Australia (SA) on 6.4%, New South Wales (NSW) at 4.7% and Queensland (QLD) with 3.8%. The Australian Capital Territory (ACT) saw a decline of 32.0%, but this is in comparison to a very strong September 2020, in which the territory posted a 39.9% increase. Victoria (VIC), which has had negative growth rates since March 2021, went down by 0.9%.

Chart 2 shows the direct comparison for the trailing 12 months to September.

It is very clear that the most recent period shows less growth than the preceding period. The change from 2020 to 2021 was around $1.2 billion or 5.2%, while the change from 2019 to 2020 was close to $3.0 billion.

In terms of the states, NSW remains the top performer for growth, increasing by 8.5%, which amounts to an extra $557 million, followed by QLD at 8.2%, a gain of $380 million. WA gained 6.24%, the ACT 4.5%, and VIC posted the lowest gain of just 0.1% or $7 million over the pcp.

Chart 3 shows the trend pattern for percentage increases based on the trailing 12 months to September.

Perhaps the most surprising element of this chart is the extent to which VIC has declined more steeply than NSW. That is despite both Sydney and Melbourne experiencing lockdowns

Analysis

One thing that seems quite clear is that the hardware retail market has not undergone the kind of shift back to 2019 in turnover numbers that had been expected. Instead, we are seeing relatively good growth in most states and territories.

Looking towards the future, as HNN outlines in its review of the latest forecast released by the Australian Construction Industry Forum (ACIF), there is some hope that the current robust numbers will continue for another year, if not two. Alterations and additions are forecast to continue to grow, as is the overall residential construction market, led by - for the moment - detached houses.

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ABS building work done: NSW, VIC & QLD

Activity level constant, but split between house and non-house altered

The boost given to the construction industry during the pandemic did, up until the last financial year, kept activity at close to pre-pandemic levels. It also changed the composition of work done, altering the balance between house and non-house construction.

Tracking the value of building work done gives a simple overview of the actual health of the building industry at a given moment. Building approvals map out - to some extent - what can be expected in the future, but building work done really provides a sense of current output. That relates to both the extent of work that is being attempted, and the rate of work that is possible in the industry during a given period of time.

We've grouped together the states of New South Wales (NSW), Victoria (VIC) and Queensland (QLD) because they are contiguous along Australia's eastern coast, have relatively large populations and population density, and because they are the three states most affected by the COVID-19 pandemic.

Value of work done residential

For the ABS series 8752.0 value of work done - residential, chain volume measures are used, which means that the value is adjusted to better reflect the actual volume of work that is done. These stats relate to the trailing four quarters to the June quarter, which are, of course, also the standard financial years.

Looking at those stats for NSW, VIC and QLD, two things are immediately clear. The first is that, while the housing market has received something of a sharp boost for FY2020/21, overall residential work done has fallen in both NSW and VIC, and risen only slightly for QLD. The second is that the big winner remains alterations and additions - which is good news for hardware retailers.

For NSW (Chart 1) there is a peak in alterations and additions (alts & adds) in FY2016/17, and a peak in non-house in FY2017/18, followed by a peak for houses in 2019. All three decline steeply in FY2019/20. For FY 2020/21, houses rebound slightly, non-house continues to decline, and alts & adds hits its highest value for the past 10 years.

In VIC (Chart 2), there is a sharp peak for alts & adds in FY2016/17, followed by a steep decline in the next financial year. Houses saw a low in FY2013/14, and have continued to record increases through to FY2018/19, followed by a mild decline in FY2019/20, and a recovery to just above the previous peak in FY2020/21. Non-house has followed a similar pattern, except that FY2020/21 saw a steep decline, back to FY2015/16 values.

Meanwhile, QLD (Chart 3) has very much gone its own way. Except for a setback in FY2016/17, alts & adds have been increasing, which particularly sharp gains for both the FY2018/19 and FY2020/21 results. In contrast, non-house reached a high level in FY2015/16 after a sharp series of rises since FY2012/13, then hit its 10-year peak in FY2016/17. Since then, it has been in decline, reaching FY2013/14 levels in FY2020/21. The stats for houses rose from FY2013/14 to FY2017/18, then fell through to FY2019/20, before climbing slightly again in the most recent period.

Financial year percentage change

This is a comparison of each financial year with the preceding year in percentage growth terms. While these stats track the changes in the above stats, they do help to show some trends that develop.

One thing we can do is to track the total amount of growth in each of the areas covered. Basically, the more area there is under the graph lines about the zero axis, the more overall growth there will be in that particular part of building work done. From this is it easy to see, glancing at these three graphs, that non-house (other residential) building work done has outgrown the other two construction types.

It is also notable how much more growth there has been in the house part for NSW as compared to VIC and QLD, while it is QLD that has the most growth in alts & adds.

Also evident is that, as all three graphs use the same scale, that VIC is far less volatile in growth terms than NSW and QLD.

Quarter on corresponding quarter change

These stats track the percentage change between a quarter and its corresponding quarter in the previous year.

NSW (Chart 7) shows how, on this basis, both alts & adds and non-house building work done entered into negative territory back in the March 2019 quarter, and while alts & adds managed to break out of that in the September 2020 quarter, non-house actually still remains in negative territory. Similarly, for house building work done, this went below zero growth for the June 2019 quarter, and only went positive - though quite strongly - for the March and June quarters of 2021.

VIC (Chart 8) shows a very different pattern, illustrating how deep the toll from the COVID-19 pandemic has been, even with fiscal stimulus. Building work done on house entered negative territory for the June 2019 quarter, and remained in negative or only slightly positive territory until the December 2020 quarter, exhibiting only mild growth as compared to NSW. Similarly, alts & adds did manage quite strong growth begin in the March 2020 quarter, and then has managed to not go negative from the December 2020 quarter through to the June 2021 quarter. Non-house, however, hit negative growth for the March 2020 quarter, and has not recovered through to the June 2021 quarter.

QLD (Chart 9) represents a more optimistic response. In particular, the state shows real strength in alts & adds, which have remained in positive growth from the December 2017 quarter, except for a flat result in the December 2019 quarter. Building work done for houses has fared less well, going negative in the September 2018 quarter, and only going positive for the December 2020 quarter. That is also the quarter where, a little surprisingly, non-house went positive, after going negative in the March 2017 quarter.

Analysis

Perhaps the biggest surprise in reviewing these stats is that NSW and QLD have much in common, while VIC has become more of an outlier. While it's easy to see this might be the case based on VIC's harsher series of lockdowns during the COVID-19 pandemic, the trend is far more historical than that.

Some of this is structural, in terms of the composition of the building work. In NSW, even with the effects of the pandemic, the non-house sector remains conjoined with the house sector. In VIC, the house sector continues to dominate, and the non-house sector is not very responsive to activity in the house sector. QLD is somewhere between those two, with its non-house sector more specialised to defined needs.

The best news for hardware and home improvement retailers is the ongoing trend upwards for building work done in alterations and additions, at least in NSW and QLD. The picture for VIC remains less clear. While there are expectations that as the economy for that state opens up again in early 2022 there will be a reinvigoration of many aspects of business, there are also some obstacles in the way of this.

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ABS building work done stats: SA, TAS and ACT

Non-house construction plays a unique role

These states and territories are dominated by one form of construction. That is house construction for SA and TAS, while non-house dominates in the ACT. The role of alts & adds varies between each, with significant growth for SA and ACT, but a general decline in TAS.

A little surprisingly, outside of the three major east coast states, the next grouping that makes some sense statistically is South Australia (SA), Tasmania (TAS) and Australian Capital Territory (ACT).

Value of work done residential

For the ABS series 8752.0 value of work done - residential, chain volume measures are used, which means that the value is adjusted to better reflect the actual volume of work that is done. These stats relate to the trailing four quarters to the June quarter, which are, of course, also the standard financial years.

For SA (Chart 1) there are a number of differences from the eastern seaboard states. Building work done on houses shows relatively consistent growth, with only a slight peak in FY2017/18, and a fairly strong uplift in FY2020/21. Similarly, non-house construction shows the same peak, followed by a slight consistent decline over two years, then the now-familiar dip for the COVID-19 pandemic in FY2020/21.

Alterations and additions (alts & adds) are somewhat more like Queensland (QLD) than the other states, with a series of progressive gains in building activity since FY2016/17, and a sharp increase for FY2020/21. The outstanding characteristic that indicates SA belongs in this group is the wide gap between house and non-house building activity, with the SA construction activity far more oriented towards houses.

In TAS (Chart 2) that division between house and non-house building activity is even greater. House activity has been increasing strongly since FY2016/17, so that the continued increase for FY2020/21 seems part of the underlying pattern. Meanwhile, non-house activity shows a general trend of decline, despite a slight peak for FY2017/18. There is also the expected downturn for FY2020/21. What does make TAS quite unique is that alts & adds show much slower growth than for the other states and territories. This has been in place since a peak in FY2011/12, though there was something of a mild improvement in FY2018/19. Even the stimulus of FY2020/21 resulted in only a small increase in building activity for alts & adds.

The ACT (Chart 3) is both very like the other states and territories, and yet quite different as well. The primary difference is that the role of non-house and house building work done is swapped, with non-house dominating increasingly from FY2014/15 onwards - though it is interesting that after a long pattern of growth, there is that same dip in activity for FY2020/21. That's perhaps to be expected, given the more urban nature of the ACT. House building activity was quite depressed from FY2015/16 through to FY2017/18, and then resumed the level for FY2014/15. Alts & adds entered a steep decline through to FY2013/14, and remained at a low level until it grew sharply in FY2019/20, and then retained that level through to FY2020/21.

Financial year percentage change

This is a comparison of each financial year with the preceding year in percentage growth terms. As with the three eastern seaboard states, one characteristic of these charts is that there are surprising spurts of growth in non-house building work done.

For SA (Chart 4) what is most noticeable is that all three categories have tended towards positive or at the least neutral growth over the 10 years shown, with the exception of FY2012/13.

By contrast, TAS (Chart 5) shows a more volatile pattern, especially for non-house building work done, though house building work is volatile on the upside as well. (Note that the scale on this chart is expanded over that of the other two.) Alts & adds, however, are significantly stable, moving from mild negative growth the mild positive growth after FY2018/19.

The ACT (Chart 6) shows more volatility in growth for alts & adds, as well as significantly more negative growth for building work done on house construction.

Quarter on corresponding quarter change

These stats track the percentage change between a quarter and its corresponding quarter in the previous year.

Looking at the stats for SA (Chart 7), what is immediately clear is that, at least over the past six years, both building work done on houses and for alts & adds has fluctuated through a comparatively narrow range of 10% positive and negative, while building work done on non-house residential construction has fluctuated both much higher and over a longer periodicity.

There is a somewhat similar pattern for TAS (Chart 8), where building work done for house construction and alts & adds roughly follow each other's fluctuations, while non-house construction follows a separate path, often with extreme fluctuations. It's notable that the most extreme of those fluctuations is for the June 2021 quarter, where growth in non-house building work done value falls by over 70%, even as both non-house and alts & adds construction growth rises.

For the ACT (Chart 9), the relationship for building work done growth between the three construction types is more complex, with occasional concordance - for example, in the June September and December quarters of 2017 - followed by wide variance, as in the December 2019 quarter. What does seem noticeable is that as the pandemic hits, affecting the June 2020 quarter, the overall volatility in growth declines.

Analysis

These three states and territories are, obviously, not geographically contiguous, and have very different regional economies. However they are similar in that all three have been affected by the pandemic, but to the same extent as the three eastern seaboard states. You might expect that, given that, their construction economies might have picked up considerably during FY2020/21, as they received effectively the same stimulus as the larger states. The reason this has not happened is likely due to their interdependence on the economies of those states.

This is an important trend to pay attention to in modelling the future of construction in Australia. In a more resource-driven economy there tends to be a more even distribution of the resulting wealth, resulting from both "organic" spillovers, such as supplying support functions for mining and agriculture, as well as "artificial" spillovers, such as government subsidised local manufacturing.

In transitioning to a more services-oriented economy, the benefits will concentrate in key urban centres, and this establishes a different network of dependencies. There is a sense of "primary" and "secondary" regions being established. All three of these states and territories are more secondary than primary regions in Australia's emerging economy, and increasingly their economies will be dependent on external factors.

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ABS building work done: WA and NT

Construction markets show decline

While forecasts indicate construction may improve through the second calendar half of 2021, there are signs of long-term decline for both these regions.

HNN has grouped together the state of Western Australia (WA) with the Northern Territory (NT) largely because these are the two regions that have had the least direct impact from the COVID-19 pandemic - so far, that is, as both face considerable future challenges. That said, there are also considerable differences. The NT is smaller both economically and in terms of population, while WA is largely driven by its resources industries.

Value of work done residential

For the ABS series 8752.0 value of work done - residential, chain volume measures are used, which means that the value is adjusted to better reflect the actual volume of work that is done. These stats relate to the trailing four quarters to the June quarter, which are, of course, also the standard financial years.

These charts illustrate why these regions have been grouped together. Both WA (Chart 1) and NT (Chart 2) show a similar slide in building work done for house construction. Also their performance in terms of non-house construction post FY2016/17 is similar. The NT does have a slightly better path for its alterations and additions (alts & adds), however. The pattern that we see here is very similar to that for other states and territories: while the pandemic boost to construction has had some effect, the level of activity remains determined more by past momentum.

Financial year percentage change

This is a comparison of each financial year with the preceding year in percentage growth terms. While these stats track the changes in the above stats, they do help to show some trends that develop.

The charts reveal very clearly how poor growth has been post FY2016/17. In both regions, only alts & adds have managed to retain some level of growth, though the pandemic boost has managed to push growth in building work done on house construction into positive territory as well.

Quarter on corresponding quarter change

These stats track the percentage change between a quarter and its corresponding quarter in the previous year.

For WA (Chart 5) there is a clear pattern of quarter after quarter of negative growth, up until the December 2019 quarter, when there is a shift towards positive growth for building work done on house construction and alts & adds. Non-house building work done only shifts into positive territory in the June 2021 quarter.

The NT (Chart 6) shows a more volatile situation, with building work done on non-house construction in particular spiking into positive growth territory. For building work done in house construction, this shifts into positive growth a quarter earlier than NT, in the September 2019 quarter.

Analysis

One possibility is that these stats indicate both WA and NT may be more at risk during the post-pandemic recovery period than many of the other states and territories. According to the WA Housing Industry Forecast Group, writing in May 2021:

The COVID-19 pandemic severely impacted Western Australia's economy in early to mid- 2020, cutting domestic economic activity to levels last recorded in 2010. Since then, the WA economy has shown strong signs, with the December 2020 National Accounts indicating the size of WA's domestic economy now exceeded the level it was before the pandemic. This outcome was largely driven by a booming mining sector and Government stimulus.
WA Housing Industry Forecast Group

The difficulty will be what happens when that government stimulus is withdrawn, especially as the future of the mining industry, which is reliant to some extent on exports to China, is not entirely certain.

The NT faces a similar circumstance, with the price of manganese (for example) expected to be relatively stable over the next two year, down from the highs it reached during 2020.

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ABS stats: Building work done

The stimulus shows its effects

The ABS stats for building work done show just how unusual the current government stimulus is, and how it affects the construction industry. While it has ramped things up, is this necessarily a good thing?

The Australian construction industry today is clearly subject to government stimulus. That stimulus, during the COVID-19 pandemic, has come from two main sources: historically record low interest rates for home loans, and a subsidy package known as HomeBuilder launched in the first half of 2020.

It's helpful to note that immediately before these measures were put in place, the federal government had gone to extraordinary lengths to create a "balanced budget" for FY 2019/20 - remember the "back in the black" media campaign? This meant that the construction sector - among others - had received little if any stimulus from July 2019 onwards. The pandemic arrived about eight months into this artificial reduction in expenditure - about the worst possible moment.

With that as a background, it is not hard to understand why both the government and the Reserve Bank of Australia (RBA) - which sets interest rates independently - were concerned the pandemic might crash the economy. They reacted swiftly, but there are serious questions, today, as to whether they over-reacted, and, particularly, whether they reacted in the most effective way possible.

One way to look at this is to revisit the controversy as to whether the recovery post-pandemic, if you were to chart the measures of its success, would indicate a "V" shape - effectively a snap-back to the pre-pandemic economy - or something more of "U" shape - a slow recovery after a sustained period of low growth. At the time, HNN suggested what seemed most likely was a "K" shape: some parts of the economy would snap-back, and others would recover only moderately, or even go into long-term decline.

The COVID-19 retail economy - HI News, May 2020

We could say the goal of recent government stimulus has been to take the K-recovery (which, we would argue, is certainly what we've seen) and transform it into a V-recovery, by stimulating those parts of the economy that have been slow - or even unable - to recover on their own. The difficulty with this, of course, is that it means stimulus does not go to the most successful parts of the economy, with the goal of producing higher rates of growth, but rather to the least effective, and often less productive parts of the economy.

This is very much the basic predicament that has "wedged" most conservative-leaning governments around the world. Their popularity is based on people working in declining legacy industries, and they find themselves, once in government, having to "square the circle" of over-funding the most underperforming part of the economy while also claiming they can create economic growth.

To put that in direct terms, the best guarantor of Australia's economy performing better during the pandemic would have been a faster National Broadband Network (NBN). The original plans called for a fibre-optic backbone delivering gigabit speeds. What Australia got instead was a fudge of legacy technologies, slowly and reluctantly delivered - and which, even in this diminished form, likely helped protect the economies of Victoria (VIC) and New South Wales (NSW) (at the very least) during the pandemic.

In terms of the construction industry itself, it's self-evident this is a highly useful and essential industry that contributes much to both the economy and the community. It's commonly accepted that there are three basic needs for humans: food and water; clothing; and shelter.

Yet once you move beyond the basics of shelter for survival, housing and construction becomes a complex issue. It certainly produces goods that contribute to the economy, and assist it to increase productivity, yet its economic impact is very different from seemingly associated activities, such as manufacturing.

The confusion over the economic role of construction really results from the industry playing a dual role in the economy. In terms of providing economic support to a community, it's a very good way to deliver benefits. A report from Australia's National Housing Finance and Investment Corporation, "Building Jobs: How Residential Construction Drives the Economy", published in mid-2020, outlines the following contributions of construction:

New analysis shows that the residential building construction industry has the second-largest economic multiplier of all 114 industries that make up the economy.
The analysis shows that $1 million of residential building construction output supports around $2.9 million of industry output and consumption across the broader economy.
Each $1 million of residential building construction industry output supports nine jobs across the economy.
Each new home built would support three jobs (on average) across the economy, based on these newly constructed multipliers and current average dwelling costs.
Building Jobs: How Residential Construction Drives the Economy

Given those numbers it is understandable that, facing a potential economic crisis, any government - and central bank - would reach for the financial levers to boost expenditure and growth in that sector. However, this usually turns out to be a very short-term solution. In a 2019 paper entitled "The Economy and the Construction Industry", authors Low Sui Pheng and Lau Shing Hou provide a solid literature review on the issue. They state:

The pressures generated by the expansion of the construction industry may push up the costs of inputs (such as labour and materials), affect the availability of financial capital for other uses, and intensify environmental stress. As a result, the over-expansion of construction activities may affect macroeconomic stability by generating inflationary pressures, and misallocating as well as wasting resources. The negative impacts of over-expansion of construction activities may considerably offset the real growth of the economy.
The Economy and the Construction Industry

The point here is that any government stimulus is essentially a downpayment that enables future growth. To the extent that stimulus is spent on endeavours that do not contribute as much as they should to the economic future, that expenditure is largely negative. It's the equivalent of building a fabulous highway that goes absolutely nowhere. There may appear to be a recovery, but it's really a facade over an economy that has not invested the stimulus in the best way.

The statistics

A feature of both the pandemic and the construction industry itself is that it does vary considerably across the states and territories. In this part of HNN's analysis, we are going to look strictly at the broad overview in Australia-wide statistics, but then we'll look at the states and territories in three groups: the highly COVID-19 affected stats of NSW, VIC and Queensland; the less COVID-19 affected states of South Australia, Western Australia and Tasmania; and the Australian Capital Territory and the Northern Territory.

We can begin by looking at a broad overview of all residential construction building work done in Australia, including public and private, which is shown in Chart 1:

Chart 1 uses the ABS version of chain volume measures. These essentially adjust each year's prices to balance them with the previous year's prices. The goal is to enable prices to provide a good measure not for the total direct value of goods produced, but for the amount of goods produced. This is particularly useful in situations where the value of what is being counted varies widely.

This chart, as with the following charts, is based on the trailing four quarters of stats up to the June quarter - which is basically the standard financial year. The values for alterations & additions are shown on the right hand side vertical axis, as these expenditures are much lower overall than those for dwelling construction.

The big surprise, of course, is that despite the stimulus, overall expenditure on new residential builds declined for both the FY2019/20 an FY2020/21, and these are the first declines after seven years of growth. Less surprising, but much more unusual, is the sharp upwards trend in alterations & additions.

Chart 2 shows the percentage change in these numbers.

What begins to become evident from this is that even without the pandemic, FY2020/21 would likely have resulted in some kind of stimulus spending by the federal government in construction.

Chart 3 focuses in on work being done in private residential construction, also using chain volume measures.

This shows something of a more nuanced picture of activity. The construction of private sector houses did recover in FY2020/21, though not back to the levels for FY2018/19. Meanwhile, however, multi-unit dwellings (other residential) continued the decline that began in FY2018/19 - for reasons largely related to the pandemic, most analysts would agree. Alterations & additions shows the same strong surge upwards.

Chart 4 shows the percentage change for the same statistics.

This clearly illustrates the effect of the stimulus in the most recent financial year, but also shows that the increase in the level of activity for houses remains below that for 2015, while the increase for alterations & additions is the highest it has been for at least 10 years.

Commenced work

The ABS stats for the commenced work probably do the best job of capturing the level of activity the stimulus has caused. Chart 5 shows the value of commenced work (using chain volume measures) for private residential construction:

The value of work commenced on private sector houses is the highest it has been for 10 years, and the same is true for the value of alterations & additions. Even for multi-dwelling construction, there is a slight tilt upwards, ending a two-year decline.

Chart 6 shows the percentage change for the same stats:

It is very evident from this chart that this stimulus is historically unique. The net change for private sector house commencements if over 45%.

Finally, Chart 7 differs from the previous charts in showing the quarter-on-corresponding-quarter change in the value of work commenced.

This shows the sharp acceleration that took place beginning in the December 2020 quarter.

Work in pipeline

These building activity stats relate to work that remains in the pipeline, and gives a sense of the available backlog of work making its way through the construction industry. Chart 8 shows the percentage change for the three measures of this work: work yet to be done, work not yet commenced, and work in the pipeline:

This shows a slightly unusual lack of synchronicity between the value of work not yet commenced and the other two measures, which indicate some delays in construction going into 2019.

Analysis

What these statistics outline more than anything else is just how unusual the current stimulus has been. Building approvals, which we've shown previously, give some idea of what is being planned for the future, but building work done illustrates what is currently happening on the ground. If we factor in a likely continued expansion for the September 2021 quarter as well, it's evident that this activity is on its way to attaining levels that are not sustainable in the economy.

The difficulty is that it will be very difficult, once this stimulus is underway, to do anything to modify it. While there are some stirrings that the RBA may break its promise to not raise interest rates until inflation has increased to close to 2.5%, it's not just that this is poor policy, it's that it could be ineffective as well.

It's poor policy because if there is another financial crisis in ten years and the RBA needs to cut rates again, the market will not accept any guaranties about how long the low rates will remain in place. And it would be potentially ineffective because the major effect of an increase in rates by the RBA is to indicate there may be subsequent, further increases, and if one raise seems unlikely, three or four in a row seem pretty impossible - at least until mid-2023.

On a more long-term, "macro" level, the real concern for the economy is that while Australia's current goal seems to be to get back to 2019, other nations are already moving into a different future. The US, for example, has seen a boost in productivity, and the impact of the pandemic has been a clear boost to digital industries. We could see, as international connections are resumed, that Australia has slipped further back.

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ABS hardware retail stats to August 2021

Mixed signals, but likely to be mildly positive 2021 Q4

While NSW continues to accelerate its spending on hardware, VIC is basically flat, and QLD shows a modest boost. So far, however, there has not been a sustained, deep retreat from the higher levels of spending reached during the pandemic.

The Australian Bureau of Statistics (ABS) has released its figures for retail sales through to August 2021. In terms of sales of hardware and building supplies, the overall view is that while growth is down from that of the first nine months of the COVID-19 pandemic (April 2020 to December 2020), growth has - somewhat surprisingly - continued, albeit at a reduced rate. The degree of that reduction has varied, however, between states and territories.

(Note that the ABS is currently not supplying up-to-date stats for the Northern Territory and Tasmania, so we cannot include these.)

Comparing the period for the trailing 12 months to August 2021, to the previous corresponding period (pcp), which is the trailing 12 months to August 2020, the stats reveal some interesting patterns. In pure percentage terms, the Australian Capital Territory (ACT) has grown the strongest, at 10.9% over the pcp. In second place in terms of percentages is New South Wales (NSW), at 10.5%, but NSW has also had the most growth in pure dollar terms, gaining $675.1 million.

Queensland (QLD) is third in terms of percentage gains, at 9.7%, and second in terms of dollar gains, at $441.9 million. Western Australia is fourth in percentage terms, at 6.64%, and third in dollar gains, at $149.7 million.

As we've seen in previous retail stats, Victoria (VIC) has continued to show growth that is slowing more than the other states. VIC managed just 0.87% over the pcp, and total growth of $56.1 million. The dollar growth is above only that of South Australia at $28.6 million (2.1% growth) and ACT at $48.3 million.

As Chart 1 indicates, while the sales growth for the trailing 12 months to August 2020 is very strong, the growth for the trailing 12 months to August 2021 remains well above the growth for the same period between 2016 and 2019. For Australia overall, the most recent period showed growth of 6.5% for a total of $1450.7 million.

Growth over preceding year, Australia-wide (not adjusted for inflation) in millions:

  • 2013 $741.7
  • 2014 $1083.3
  • 2015 $1495.7
  • 2016 $1112.6
  • 2017 $543.0
  • 2018 $228.9
  • 2019 $420.4
  • 2020 $2632.8
  • 2021 $1450.7
  • Percentage change trailing 12 months to August

    Chart 2 shows the percentage change in retail revenues, going back to 2014.

    For the most recent period, NSW is the only state to show increasing levels of growth, while QLD is essentially flat, and the other states and territories show reduced growth. There is a very sharp contrast between NSW and VIC, with VIC outgrowing NSW for 2018, 2019 and 2020, before being overtaken in 2021. The other noticeable shift is for WA, after two years of negative growth of around -7% in 2018 and 2019, recovering strongly for 2020.

    Month-on-corresponding-month percentage change

    For a look at what is happening in the current market, Chart 3 compares each month to the same month in the previous year.

    For August 2021 as compared to August 2020, the ACT shows a sharp drop of -21.6%, with NSW down by 1.0%, and VIC down 0.5%. The other states and territories show positive growth, with SA up by 9.9% and QLD up 5.4%. That's a substantial change from April to July 2021, when every state and territory showed negative growth.

    Analysis

    An interesting question is, what has caused the surge in retail expenditure for hardware during August 2021? While this is, of course, the beginning of the spring/summer pre-Christmas period of expenditure on home projects, HNN would have forecast that it would have kept growth closer to flat for the period, as extra, COVID-19 driven expenditure would have dropped off.

    One theory, which has been gaining some currency among retailers, is that Australian consumers have "saved up" both in terms of the actual cash for purchases, but also purchase intentions, for the end of 2021. That theory suggests that Christmas 2021 could be a high spending period.

    As is so often the case when it comes to the pandemic, however, the stats seem to be a bit contradictory on this matter. In terms of what is positive, the following chart is taken from the Reserve Bank of Australia's "Chart Pack" for October, and includes data up to 30 September 2021.

    As the arrow (which HNN has added) indicates, there has been a sudden and sharp increase in expenditure for what looks like August and September 2021.

    On the other hand, though we have from the same Chart Pack the graph for average hours worked:

    The element to focus on is the green line denoting the average number of hours worked. This has turned down during August and September 2021, which could indicate less funds available to consumers.

    Then there is the NAB Business Confidence Survey. The most recent available survey, from August 2021, is charted by NAB:

    NAB Business Confidence report

    While confidence is, as NAB puts it, "ticking up", it is also well below the long-run average.

    In the end, what we're going to see over the final quarter of calendar 2021 is a range of different influences, some negative and some positive, coming into play. Some of these are very contradictory. For example, if there is a moderate recovery, and the efforts to contain COVID-19 through mass vaccinations do work, but not exceptionally well, then we might see accelerated Christmas spending.

    On the other hand, if COVID-19 is thoroughly contained, that could open up the possibility of more travel, both in Australia and overseas, which could see considerable funds spent on those activities, with a consequent slump on spending for the home.

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    Houzz and ABS stats point to changed renovation market

    Post January 2021, the market has changed

    According to a Houzz survey, spending on kitchens increased dramatically in 2020, while ABS stats indicate that during 2021 the renovation market kicked into high gear in NSW, VIC and QLD.

    Houzz has released its survey results for Australia's renovation industry, covering activity during calendar 2020. This survey was conducted from April to June of 2021. The sample consisted of Houzz users who were over 18 years old and homeowners. The total sample size was 2471, with 2303 actual homeowners, of which 982 had renovated their primary residence during 2020.

    Some 74% of respondents are married, and 62% have household incomes in excess of $100,000. Around 27% of the residences that are being renovated are less than 20 years old, 28% between 20 and 40 years old, and 19% between 40 and 60 years old. Detached, single-family homes make up 82% of the sample, and over 40% of homes have a value above $1,000,000.

    The survey is a very useful addition to the overall picture of renovations in Australia. It's not definitive, but it can be seen as providing insight into what are some of the most valuable customers in the renovation area. These are homeowners who believe in thorough research, and who are invested in the ongoing development of their homes, both following current trends, but also with a strong sense of architectural and design structures.

    We might refer to this group as "moderate influencers", who change the conversation about home design through secondary engagement with a community, rather than through developing what some refer to as individual, personal "brands".

    Overview

    The highlights of the survey indicate a strong shift in some behaviours in 2020 as contrasted with 2019 - most likely due to the influence of the pandemic. These include:

  • Increased focus on kitchen renovations, with 33% of homeowners making structural changes, and the median spend increasing from $15,000 in 2019 to $20,000 in 2020.
  • Outdoor area changes are dominant with 59% of homeowners planning projects, especially as regards structural changes to gardens.
  • Electrical is a primary area of upgrades, with 40% of homeowners making these changes, and 66% of renovators hiring electricians.
  • Cash is king, with over 80% of renovators using cash/saving to finance renovations, while 13% rely on credit cards, and 10% making use of home mortgage refinancing.
  • Activity to continue to end of 2021, with 48% of homeowners planning further renovations, and 41% planning interior design changes.
  • ABS renovation stats

    The Australian Bureau of Statistics (ABS) also makes available some useful stats on alterations and additions in Australia. As with the Houzz stats, these do not take a fully comprehensive view of all renovation activity, as they rely on projects that have had to apply for building permits, missing out on smaller projects. Nonetheless, they are very useful in determining the overall level of activity.

    Chart 1 shows the numbers of renovations for each state and territory.

    The initial element of interest is that both Queensland (QLD) and Victoria (VIC) have more renovations recorded than does New South Wales (NSW). Secondly, after May 2020, the number of renovations in QLD accelerates, so that from June 2020 to July 2021, that state has more than VIC, and only in August does VIC surpass QLD.

    Thirdly, there is something of an "extreme event" in January 2021, with all the states and territories to some extent seeing a drop in building approvals for renovations. This is, at least partially, seasonal as well, with similar - though shallower - events occurring in January for 2020 and 2019.

    As we are talking about building approvals rather than actual construction work, it's likely this is a combination of both prospective renovators and government offices taking something of a break in the post-Christmas holidays. But that doesn't quite explain the severity of the dip for January 2021. It's likely to be made up of, in addition, what turned out to be a brief period of relief from the more arduous types of pandemic lockdown, along with a degree of uncertainty about the property market.

    Chart 2 shows the same time series, but for the total amount spent on alterations and additions.

    What is most interesting here is that we can see a level of spending for both NSW and VIC that, up until that January 2021 date, is within the range set from 2018 onwards, though on the high side of that range. After January 2021, however, the spending for both states achieves a new high, with VIC even managing to outspend NSW during July and August.

    For QLD it is a little different, with that state seeing a significant increase in spending from June 2020 onwards, then going into a sharp peak for both February and March 2021, before returning to a still high, but more subdued level through to August 2021.

    Chart 3 shows the combination of these two data sets, with an average cost per building application for alterations and additions - simply the data from Chart 2 divided by that from Chart 1.

    This shows some increase in the average cost of renovations for many states and territories, though this is not sustained overall. Both NSW and VIC only see sustained increases post-January 2021, while Tasmania (TAS) sees elevated levels from October 2020 onwards. The Australian Capital Territory (ACT) shows a high rate of fluctuation from August 2020 through to February 2021, while QLD shows an increase in average price from December 2020 through to August 2021.

    Of course, these average prices tend to be distorted by the presence of more expensive projects, which drive the overall average higher. Chart 4 shows the number of building applications for projects costing between $750,000 and $1,000,000.

    This shows a sharp increase in these projects for NSW, VIC and QLD, and smaller but significant increases for Western Australia and South Australia. NSW begins to exceed previous highs in September 2020, while for VIC this takes off in February 2021. In QLD there is an increased level of activity from August 2020, though, unlike NSW and VIC, this returns to close to normal levels in August 2021.

    Analysis

    The ABS stats bring two questions to mind: what has been happening over the past 18 months or so, and secondly, how does this affect what is likely to happen through to July 2022?

    As this data does cover period of previous highs in house prices, it is evident that, at least for calendar 2021 so far, we are seeing an unusual renovation market develop, at least in NSW, VIC and QLD, which are the three states most affected by the COVID-19 pandemic. Partially, of course, it is likely to be a reaction to higher house prices, as homeowners either find that renovations prove profitable when selling a home, or decide that it is better to renovate their existing home instead of entering into an increasingly over-priced market.

    However, it is also possible that what we're seeing is something of a new "minimum standard" for homes being established. The lockdown has really given many family homes a real workout, as they become the sole focus of just about all family life - as well as work life in many cases.

    The question that remains is if this new standard will continue as Australia moves past the pandemic through 2022, with more people choosing to work at least half the time from home. Alternatively, homeowners may look back at some renovations with a sense that they are less necessary in 2023, and we'll see a return to house standards from 2019.

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    ABS stats: building approvals

    Has the pandemic shifted approval patterns?

    Attention to a looming house price crisis has been growing. Building approval stats from the ABS do support the notion that there has been a surge of growth in 2021. While there are some pandemic effects, most of the growth is due to economic stimulus.

    The steep rise in house prices during calendar 2021 has focused attention on the housing market. One source of commentary on this situation that has been a little neglected is the proceedings of the House of Representatives Standing Committee on Tax and Revenue, which held an inquiry meeting on 14 September 2021. The terms of reference of the inquiry included:

    The House of Representatives Standing Committee on Tax and Revenue will inquire into and report on the contribution of tax and regulation on housing affordability and supply.

    It began with a rather rousing statement by the Chair, the Hon. Jason Falinski MP, the Member for Mackellar in New South Wales:

    The housing market represents, according to CoreLogic, $8.9 trillion in Australian wealth. This compares to $3.3 trillion in our superannuation system and $2.9 trillion in issued shares on the Australian Stock Exchange. There are nearly 10.5 million dwellings in Australia, there are $2 trillion in mortgages and 55 per cent of all household wealth is represented in the housing market. Every year we sell nearly 600,000 homes, representing just over $400 billion in sales.
    We find ourselves in a situation where we live on one of the least densely populated continents in the world, outside the South Pole, with some of the highest wages and the highest minimum wages in the world, and yet we have some of the least affordable housing in the world. It makes no sense.
    Standing Committee on Tax and Revenue, Housing affordability and supply in Australia, 14 September 2021

    [Note: This is taken from a Hansard "Proof" document, and as such is subject to possible future emendation.]

    There is a reason why Mr Falinski was almost somewhat raucous in his opening comments. As the hearing went on, it became evident the position of government departments such as the Treasury, as well as the Reserve Bank of Australia (RBA), was that housing is today as affordable as it has ever been, with the exception of the amount required for the housing deposit.

    It's not worth going into that general discussion, but there was one interesting statement made by Dr Lucy Ellis, who is an assistant governor at the RBA. It was instigated by a question from the Hon. Julie Owens, Member for Parramatta, which in part asked:

    It's as if all of the modelling at the moment looks at people who have already selected to go into the housing market because they can afford it, and therefore the demand is driven up by people who can afford a certain range of property which already exists, and then the supply lags in providing more of that same property. But what we don't know is what the demand is for housing stock that isn't there at the moment: lower priced housing stock, different locations, a different way of building, different designs, smaller - there's a whole other group of people who would want housing that aren't even anywhere near the market. Given the lag in supply, is there any model or way of jumping ahead five years and producing a market which currently doesn't exist at all?

    Dr Ellis responded in part:

    It's a really interesting question, so thank you for that. What you're getting at is that looking at averages and medians is not informative. One of the restrictions that we do see sometimes on supply is requiring detached houses, large blocks - the kinds of restrictions that were imposed in the post-war period here. For a long time in Australia, you could have any kind of home you wanted as long as it was a triple-fronted brick veneer with three bedrooms. This is something we talked about in a 2014 speech I gave to a Citibank housing conference, where we talked about this.
    We also talk about this in our current submission. You can't just look at the averages and say that that means that housing is unaffordable. The question is: is it appropriate for a particular household type?
    ...
    You're absolutely right about smaller, cheaper properties. This is fundamentally a distributional issue. If housing prices are high, someone is paying those prices. But if there is someone who can't pay those prices then they're renting. I think, fundamentally, this is where the apartment market comes into play. As we show in our submission, there's been an enormous increase in the share of apartments in newly built dwellings over recent years. The number of dwellings built over the years leading up to the pandemic was actually higher. We were adding to the housing stock faster than we were adding to population.
    So apartments, smaller buildings, are part of that story. So, yes, absolutely, when we think about restrictions on housing supply, we do need to think about things like, "Are we are we imposing particular types of housing on households who might be better served by other types of housing?" That's absolutely a question that governments may want to consider.

    While this is certainly something of an insight, from both Ms Owens and Dr Ellis, it's possible to take it slightly further. The issue with housing demand is, as they point out, that it is not general. People do not look at their economic situation, then find a rational housing solution based on that. For many Australians, the standard they apply to their own housing is based on the houses they grew up in, and there is an expectation they will live in a dwelling that is at least close to that expectation.

    This has created much of the difficulty with housing, at least for family units with one or two steady incomes. As Australia's cities have grown, housing prices have climbed for desirable areas. At the same time, over the past six or seven years, wages have not increased, and the economy has been driven by factors other than productivity gains, which has meant - in this instance - wealth distribution has been uneven. New home buyers have found themselves in the position of either overspending on housing, or accepting that, in relative, societal terms, they have become downwardly-mobile, and have a reduced status in comparison to their parents.

    What is really happening to the market is what economists refer to as "inelasticity of demand". This means that consumers are unwilling to substitute a less expensive product for a more expensive product - usually for reasons that do not relate to the use-value of the product itself.

    In turn, that inelasticity of demand has translated into a form of inelasticity of supply. There may be opportunities available in the production of less-expensive housing, but the best opportunities, from the perspective of housing developers, rests in the production of more "premium" housing.

    The pandemic effect

    The COVID-19 pandemic could have had the effect of undoing some of that inelastic structure, with people opting for more practical forms of dwelling, or simply realising that perhaps social mobility means less than it once did (in terms of, for example, individual development and life opportunities). However, it seems instead to have had something of the reverse effect.

    Looking at the most recent Australian Bureau of Statistics (ABS) stats for building approvals through to August 2021, we can see some indications of this. The charts we present here deal mainly with the changes in building approvals within the greater metropolitan regions of Sydney, Melbourne and Brisbane, as contrasted with building approvals across the rest of New South Wales (NSW), Victoria (VIC) and Queensland (QLD).

    New South Wales

    Chart 1 shows these stats for NSW.

    Section 1, the top chart, shows the number of building approvals for houses in greater Sydney, and those outside of greater Sydney. The first thing to notice is that overall housing demand has risen above the level of the last peak, in 2018. Secondly, there has been a proportional increase in the number of house approvals for the area outside of greater Sydney. For the five years before 2021, the average ratio was 65.4%, and for the 12 months to August 2021 this grew to 73.3%, up 7.9%.

    Section 2, beneath that, shows quite a different scenario for not-houses (essentially multi-unit dwellings). While there has been a surge upwards in approvals for the 12 months to August 2021, it is relatively modest, taking demand back to the level of 2019. In terms of the ratio between approvals inside greater Sydney to those outside, the situation is a little complex. While the ratio for 2021 at 22.8% is higher than the prior five-year average 17.6%, it is actually down on the ratio for 2020, which was 24.2%. Essentially, approvals for not-houses outside of greater Sydney are almost static from 2019 to 2021.

    Section 3 shows the percentage change in building approval numbers. It is a fairly classic over-correction situation, with approvals going into negative growth territory in 2019 and 2020, then recovering strongly for the 12 months to August 2021. It is interesting to note that in growth terms not-houses outside of greater Sydney have done better than not-houses inside greater Sydney since 2017, but that has reversed for 2021.

    It's worthwhile noting the exact percentage growth for all four categories for 2021, as there is quite some variance. Approvals for houses in greater Sydney grew by 25.76%, not-houses in the same area by 29.55%, outside Sydney houses grew by 36.44%, and not-houses in the same area by 22.15%. So it is all strong growth but there is close to a 14% variance.

    Finally in Section 4, we see the ratio of not-houses to houses. This indicates that as far as building approvals go, the situation has been close to static over the past three years.

    Victoria

    Chart 2 shows the same numbers, but for VIC.

    Section 1 on the top shows the peak in approvals for houses has achieved a very high level. There has also been a considerable increase in the number of approvals for houses outside greater Melbourne. The five-year prior average for the proportion is 41.1%, and the number for the 12 months to August 2021 is 54.5%, up by 13.4%.

    Section 2, underneath that, shows how limited the market for not houses outside of the greater Melbourne region is. Even with that, however, there has been a surge in approvals. The prior five-year average of the proportion of not houses outside greater Melbourne to those inside Melbourne is 3.7%, and for 2021 this rose to 8.1%.

    Section 3 perhaps illustrates the unique situation in VIC best. This shows the percentage change in building approval numbers. Both houses outside greater Melbourne and not houses in Melbourne show strong growth, while houses inside Melbourne show good growth, but not houses in Melbourne show a decline.

    Section 4, on the bottom, shows a very different situation to that of NSW. There has been a sharp decline in the ration of approvals for not houses to houses in Melbourne, while approvals for not houses outside of Melbourne are essentially stable.

    Queensland

    Then there is QLD, which really does seem in some ways to occupy a middle-ground between NSW and VIC.

    Section 1, the top chart, shows the number of building approvals for houses in greater Brisbane, and those outside of greater Brisbane. Once again, there is a strong peak in approvals, above the previous peak in 2018. While the ratio of those outside greater Brisbane to those inside has grown from 2020 to 2021, at 74.9% and 85.8% respectively, the average for the prior five years is actually 87.9%, indicating the 12 months to August 2021 is more of a return to a norm than a pandemic generated shift.

    Section 2, below that, shows that while not house approvals grew for 2021, it is to a level only slightly above that of 2019, and far, far below the peak for 2016. Again the situation for the ratio between inside and outside greater Brisbane is a little complex. The ratio did grow from the 64.3% of 2020 to 67.0% for 2021, and this is above the prior five-year average of 56.5%. However, the ratio for 2018 was 74.5%, so this is well within the pre-pandemic ranges.

    Section 3 shows the percentage change in building approval numbers. It bears some resemblance to the same graph for NSW, only with stronger growth. In particular, the grow for houses outside of greater Brisbane increased by a substantial 63.0%. That is likely due to strong demand generated by people migrating to Brisbane, coupled with the pandemic effects.

    Section 4, on the bottom, is interesting as it reveals something of an unexpected trend. Since 2017 there has been a trend of a declining ratio of not houses to houses. It is most pronounced inside the greater Brisbane area, but outside Brisbane also indicates a slide. There may be some acceleration in this slide for 2021, but it follows on from a well-developed trend.

    Analysis

    It is undoubtably true that there have been some extended effects from the COVID-19 pandemic on the pattern of geographic distribution of building approvals. However, it would seem that economic factors such as very low interest rates and programs such as HomeBuilder from the federal government, have had more influence on the market.

    One factor that may be present is that homeowners are not banking so much on the current boom in house prices continuing, but on the federal government, should the boom cease abruptly, stepping up with further aid and assistance. In that case home buyers are not really assessing the immediate risk in purely market terms.

    The real difficulty facing the RBA and government is that while the housing market has responded to low interest rates, the business economy has not. Investment in business remains very low, and wages growth continues to drift sideways. A strong housing market economically does little other than to shift investment to one of Australia's lowest productivity industries, and to distribute wealth along slightly different lines.

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    ABS house price stats

    The 2021 market starts to overheat

    Probing the ABS stats on dwelling prices and transactions reveals there has been an acceleration in transactions in regions outside major cities. However, it's not in houses, it's in multi-unit dwellings.

    It will come as no surprise to anyone in the hardware industry - suppliers or retailers - to hear that dwelling prices have continued to increase in Australia.

    While it is no surprise, these increases do come with two, somewhat opposing types of puzzlement. For many in the Australian hardware retail industry, as well as their trade and building clients, the puzzlement is why so many people keep predicting a price collapse that never eventuates, and why economists seem so distressed about an economic event that seems fortunate. Homeowners are making money on their property investments, building more houses, spending more on renovations - what's wrong with that?

    On the opposite side, economists remain increasing bewildered about why dwelling prices keep rising, and why people aren't more concerned about the consequences should the housing market suffer a setback.

    It helps to understand that, in relatively simple terms, what economists expect and look for in a housing market is one that responds to the general, overall economic conditions. When the economy does well, house prices go up, and when economic growth slows, or contracts, house prices should remain stable, or even decrease slightly.

    The thinking goes that this is something of a baseline pattern. Economies can vary from that pattern, but sooner or later the pattern will reassert itself. If there is a big enough gap between what the forecasted economy looks like as compared to the actual economy as represented by its performance, then a "correction" occurs. If the correction is large enough, it becomes an economic event in its own right, creating harm which is far worse than just the difference between the expected economy and the actual economy.

    Dwelling statistics

    We'll go into these economic matters in more detail later. First, we need to take a bit of a dive into the house price numbers from the Australian Bureau of Statistics (ABS) to see what is happening and where.

    To begin with, Chart 1 presents an orienting, overall view, for all categories of residence, of how the ABS price index percentage has changed, comparing quarters with the previous corresponding period (pcp).

    The most important element to understand about these stats is that they highlight the prime area of concern. Going back to the start of the COVID-19 pandemic, in the March quarter of 2020, the index for Sydney, Melbourne and Hobart shows a peak or around 9% growth is reached, after the index growth has gone negative just two quarters previous.

    What happens next, through the June, September and December quarters of 2020 is a decline for both Melbourne and Sydney, while the other states and territories tend to converge, so that they are all in a growth sector of around 2% to 5% in the December 2020 quarter. It is from that point where this convergence subsequently shoots up in terms of percentage gains on the price index, with Sydney reaching over 19% in gains.

    Figures from CoreLogic and elsewhere indicate that end-surge has continued through into the September 2021 quarter. So it is the three quarters of 2021 which have raised a degree of alarm with economists and others.

    Sydney and Melbourne

    While this surge has affected all the states and territories, the most significant effects have occurred in Sydney and Melbourne areas. We can see much of what has taken place elsewhere in these stats, so HNN will confine the in-depth coverage to these capital cities and their states.

    Sydney

    Chart 2 shows the percentage change in the number of transfers for established houses (so not new builds), as well as for attached dwellings (apartments, etc) in Sydney. It also shows the percentage change in the ABS price index for established houses and for attached dwellings.

    The December 2019 quarter shows the percentage change in the number of transfers for both established houses and attached dwellings hitting a peak, while the percentage gain in the price index for those categories is around 5% for the houses and 2% for the attached dwellings. There is then a corresponding slide in these transfers through to the June 2020 quarter.

    Most likely what we are seeing in this period is exit activity, with prices for established houses and attached dwellings going down from the March 2018 quarter through to the September 2019 quarter, then the price index increases modestly (perhaps under the influence of volume available) by less than 5% in the December 2019 quarter, hitting a peak in the March 2020 quarter (just pre-pandemic), rising above 10% growth for established houses, and over 5% for attached dwellings. Attached dwellings see growth decline fractionally for the June 2020 quarter, while established houses see a small decline in price growth. Those declines in growth continue through to the December 2020 quarter, with established house price growth reaching 5%, and attached dwellings only slightly above 0% growth.

    For the last two quarters of the stats, March and June 2021, the established house price index hits 25% growth, with attached dwellings price index growth up 20%, with transfers for both growing at over 10% in the same period.

    Chart 3 shows the percentage change in the number of transfers for NSW outside of greater Sydney.

    Well, if you are looking for the chart that shows pandemic-influenced behaviour in NSW, this is the one. It's notable that activity begins to increase in the September and December quarters of 2020, then really takes off in the March and June quarters of 2021.

    In terms of raw numbers, the following table shows what these were from the June 2020 quarter through to the June 2021 quarter:

    So, essentially the number of attached dwelling transfers went from being proportionally less than a quarter to close to half.

    The behaviour this points to makes sense. For people living in Sydney in areas that were set to be placed under lockdown, while moving from an apartment to a house would improve their living conditions, by far the best move would be to get some kind of dwelling outside of the lockdown zones - even moving from a house in lockdown to an apartment outside lockdown would be a good move.

    Melbourne

    Chart 4 shows the percentage change in the number of transfers for established houses, as well as for attached dwellings (apartments, etc.) in Melbourne. It also shows the percentage change in the ABS price index for established houses and for attached dwellings.

    As with Sydney there is a peak in transfers in the December 2019 quarter, as prices index growth for established houses and attached dwellings becomes positive, peaking in the March 2020 quarter. However, the decline in transfer growth is longer and steeper for Melbourne than Sydney, getting down to 48% in September 2020, and only moving into positive growth in the March 2021 quarter. Similarly, it is only in the June 2021 quarter that growth in the price index really takes off, even as growth in transfers flattens.

    There is also a highly similar pattern when it comes to the number of transfers in the area outside greater Melbourne as shown in Chart 5.

    Just as with NSW outside Sydney these numbers indicate a sudden and rapid acceleration in the number of attached dwellings being transferred beginning in the March 2021 quarter. While the percentage growth looks impressive, however, the actual numbers and degree of shift is less than that for the NSW numbers, as shown in Table 2.

    In this case, the attached dwelling transfers only reach around 36% of total transfers, but still indicate a substantial gain.

    The response

    From these stats we see two different things. The first quarter of 2020 really performed like a market that had received some mild stimulus after a slump - and remember that at that time the federal government had dialled back fiscal stimulus, as it was attempting to "balance the budget" in its unsuccessful "back in the black" campaign.

    The subsequent quarters of that year show the impact of the two main stimuli - the RBA lowering the cash interest rate, and the HomeBuilder subsidy scheme for new builds and renovations - as they played off against the headwinds of the pandemic.

    Then, at least from the start of 2021, the housing market is beginning to behave like any other rapidly expanding housing market from the past.

    The second change is that there has been a significant increase in activity related to areas outside the main urban regions, at least for Sydney and Melbourne - and likely in most of the other states as well. Perhaps the most interesting element of this is that the boost has been mainly for attached dwellings.

    The concern of economists is that the housing market is, essentially, working in its own "fake" economy. The market, instead of referencing the overall Australian economy, is referencing itself, on the basis of "prices went up yesterday, so prices will go up tomorrow".

    Looked at from the perspective of the RBA, there really doesn't seem much that can be done to intervene.

    Philip Lowe, governor of the RBA, in an address to the Anika Foundation on 14 September 2021 entitled "Delta, the Economy and Monetary Policy", had this to say:

    Finally, I would like to address the question of housing prices, as some analysts have suggested we might lift the cash rate to cool the property market. I want to be clear that this is not on our agenda. While it is true that higher interest rates would, all else equal, see lower housing prices, they would also mean fewer jobs and lower wages growth. This is a poor trade-off in the current circumstances.
    That is not to say that there aren't public policy issues to be addressed here. On the financial side, the issue is the sustainability of trends in household borrowing. We are continuing to watch this closely, with the Council of Financial Regulators discussing possible regulatory steps if lending standards deteriorate or credit growth accelerates too much.
    More broadly, society-wide concerns about the level of housing prices are not best addressed through increasing interest rates and curbs on lending. While monetary policy is contributing to higher housing prices at the moment, the way to address these concerns is through the structural factors that influence the value of the land upon which our dwellings are built. The factors include: the design of our taxation and social security systems; planning and zoning restrictions; the type of dwellings that are built; and the nature of our transportation networks. These are all obviously areas outside the domain of monetary policy and the central bank.
    On the economic effects of the Delta variant of COVID-19

    It's less that Mr Lowe isn't concerned about the state of the Australian housing market, and more that - publicly at least - there's little he can do about it, directly. The judgement comes down to seeing the side-effects of increasing interest rates as being worse than the side-effects of keeping interest rates low.

    Analysis

    In the end, there is an intersection point between where the structural concerns of the economy cross over with the aberrations that keep cropping up in the housing market. There are two charts, published monthly in the Chart Pack of the RBA that point to primary structural problems. The first is the wage price index growth:

    The second is for the share of nominal gross domestic product (GDP) that goes to business investment.

    Both of these graphs indicate that the Australian economy is operating way outside of any kind of reasonable norm. Low wage increases would most often create conditions where there would be a boost in business investment. Where that doesn't happen, you could be looking at an economy that is ready to crash in some new and interesting way.

    What HNN suspects is happening is that businesses are actually reluctant to undertake the changes they need to increase productivity at scale. The reason for this is somewhat paradoxical, in that it requires businesses to better train their knowledge worker staff to perform their tasks. That means specialisation, which means both retention and training become major concerns, which would then push up wages.

    Businesses are, in other words, preferring to not improve productivity, thus "saving" on investment, while also ensuring that wages are kept low by keeping job skills at a close to commodified level.

    This creates an economy where "getting ahead" for an individual is now less dependent on pursuing an active career at work, and more dependent on pursuing individual investment strategies. Given that low investment means that Australian businesses are tending to underperform (as compared to global peers), that makes real estate a desirable vehicle for investment.

    All this is not helped by a federal government which is ambivalent about the tech industry, and a culture which has tended to demonise that industry, even as it increasingly relies on its services and products.

    While all this can seem for the moment somewhat dire, it is likely that as Australia emerges from the COVID-19 pandemic in the second calendar quarter of 2022, that there will begin to be a shift towards more innovation in business. One spur for that will be changes such as the wider adoption of work from home, and possibly a re-evaluation of gender roles in families and in the working world.

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    ABS stats: Alterations & additions in NSW

    Smaller geographic areas reveal more patchwork growth

    In the wake of the pandemic, NSW will be one of the states that changes the most. Not only is there a move to ex-urban areas, but the nature of housing in urban areas itself will likely change.

    Talking about Australia's future would seem, at the moment, to be something of a "big ask". While immediate outcomes are in doubt, and watched anxiously by us all, there are some things we can be quite certain of looking a year ahead. One of those is that one lasting effect of the pandemic will be a partial reshaping of Australia's property market, and hence also its building and construction industries.

    Tracking those changes will be an essential task, both for hardware retailers and suppliers. At HNN we've been working on developing more flexible and information ways to convey statistical information about the construction industry to our readers. While that's still under development, we are providing something of a preview of some of our latest data models.

    The main difference with these models is the use of what the Australian Bureau of Statistics refers to as its "Statistical Area 2" (SA2) geographic level of data. SA2 blocks are smaller than those for local government authority (LGA) areas, and are closely keyed to both demographics and economics. They are by far the most useful datasets for tracking industries such as renovation, building and construction.

    In this series we're providing a look at a single data point, which is the percentage change in spending on alterations and additions (A&A), comparing the most recent data for the month of July 2021 with data from July 2020.

    One factor that we have to deal with in this data, is what to do with those areas which recorded no expenditure for A&A during July 2020. We've identified three conditions worth noting: those areas that had no expenditure recorded in July 2021 as well, those that had expenditure under $100,000, and those that had more than $100,000 in expenditure. These areas are marked in shades of blue.

    Link to full-size graphics

    Chart 1 shows the expenditure growth pattern across New South Wales (NSW) as a whole. At this macro scale, perhaps the most interesting feature is the relative scarcity of areas that have had either mild declines or mild gains in expenditure. It is also clear that there has been ongoing growth for A&A in more inland areas.

    Chart 2 shows the same data for the Greater Sydney area. This demonstrates how finely gradated activity is in major metropolitan regions, and especially Sydney. Areas in the same LGA have quite different statistics for building approvals. While it would be widely expected for Sydney that there would be growing activity, generating an increase above 100% in many areas, it is also interesting how many low growth areas there are, and how many areas in light blue, indicating sharp growth off of a zero basis in July 2020.

    Analysis

    One of the bigger questions that needs to be asked in the aftermath of world-changing even such as the pandemic is whether the change is reactive, or something more structural. If it is more reactive, then it is likely we're seeing some expenditure from the coming years being "pulled forward" to 2021 - which could mean that growth would at least slow. If it is structural, then that means the hardware retail industry needs to revalue itself to some extent.

    As is often the case, it seems that in terms of NSW it is most likely a combination of these. Activity in more urban areas is likely to be something of a pull-forward, with A&A upgrades destined to last many families for a long time. In the less-urban areas, however, it is more likely to be at least partially structural.

    One aspect of that structural change will be the creation of some attractive areas, and other less attractive areas - something like neighbourhoods, but writ large over more expansive spaces. Those will be formed by everything from the randomness of micro-climates to the availability of transportation, and proximity to good schools and health care.

    Those patterns will progressively reveal themselves over the next few years, so in many ways these charts serve as a kind of baseline for change to come.

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    ABS stats: Alterations & additions in VIC

    Growth has moved from the inner suburbs to all of the suburbs

    Where in the past the Melbourne CBD was central to many businesses, the pandemic may have ended that trend. However, it remains unclear if the city will decentralise, or simply become more diffused.

    These statistics relate to the Australian Bureau of Statistics (ABS) building approvals for the month of July 2021. They contrast that month with the prior corresponding period, July 2020, and show the percentage of growth in expenditure on alterations and additions (A&A).

    The data maps that are provided make use the a smaller geographic unit provided by the ABS, the "Statistical Area 2" (SA2). This is smaller than, for example, a local government authority (LGA) area, and are based on both demographic and economic factors.

    In looking at these, there is a sharp contrast between Victoria (VIC) and New South Wales (NSW) in how demand for A&A has played out.

    Link to full-sized image

    Chart 1 shows this data for the entire state. One of the contrasts with NSW is the substantial areas that have recorded either mild growth or mild decline in expenditure. At the same time, there are areas that have recorded unusually high growth, and these range from coastal regions, to areas along the border with NSW.

    Chart 2 shows the same information with more detail for the Greater Melbourne area. What is quite surprising about this data map is the homogeneity of a sharp rise in expenditure for A&A activity.

    It is as though the usual segregation into suburbs with different housing values and demographic makeup has been swept away. Most noticeable is the increase in this activity both to the west of the city and to the north-east.

    Analysis

    The question that hovers over Melbourne is whether the city will evolve to become more decentralised, or if it will simply see the city CBD become less central, and its peripheral suburbs grow in importance.

    There is certainly some evidence in these statistics of a trend towards the latter, but Melbourne has always been somewhat socially - if not politically - conservative, and it is still possible that by 2023 many of the older patterns will have reasserted themselves.

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    ABS hardware retail revenue stats

    Growth is unevenly distributed

    Moving into FY2022, Australia is beginning to show wide differences in hardware retail revenue between the states and territories. While NSW and QLD continue to grow, VIC shows growth flattening. Looking at the July 2021 numbers, some states have tapered their negative growth, while others have plunged deeper.

    The Australian Bureau of Statistics (ABS) has released the retail revenue stats for July 2021. Chart 1 shows the trailing 12 months to July results for hardware retail sales.

    As the Australian economy shifts into a full 17-month period that has been affected by the COVID-19 pandemic, the stats show the gains made in hardware retail now show as spread out over the past two trailing 12-month periods.

    The performance numbers themselves show something of a split in the industry between the states - and it's not along the line of prosperous vs less-prosperous regions. For example, New South Wales (NSW) shows an increase of 12.7% over the previous corresponding period, which was the 12 months to July 2020. However, Victoria (VIC) shows an increase of just 1.5%.

    Besides NSW, the other two high-performing states were Queensland (QLD) which showed a 10.8% increase and the Australian Capital Territory (ACT), which lifted by 15.4%. South Australia (SA) was up 2.6% and Western Australia saw revenue increase by 7.8%.

    Overall, Australia reported a gain of 7.8% as well, with total revenue at $23.6 billion for the 12 months to July 2021.

    Chart 2 shows the shows how the percentage change in revenues has played out over the past 10 periods.

    It's interesting to note that there was some degree of consolidation in the trailing 12 months to July 2020, while in the most recent period there is a diversity of responses. It is evident both that in its second phase, the COVID-19 pandemic is affecting states differently, and that there are other forces at play as well.

    Chart 3 shows the month-on-corresponding-month comparison for the states over the past two years.

    This shows a high degree of synchronicity from July 2019 through to May 2020, followed by a period of variance up until January 2021, since when the relative growth positions of each state have been maintained. Since April 2021, that growth has been negative - though QLD was close to zero for July 2021, at -0.7%.

    Analysis

    It remains very likely that the high levels of revenues seen during FY2020/21 will fall off by the start of 2022. While the stimulus produced by low interest rates will persist through 2022, there will probably be an ongoing reduction in direct economic stimulus by the federal government. The Housing Institute of Australia (HIA) has flagged concerns about a falling house market in 2022, and it is likely to emerge there is also a finite amount of renovations that homeowners will want to consider.

    The question remains how far will revenues decline in the future, and what will be the distribution of that decline? Will the distribution favour larger operators such as Bunnings, or will smaller, local retailers be better off instead?

    Outside of those internal factors, it is unclear how the transition out of the pandemic, as vaccines finally become more readily available, is going to affect the overall economy and hardware retail in particular. Much of that will take place on the microeconomic level, but there will also be a broader influence from macroeconomics.

    While Australia is going to discover that it has successfully made its way through the muddle of the pandemic, other places in the world have done much better. The US, for example, has reported a surge in productivity, after 15 years of decline - likely due to the adoption of technologies that have been resisted in the past. Post-pandemic, Australia could find its position in the global economy has shifted, and not necessarily to its advantage.

    Whatever the outcome, though, for smaller hardware retailers, the past 18 months have at least provided a little relief from some tough years, and the potential to have more capital to invest in their businesses. It seems clear they are going to need that buffer in the years ahead, as the requirement to invest and develop their businesses becomes more urgent.

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    Surprises in renovation stats

    Victoria lags Queensland

    Accurate stats on alterations and additions are difficult to determine. However, the ABS does offer some series of stats that provide a good look at what is happening in this sector of the building industry.

    Tracking alterations and additions (A&A) - or renovations, as most retailers think of them - has never been simple. That's not through lack of trying, either. The Australian Bureau of Statistics (ABS) presents some quite brilliant numbers, and this is an aspect that they've been expanding over the past five years or so. The problem isn't so much getting a hold of the numbers, it's more working out what they really mean.

    Two interesting sets of numbers are those that register building work done, and those represented in the stats for the national accounts.

    National accounts

    These stats are contained in the ABS 5206.0 series, specifically the state-by-state breakdown of State Final Demand. According to a paper from the Australian Housing and Urban Research Institute - RMIT Research Centre:

    The method used to calculate residential alterations and additions starts with the BAS [Business Activity Statements]. Because a significant proportion of alterations and additions are not captured in the BAS, it is used as a benchmark, which is then extended by use of estimates of expenditure on alterations and additions drawn from the Household Expenditure Survey.
    Australian Housing and Urban Research Institute - RMIT paper

    So, these are interesting statistics, as they represent a genuine effort to get at the "real" expenditures on A&A, based on businesses reporting activity, as well as a survey of the consumers of those services.

    The most pertinent detail to look at from this set of stats is shown in Chart 1.

    This consolidates the four quarters of the financial year, and then compares the percentage change between them. Most noticeable is that, while every other state and territory has moved upwards in FY2021, Victoria (VIC) has not. In fact, VIC shows a certain stability during FY2019 and FY2020 as well.

    Chart 2 shows the raw numbers on which Chart 1 is based, but only for the three most recent years.

    It is notable both that NSW provides for much greater expenditure, and that Queensland (QLD) exceeds the expenditure of VIC in the most recent year. In fact, where both NSW and QLD show considerable stimulus is present for 2021, VIC indicates a slight decline. The only other region with a similar pattern is Western Australia (WA).

    Building work done

    The building work done stats are also largely based on survey information, and is limited to residential construction valued at over $10,000, and non-residential construction valued at over $50,000.

    Chart 3 shows the percentage change between financial years for A&A work done.

    Once again, we see similar patterns, with QLD growing in recent years, NSW suppressed for the years prior to FY2021, then growing strongly, while VIC is not suppressed as significantly as NSW, but displays much lower growth in FY2021.

    Analysis

    What these stats show is how different each area of Australia can be. The low number for VIC in FY2021 does actually correspond to some extent with the fall-off in hardware retail sales we see for that financial year. However, the flat-lined low growth in A&A for VIC in FY2020 does not correspond with the sharp increase in hardware retail sales for VIC in that year.

    It has to be presumed, then, that much of the activity in hardware retail for VIC does take place outside of the A&A category. Most likely, we would be looking for in FY2020 a sharp increase in sales for the construction of new dwellings, especially houses.

    This would be an indicator that we could see the VIC market become much more volatile during 2022, if the housing market does begin to cool, as many sources are indicating.

    The second surprise from these stats is just how strong the market in QLD has become. It is rapidly overtaking VIC in terms of A&A, and remains second only to NSW.

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    Doherty modelling rewards consideration

    Hidden inside the Doherty's model are some additional, helpful conclusions

    While state and federal governments are focused on 70% and 80% vaccination targets, there are lower targets that provide a better guidance to managing the pandemic.

    This is the time of year when many businesses are revisiting forecasts for this financial year originally developed in May. That is, if they have been developed very much at all, as it has become difficult, in this pandemic time, for any business to come up with a forecast that makes sense.

    That process has been helped along a little by what has become known as "the Doherty paper", which bears the somewhat modest title of the "Doherty Modelling Report for National Cabinet" (DMRNC). As is not uncommon for this kind of contribution, the reporting on it has been vigorous, but not really as helpful as it could have been.

    That's because the entire national discourse, at the moment, has become focused on two numbers: 70% and 80% - which are the rates of adult population full vaccination where it will be possible to change how the COVID-19 pandemic is managed.

    One thing we've learned in this pandemic is just how often both politicians and scientific opinion get things a bit wrong - curiously, this time, by generally being too optimistic. It seems to HNN that the forecasts of reaching 70% vaccination by October 2021 are part of that optimism. Some of that has to do with the exigencies of vaccine supply, and some of it is based on, we believe, an underestimation of how much resistance there is in the community.

    A better, calmer analysis of the DMRNC indicates that even the 70% goal is not as vital as has been made out. In fact, there are substantial benefits to be obtained if 60% is reached. However, those benefits are highly conditional on the policy being pursued by individual state governments.

    Approaches and consequences

    It is evident that there are two poles to the policies of state governments. On one hand there is the NSW approach, which is one of very moderate restrictions, targeted to specific areas as much as possible. On the other side, there is the VIC approach, of very tough restrictions and a high level of compliance enforcement, taking in very broad regions.

    Most states - Western Australia (WA), Tasmania (TAS) and South Australia (SA) - are much closer to the VIC model than the NSW one. Queensland (QLD) is somewhere in the middle, but it is leaning more towards VIC than NSW. In fact, NSW seems to be headed down a path of relative policy isolation in Australia.

    The three factors

    One of the core insights offered by the DMRNC is that there are three key elements that affect what it terms the "transmission potential" (TP) of the SARS-CoV-2 virus at any particular time, with a TP of 1.0 representing steady state (every infected person subsequently infects just one other person), below 1.0 a decline in infections, and above 1.0 an increase in infections.

    Those three elements are: the percentage of population effectively vaccinated against infection; the Public Health and Social Measures (PHSM) in place, which range from social distancing to lockdown restrictions on movement and contacts; and the "test, trace, isolate, quarantine" (TTIQ) regime in place.

    The paper suggests four different levels of PHSM:

  • Baseline PHSM - only minimal density/capacity restrictions, as in NSW March 2021 (baseline TP as used above)
  • Low PHSM - more stringent capacity restrictions, as in NSW 23 August 2020
  • Medium PHSM - stringent capacity restrictions, group size limits, stay-at-home orders (except work, study, essential purposes), as in NSW 1 July 2021
  • High PHSM - no household visitors, curfew, stay-at-home orders (except essential purposes and permitted work), as in VIC 23 August 2020
  • TTIQ is presented by the DMRNC as either being "optimally" or "partially effective", a factor that is based largely on the peak case-load created by other conditions.

    Putting all those options together gives rise to a set of graphs, which were also used by the prime minister in first introducing the conclusions of the DMRNC.

    To zoom out on these charts for a moment, there is a point being made in the DMRNC by presenting these together. What separates the charts is the level of TTIQ capability, and the point being made is that before any form of restriction easing can be put in place, it is necessary to first reduce the number of active emerging COVID-19 cases to a level where TTIQ can function.

    Though it is even more complex than that, as the quality of delivered TTIQ also depends on PHSM making the task easier. As the DMRNC states:

    Baseline TP will be influenced by spontaneous and imposed changes in physical distancing behaviours, the number of social contacts on average between individuals and the timeliness of test, trace, isolate, quarantine (TTIQ) measures. We use a starting TP of 3.6 for the Delta variant based on averaged observations from NSW in March 2021, a period with minimal social restrictions and no major outbreaks. TTIQ assumptions are based on the performance of the Victorian public health response at the height of the 'second wave' in 2020 as our best estimate of achievable effectiveness at high caseloads.

    The top chart, which shows the situation with only partial TTIQ effectiveness, indicates that even with 70% and 80% of all adults vaccinated, continuous PHSM restrictions will still be required. The bottom chart, with optimal TTIQ effectiveness, shows that at 80% vaccination there will be much less a requirement for PHSM restrictions.

    Or, in other words, vaccination is not a universal panacea. Without systems in place to keep the case incidence low, and TTIQ functioning at a high level, PHSM restrictions will always be necessary.

    This brings the DMRNC to considering the likely scenarios that will emerge in terms of periodic increases in PHSM - what Prime Minister Scott Morrison and others refer to as "short, sharp hard lockdowns". As the paper states:

    TP estimates with and without stringent PHSM can be used to calculate the approximate proportion of time those stringent measures would need to be in place to prevent exceedance of health sector capacity over a hypothetical long-term. This static analysis can indicate the plausible societal and economic impacts of the PHSM required to constrain transmission under each scenario and coverage over the long-term.

    Table 1 illustrates this situation more precisely. This table is a distillation of four tables presented in the DMRNC. Those tables provide estimates of how much time will be required in moderate or strict lockdowns given the quality of TTIQ available (which depends on the case load) and the extent of vaccination. The predicted outcomes in the table presume an ongoing, background PHSM at a low level.

    Again, the most important element is that low case numbers are vital to reduced restrictions. Even at 70% vaccination, with high case numbers more than half the time would need to be spent in moderate lockdowns, or more than one-fifth the time in strict lockdowns.

    With low case numbers, and consequentially optimal TTIQ available, with just a 60% vaccination rate as little as 6% of the time would need to be spent in strict lockdown (basically an eight-day lockdown every four months). At 70%, it would be possible to remain lockdown-free - but, again, with ongoing, low-level PHSM measures.

    Analysis

    It is understandable that at the moment there is something of a tidal pull towards hoping that things will return to "normal" in the future. However, looking at countries such as the US and Britain, it would appear that even in areas where 80% vaccination rates are reached, it will still be necessary to pursue containment measures. There is also the possibility that we will see versions of the SARS-CoV-2 virus emerge that will require new vaccines, or which have additional consequences for the infected.

    As such, HNN thinks that a prudent course in forecasting and planning for the future is to presume that we will likely be closer to the world envisaged by the 60% vaccination predictions. There will still be lockdowns, in other words, but they will be less severe, and last for a reduced period of time.

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    ABS building approvals: QLD by LGA

    Approvals for Queensland by LGA

    While Queensland is a unique market, it does display many of the characteristic responses to the COVID-19 pandemic that both Victoria and New South Wales did. While the coastal region dominates expenditure - like NSW - there is a migration of investment to ex-urban and more inland areas.

    The Australian Bureau of Statistics (ABS) has released its building approvals stats up to June 2021, completing the financial year. These have been recently updated with additional stats on a local government authority (LGA) basis.

    In these series of stats, we are looking at building approvals for Queensland (QLD), with a focus on the south-eastern corner of the state, which includes the state capital, Brisbane.

    Planned expenditure

    We start by looking at the pure planned expenditure for all residential construction, including alterations and additions, houses and multi-unit dwellings. Chart 1 shows these numbers for the entire state.

  • For a larger version of this map, please click on the link below:
  • Chart 1 large image

    These are similar to the map of expenditures developed for New South Wales, in that the high spending areas are spread along the coast. Five areas had expenditures of over a billion dollars for the year, which are:

  • Brisbane $4,095,328,000
  • Gold Coast $2,370,669,000
  • Sunshine Coast $1,630,481,000
  • Moreton Bay $1,272,367,000
  • Logan $1,129,273,000
  • Zooming in on the Brisbane area, Chart 2 offers an expanded view.

    While the expenditure is concentrated around the prime urban areas along the coast, the map also shows reasonable expenditure inland as well, with the Southern Downs Region recording close to $67 million.

    Growth in planned expenditure for renovations

    Moving from pure expenditure to measuring the growth in planned expenditure for alterations and additions (renovations), Chart 3 shows this for the entire state. This chart is based on the most recent year, FY2020/21, compared to an average of the three preceding financial years. (This helps to smooth out the down market experienced in 2019/20.)

  • For a larger version of this map, please click on the link below:
  • Chart 3 large image

    In terms of total expenditure, the list of the largest spenders is somewhat familiar:

  • Brisbane $881,281,000
  • Gold Coast $229,768,000
  • Sunshine Coast $215,353,000
  • Ipswich $203,218,000
  • Logan $109,796,000
  • The big surprise is that in sixth place there is Rockhampton, with $104,735,000 in expenditure.

    Chart 4 shows the situation for the areas around Brisbane.

    What is interesting about this map is that it shows a similar situation to that seen for both Melbourne and Sydney. The more urban/city regions (Brisbane, Moreton Bay, Sunshine Coast, Noosa) show, in general, an increase in activity, but it is the outer, ex-urban regions which have the highest level of growth. The top four areas are:

  • Ipswich 608.1%
  • Rockhampton 575.5%
  • Livingstone 392.6%
  • Somerset 292.3%
  • Ipswich, for example, went from an average of $28,699,000 to $203,218,000 for FY2020/21, while Rockhampton went from an average of $15,506,000 to $104,735,000.

    Number of houses approved

    Moving away from planned expenditure to the number of dwellings that are approved, Chart 5 shows the percentage growth in the number of private houses approved for QLD.

  • For a larger version of this map, please click on the link below:
  • Chart 5 large image

    Note that the mid-blue colour key indicates an area that had zero houses approved for FY2019/20.

    While the major urban areas continued to see the largest rise in the number of houses, the outstanding LGAs which combined a steep percentage rise with hundreds of additional approvals are:

  • Townsville 135.0% - 613 additional houses
  • Toowoomba 98.9% - 540 additional houses
  • Cairns 90.5% - 478 additional houses
  • Fraser Coast 63.4% - 444 additional houses
  • Bundaberg 136.3% - 394 additional houses
  • It's interesting that Rockhampton, which saw increased renovation activity, saw a decline in house approvals, going from 140 in FY2019/2020 to 135 in FY2020/21, a loss of 4%.

    Chart 6 shows the same data for the region around Brisbane.

    Again, the pattern we've seen before repeats, with the established urban coastal areas showing an increase in activity, while the more inland areas show a major boost in approved housing numbers. It is notable that both Noosa and the Gold Coast showed flat growth.

    Number of multi-unit dwellings percentage change

    QLD is, in general, somewhere mid-way between NSW's avid acceptance of multi-unit, and Victoria's less enthusiastic approach to anything that is not a house. Chart 7 shows growth in multi-unit building approvals across QLD.

  • For a larger version of this map, please click on the link below:
  • Chart 7 large image

    For much of regional QLD, percentage growth is not very revealing, as the numbers for multi-unit are quite low. Rockhampton, for example, shows high growth, but it's really only a gain from three units in FY2019/20 to seven units in FY2020/21.

    The real activity takes place in the urban areas around Brisbane, as shown in Chart 8.

    What is interesting here is that there is only mild growth in Brisbane, Sunshine Coast and Gold Coast, but enhanced growth in Logan, Ipswich, Redland and Noosa.

    Analysis

    QLD is, of course, a very unique market. Nonetheless, there do seem to be signs of the forces at work on NSW and Victoria are also exerting pressure here, during this time of the COVID-19 pandemic. There is a de-emphasis of the more urban areas, and a shift to ex-urban and semi-rural areas. Even though QLD has done a great job of managing the pandemic, it's likely that the anxiety produced by the potential for lockdowns and other restrictions has encouraged this behaviour.

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    ABS retail stats: slowdown moderates

    Retail sales continue to decline monthly, but at a slower rate

    FY2020/21 proved itself another good year for hardware retail, with revenue up over 10%. There will likely be some erosion of those gains during FY2021/22. For independent hardware retailers, however, both revenues and profits will continue to be above the pre-2020 average.

    The Australian Bureau of Statistics (ABS) has released stats for retail sales to June 2021, completing the financial year.

    As expected, the numbers for FY 2020/21 show strong growth for hardware retail sales. Overall, hardware retail in Australia grew by 10.7%, or $2299 million. Chart 1 shows the cumulative numbers for Australia's states and territories.

    In percentage terms, the best-performing stats are from the Australian Capital Territory, recording an increase of 19.0%. That is followed by New South Wales (NSW) with a 15.0% increase. NSW also gained the most revenue, increasing sales by $932 million. Queensland (QLD) also performed well, with sales up by 13.0% and $571 million. Western Australia (WA) increased sales by 9.9% and $216 million, while South Australia (SA) grew by 6.7% and $88 million. Victoria (VIC) had the lowest level of growth, at 5.5%. It also came third in increased revenue, at $345 million.

    The pattern of growth can be seen in Chart 2, which illustrates percentage change between the financial years.

    While all states and territories remain in positive growth, VIC and SA show a sharp decline for the most recent year, while growth in the Australian market overall has flattened.

    In terms of the immediate market conditions, Chart 3 shows the month-on-corresponding-month numbers for hardware retail sales.

    There has been a relatively steep decline in these numbers since February 2021, but May 2021 seems for the moment to represent something of a bottom, with the trend going up for June 2021. Nonetheless, the trend remains in negative territory.

    Analysis

    The hardware retail market has continued to be robust, supported by ongoing building activity, driven both by overall increased demand, and subsequent housing price increases. There are certainly signs of a slowing market, but the relative uptick for June 2021 sales is a positive sign that the market is not developing strong negative momentum.

    However, there are overall "danger" signals in the economy. HNN believes that many economists have underestimated the net effect of both NSW and VIC being in a generally broad lockdown, along with a partial lockdown in QLD. The stimulus package that has been supplied is limited only to those businesses directly affected by these lockdowns, such as some retail and hospitality. Unlike the previous JobKeeper program, those businesses suffering secondary effects are being neglected.

    As NSW has not been able to this point to put an adequate brake on its R ratio for COVID-19, it seems set to remain in lockdown until at least mid-September 2021. Should VIC find itself inhibited in moving out of lockdown for a sustained period, in large part due to continued migration of the virus across the NSW border, the economy could suffer substantially, and it is likely the federal government will continue its reactive policies.

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    ABS building approvals by LGA for NSW

    The shift to regional areas is real

    While the patterns of the past, which favoured both Sydney and coastal NSW, certainly remain, construction dollars are moving to more regional areas. This is particularly the case for both renovations and houses, but less true for multi-unit dwellings - with some notable exceptions.

    As New South Wales suffers through the early stages of what is likely set to be a few months of "lockdown", one hopeful note for hardware retailers is the extent of growth in construction for the state.

    The Australia Bureau of Statistics publishes stats for building approvals categorised by smaller regions, including local government authorities (LGAs), some weeks after its state- and territory-wide stats are brought out. These provide a closer insight as to where industry growth is taking place.

    Alterations & additions

    While we do want to focus on the areas where there has been growth in construction, it is a good idea to first establish some context. That context is best provided by charting the basic expenditure spent on alterations and additions (aka renovations) in NSW, with an additional focus on the greater Sydney area.

    Total expenditure

    Chart 1 shows that expenditure. Note that the colour gradients used for different approval cost estimates is in a "split key". Below $7 million the key is in $1 million increments, and above $20 million it is in $20 million increments.

  • To download a larger version of this chart, please use the link below:
  • Chart 1 large version

    The need for a split key is very much an indication of the NSW situation. The state, as with much of Australia, has a strong polarity between smaller, very high value, mostly urban regions, and lowered valued, mostly inland regions.

    It is evident that the coastal region of the state receives the most expenditure, though there are a few inland regional areas, such as Wagga Wagga, Dubbo and Tamworth that have moderately high expenditure.

    Chart 2 focuses on the Sydney area for the same data.

  • To download a larger version of this chart, please use the link below:
  • Chart 2 large version

    It's tempting to see something of a similar polarity in the greater Sydney map. The highest profile areas Northern Beaches, Ku-Ring-Gai, Inner West, Sydney itself, Woollahra and Randwick seem to be in a class of their own, though Sutherland and Waverley are not far behind.

    The Northern Beaches, in fact, far outpaced the rest of NSW, with over $290 million in renovations, followed by Inner West with $149 million, and Sydney itself with $142 million. Wagga Wagga, the strongest of the regional LGAs, managed $20 million, and Tamworth came in at $14 million.

    Percentage growth

    To determine percentage growth, HNN averaged the estimated cost on the building approvals for the three preceding July to May periods, to establish a more representative baseline. In contrast with Chart 1, this shows a somewhat more optimistic outlook on renovation expenditure. Chart 3 shows the trends for the state.

  • To download a larger version of this chart, please use the link below:
  • Chart 3 large version

    It's interesting to note that in the inland regional areas, some LGAs have had very high increases in renovation expenditure, but are adjacent to areas that have seen very strong declines. It's likely that investment is, for the moment, picking "winners and losers" even in regional areas.

    There would seem to be something of an identifiable trend in the ex-urban areas directly adjacent to Sydney, with a "belt" of reductions in renovation spending through Dungog, Singleton, Lithgow and Oberon, and then a layer of high-spending areas such as Mid-Coast, Upper Hunter, Mid-Western and Bathurst. At a guess, we're looking at people finding the value provided by those ex-urban areas to be less attractive than more regional areas.

    Two anomalies would be, again, Wagga Wagga, and also Blayney (and Orange), which show a sharp increase in planned expenditure.

    Chart 4 shows the same percentage growth numbers for the greater Sydney area.

  • To download a larger version of this chart, please use the link below:
  • Chart 4 large version

    Again, Northern Beaches shows a strong performance, along with Lane Cove, Cumberland, Fairfield and Georges River. Given the strong performance of so many regional areas, it's a little surprising that renovation spending did not show even more growth.

    Detached houses

    For detached houses, HNN chose to contrast the number for June 2020 to May 2021 directly with those for June 2019 to May 2020. Chart 5 shows some of the same trends seen in renovations.

  • To download a larger version of this chart, please use the link below:
  • Chart 5 large version

    It's possible that we are looking at two major regional clusters evolving. One is along the south-eastern border with Victoria, including Wentworth, Balranald and Hay, and the other is mid-northern, including Walgett, Coonamble, Narromine, Gilgandra, Dubbo, Warrumbungle, Gunnedah, Liverpool Plains and Tamworth.

    One of the real anomalies would seem to be Wollondilly, just south of the Blue Mountains, with a high rate of growth not matched by its surrounding LGAs.

    Chart 6 shows the same data for the greater Sydney area.

  • To download a larger version of this chart, please use the link below:
  • Chart 6 large version

    In comparison with the growth in numbers of approvals for regional areas, the greater Sydney area shows more subdued activity. Only Strathfield and Inner West show high increases, followed by Sutherland. Both Hornsby and Penrith show actual declines, as do Randwick, Bayside and Georges River. Woollahra shows the steepest decline.

    Other residential, including multi-unit dwellings

    It is interesting that the chart showing growth in the number of "other residential" - mostly multi-unit - dwellings take us back to the initial chart of raw expenditure on alterations and additions. Again, most of the activity is concentrated along the NSW coast.

  • To download a larger version of this chart, please use the link below:
  • Chart 7 larger version

    The anomalies in this chart include unexpectedly large increases for Cabonne, Orange and Mid-Western, and a decline for Mid-Coast, Newcastle and Lake Macquarie. Wagga Wagga, also, shows unexpected strength in this category, as does Inverell.

    The results for greater Sydney seem more expected, as shown in Chart 8.

  • To download a larger version of this chart, please use the link below:
  • Larger version of Chart 8

    Northern Beaches, The Hills, Cumberland, Sydney, Bayside, Willoughby and Lane Cove all showed strong increases, while Blacktown and Ryde kept pace. There were strong declines in both Strathfield and Mosman, while Hornsby, North Sydney, Canada Bay, Burwood and Georges River showed significant declines as well.

    Analysis

    It is almost somewhat thrilling to see so many construction dollars going to regional NSW. The question remains, however, to what extent this is a medium-term response to the COVID-19 pandemic, and how much of it is long-term structural change.

    It does certainly seem that there is a new patterning of construction, and it's likely that has much to do with more work from home (WFH) opportunities becoming available.

    That said, however, the coastal bias of NSW certainly remains, especially when it comes to the baseline of where the most financing goes. Some of the sharp gains in regional areas really points to a past imbalance towards urban, suburban and ex-urban Sydney.

    The real possibility here, however, is that we could be seeing the development of a "third pole" for NSW, a move away from the binary country/city division that has steadily grown over the past 40 years.

    For hardware retailers, this points to a range of new opportunities opening up in what once were the hinterlands of the state. One of the advantages of the low to medium distribution of population in these areas is that it will generally be easier to compete with a Bunnings Warehouse (for example), as there is a lack of true "hot spots" that can be readily monopolised by any single retailer.

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    ABS stats: Renovations in Melbourne LGAs

    Maroondah and Greater Dandenong show strong growth

    The two years before the pandemic saw an overall decline in renovation spending in greater Melbourne. That turned around dramatically during the period from July 2020 to May 2021. The fastest growth was in outer eastern local government areas, such Greater Dandenong, Maroondah, Knox and Monash.

    HNN is introducing a new set of statistical analytics, which go down to the local government authority (LGA) level for each state. This week we have stats for the greater Melbourne metropolitan region, but this will expand to the other state capitals over coming weeks.

    Hardware retailers have been very aware that the COVID-19 pandemic has changed spending patterns for homeowners. Part of this has been different patterns of expenditure, not only for different goods, but also in different areas.

    Map 1 shows the overview regarding building approvals for alternations and additions (renovations) for those LGAs in the greater Melbourne region. Building approvals capture only a part of the overall renovation market, as only those with expenditure above $5000 typically apply for a building permit. It is, however, a good overall indication of major renovation work.

    It is clear from glancing over the three maps provided that for the period June 2020 through to May 2021 there was substantially increased activity as compared to the corresponding two previous periods. What is interesting is that much of that increased activity took place in the outer eastern LGAs of Melbourne.

    Maroondah, after two years of small negative growth, saw renovations spending grow by 82% to $60.5 million. Greater Dandenong, after two years of negative growth of around -20%, grew by 80% to $15.7 million.

    The highest expenditure, however, was in Mornington Peninsula, where FYTD2021 recorded approvals worth $215.8 million, an increase of 41% on 2020. Knox grew by 69% to reach $39.5 million. Monash recorded $47.7 million, reflecting growth of 60% - though this was partly due to a dip for 2019, with its 2018 approvals worth around $44 million.

    The LGA of Casey was another area of growth, up by 46% on approvals worth $48.7 million. Plus, Moonee Valley also showed strong growth, up 64% to $82.0 million.

    Analysis

    There are likely two forces at work in determining which areas undertook more renovations work at the start of the COVID-19 pandemic. The first of these is a direct response to the lockdowns imposed by the Victorian government on the entirety of the greater Melbourne region. Areas such as the Mornington Peninsula, for example, had a lower incidence of actual COVID-19 cases, and it is at least rumoured that enforcement of restrictions was somewhat more lax than in LGAs to its north.

    As a popular place for Melbournians to have "holiday" and "second" homes, it's likely there was an extent of retrofitting those smaller dwellings to more permanently house families. At the very least, these environments would have afforded access to more outdoor activities, such as beaches.

    For the outer eastern LGAs of Maroondah, Greater Dandenong, Knox and Monash, the equivalent strategy might have been to extend existing houses, made possible by the relatively low density of population in these areas. However, a secondary factor might have been more structural, and more permanent. While it's unlikely that "work from home" (WFH) will completely take over the Australian workforce, it is likely that working from home for two to three days a week will become more common.

    The commute from Knoxfield in Knox to the Melbourne CBD, for example, is around an hour by car or by train, a total of 10 hours per week spent commuting. With that effectively cut in half by WFH, the attractiveness of these areas is set to increase.

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    ABS stats: Dwelling approvals in Melbourne LGAs

    Steep decline for Melbourne CBD LGA

    The pandemic has created some sharp shifts in building approvals, with outer LGAs such as Wyndham and Yarra Ranges seeing a surge in multi-unit approvals, while Melbourne CDB and surrounds shifts towards detached houses

    The COVID-19 pandemic is thought to have changed dwelling construction patterns. There is evidence to suggest that this is true.

    LGA total value of houses

    Map 1 shows the growth pattern of expenditure planned through building permits for detached private houses, contrasting the period July 2020 to May 2021 with the corresponding period of July 2019 to May 2020. These are for the local government areas (LGAs) of the Melbourne metropolitan region.

    The biggest change instantly noticeable is that the Melbourne CBD and surrounds district has seen a strong increase in building approvals for houses. However, many other inner city LGAs, such as Yarra and Port Phillip, have seen declines. In fact, there is a general decline in all the eastern bayside areas, including Frankston, while the Mornington Peninsula shows a modest increase.

    The areas that have benefitted the most are the outer LGAs, Casey and Cardinia in the east, and Melton in the west, with the northern LGAs of Hume, Whittlesea and Banyule also benefitting.

    LGA total value of other residential

    Map 2 shows the same type of data, but for the "other residential" category, which includes flats and apartment buildings.

    As expected, balancing the strong showing for the Melbourne LGA in house approvals, there is a very strong decline in these approvals for the multi-unit category.

    What is most interesting is the strong surge in activity and investment for multi-unit dwellings in some outlying LGAs such as the Yarra Ranges and Wyndham. However, there is a decided decline in similar LGAs, such as Melton (in particular), Hume and Cardinia.

    Both Casey and Greater Dandenong, however, have seen significant increases in approvals, even though they also did well for detached houses. Hobsons Bay is something of an outlier, with a very sharp increase, while adjacent LGAs have seen approvals for multi-unit decline. The same could be said for Glen Eira, which also saw multi-unit approval value spike upwards.

    Overview of all residential

    We can see the net sum of these two data maps in Map 3, which lays out the combined total of planned investment in residential as indicated by building approvals.

    Again, the most stark feature is how much investment in the Melbourne LGA has declined, and this contrasts oddly with the steep rise in investment in Hobsons Bay. Melton, Whittlesea, Casey and Greater Dandenong have all seen significant increases in residential building approval values. Glen Eira is the best performer after Hobsons Bay, boosted by the considerable investment in multi-unit dwellings.

    Analysis

    One pattern that is surprising but quite clear is that there has been a substantial increase in the value multi-unit building approvals in Melbourne's outer suburbs. That should really be expected. As house prices have continued to rise to increasingly unsustainable levels, first home buyers are likely confined to less expensive multi-units a substantial distance from the Melbourne CBD.

    As HNN remarked in the stats on renovations, this is a trend that could be fuelled by the rise of "work from home" (WFH) in many businesses. If new homeowners need only commute two or three days a week, a longer drive or train ride becomes more easy to bear.

    It is tempting to consider whether what we are really looking at here are the first moves towards a true decentralisation of Melbourne. Businesses are facing increasing problems finding qualified people to employ, and yet remain reluctant to compete on the basis of higher wages. Moving a business closer to the areas where highly qualified workers have chosen to live - such as the Monash LGA - might be a way to secure more and better employees, without having to pay them more.

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    ABS stats: Building approval numbers strong for houses

    While houses perform well, apartments show volatility

    The most recent building approval numbers from the ABS indicate continued growth in number of approvals for houses. However, there has been increased activity in building approvals for apartments, with a very recent improvement in numbers for larger apartment buildings.

    The Australian Bureau of Statistics (ABS) has released its data on building approvals to May 2021. The results show a confirmed shift from multi-unit dwellings towards detached houses. However, they also show complexities around a correction in the market, as it weighs more towards multi-unit than it has in the past.

    Chart 1 shows the numbers for the three main categories of houses, apartments and semi-detached, on a 12-month trailing basis to May.

    This chart shows the patterns we've come to expect. Poor performance during 2019 tilts the number of houses down for 2020, but this is followed by a sharp upswing, setting a new high for the past 10 years. Apartments, meanwhile, after reaching a peak in 2016, decline steeply to 2019, then continue to decline at a more shallow rate. Semi-detached houses reached a soft peak in 2018, declined to 2020, then show a mild uplift for 2021.

    Chart 2 illustrates the changes in the previous numbers more clearly.

    Both 2018 and 2020 show a sharp convergence of growth rates during periods of market consolidation, while 2019 shows broad differences, as a falling market affected each sector individually. 2021, as might be expected, shows a very different response from each sector to the pandemic. Houses show strong growth in numbers of around 38%, while the total for all semi-detached houses is around 9% in growth. Three-storey apartments manage to come close to 0% change after two years of declines, while other apartments continue to decline in numbers.

    Chart 3 shows the month-on-corresponding-month percentage change for the number of approvals for houses and semi-detached houses.

    Houses have continued to outperform semi-detached, with one-storey townhouses doing better than taller townhouses. The pattern for the houses shows some interesting aspects. Their performance really took off in September 2020, reaching a high in December 2020, falling in January 2021, falling in February 2021, then hitting a new high in March 2021, before drifting down for April and May 2021. Out of the six months to May 2021, the growth rate was above 50% for five months.

    Chart 4 is perhaps the most interesting of the four charts, showing the month-on-corresponding-month percentage change for the number of approvals for apartments.

    Except for a surprising growth surge for three-storey apartments in April 2020, performance has been mostly negative or close to zero, with the exception of apartments in a one- or two-storey block, with three-storey apartments trailing close behind.

    However, past February 2021 there has been some volatility in the numbers, slanted towards the upside. The number of building approvals for apartments up to three-storey surged abruptly during that month, with three-storey apartments retaining some growth in March, but one and two-storey apartments falling steeply, yet recovering growth in April and May 2021. The surprise for May 2021, however, was a resurgence in approvals for apartments of four or more storeys.

    Analysis

    Building approvals certainly indicate that the industry is predicting ongoing health in the house building sector of the construction industry. There is evidently a great deal of predicted demand. Equally, though, the numbers indicate that some builders do see an emerging opportunity in the apartment market, should the lockdown measures aimed at limiting the spread of the pandemic ease. Overwhelmingly, house prices have risen to a level where many families and individuals simply cannot afford them, making apartments a more attractive option.

    That said, the inability of the current federal government to secure an adequate supply of appropriate vaccines against COVID-19 has increased concerns that the Australian economy could go into a slump during the second calendar half of 2021. While that may be relatively temporary, it could see the housing market go into a dip, before slowly recovering in the first half of calendar 2022.

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    ABS stats: Building work done shows shift to houses

    COVID-19 has made apartments unpopular and boosted housing investments

    The pandemic has meant prospective homeowners have become eager to invest in any form of security, and houses represent, for many, more of a sanctuary than multi-unit dwellings. That has altered the structure of demand and supply in the building and construction industry.

    The Australian Bureau of Statistics (ABS) has released its quarterly statistics for building work done, covering the period up to the March 2021 quarter. These stats are rather intense, with no fewer than 80 datasets, many of them complex. HNN has gone through these and extracted around 24 that we think will help to answer some basic questions about what is going on in house and multi-unit dwelling construction at the moment.

    In general, the housing market has cyontinued to see strong price rises for houses, and lower price rises for flats and apartments. There has also been considerable stimulus applied to the building and construction industry, both through historically low interest rates, making borrowing less expensive, and federal government subsidies such as HomeBuilder, along with longer-running boosts to help first-home buyers access the market.

    In light of this it is a little surprising to see that the value of private residential building work done remains considerably below its peak. This is illustrated in Chart 1.

    The peak was reached in the June and September quarters of 2018, lifting to around $21 billion in both those quarters. Currently, for the December 2020 and March 2021 quarters, it is below $18 billion. That said, there is evidently a stronger increase in building work done for houses in the March 2021 quarter, which came in at $9.25 billion, up by 12.4% on the March 2020 quarter.

    Stats for work commenced shows a similar pattern. The value for the December 2020 quarter showed a local peak, reaching $11.374 billion, up 30.1% on the previous corresponding period (pcp), while the March 2021 quarter was $10.358 billion, up 28.95% on the pcp. Yet these numbers were still below the highs for the March, June and September quarters of 2018, which peaked at over $21 billion. This is shown in Chart 2.

    Looking at the number of dwelling units commenced across Australia, the trend that can be discerned in the previous two charts is made more clear: there has been a significant drop in construction of multi-unit dwellings, and a sharp rise in the number of houses, as indicated by Chart 3.

    The number of house dwelling units commenced hit a five-year high in December 2020, at 34,565, up 36.0% on the pcp. In terms of growth, the March quarter was even better, growing 40.5% to reach 32,812. By contrast, multi-unit dwelling commencement numbers decreased by 2.75% in the December 2020 quarter, and slid steeply down 24.0% in the March 2021 quarter.

    When it comes to the number of dwelling unit completions, however, a slightly different picture emerges. As Chart 4 shows, the March 2021 quarter shows a slowing.

    In fact, housing unit completions in the December 2020 quarter were 27,542, just 0.3% up on the pcp, while multi-unit completions slumped by 26.5% to 19,673 in that quarter. For the March 2021 quarter, this reversed, with house completions down 3.7%, and multi-unit completions up 6.6%. Once again, 2018 had more activity, with house completions over 33,800 for that year's September quarter, and multi-dwelling units over 26,000 in the June quarter.

    For the number of dwellings under construction, once again it is house units that started growing from the June 2020 quarter, while multi-unit construction declined overall. This is clearly indicated in Chart 5.

    These stats are further explored in Chart 6, which breaks out the trailing 12-months numbers and the quarter-on-corresponding-quarter changes.

    These charts show not only the decline for multi-unit dwellings and the sharp uptick for house units, but also the decline that had taken place beginning in 2019.

    Potential work

    Chart 7 shows the value of work yet to be done, which encompasses work on already commenced but not completed projects.

    Again, this shows an increase in project activity to come that is generated mainly by house dwelling units. In the December 2020 quarter this grew by 23.28% for houses over the pcp, and by 37.8% in the March 2021 quarter over the pcp. Meanwhile, multi-dwelling units dropped by 9.1% over the pcp for the March 2021 quarter.

    Similarly, looking at the value of work not yet commenced, this also showed a strong uptick for house units in the March 2021 quarter, as shown in Chart 8.

    For the March 2021 quarter, this increased for house units by 33.8% over the pcp, while it fell by 7.2% for multi-unit in the same quarter. That has resulted in an increase of 4.77% for overall residential in the March 2021 quarter.

    In looking at the chart for the value of work in the pipeline, it's notable that this is the first increase in this number for some years that has been driven by house dwellings, as Chart 9 shows.

    In past years, the multi-unit dwelling category has been responsible for most of the growth. The house category grew by 21.3% for the December 2020 quarter over the pcp, and by 36.9% for the March 2021 quarter.

    Finally, we come to the number of dwellings that have been approved but not yet commenced. Overall, this is a declining number, though this is largely driven by a steep fall in multi-unit dwellings, while house dwellings have staged an increase, as shown in Chart 10.

    For house dwellings, this increased by 21.7% for the March 2021 quarter over the pcp, while for multi-unit dwellings it fell by 17.24% in the same quarter.

    Analysis

    It is not unexpected that a dire event such as the COVID-19 pandemic would result in industries such as building and construction being altered, at least for a time. What these charts all represent is a sharp departure from the trends of the past, which have seen growth in apartment construction, to the extent that both Victoria and Queensland (which is really to say Melbourne and Brisbane) were coming close to echoing the situation in New South Wales (Sydney), where the housing market and the multi-dwelling market were clearly conjoined.

    There is no doubt that this movement has been interrupted. It is not, then, simply about different levels of demand, but a restructuring of demand. For independent hardware retailers, this has probably added to the strong sales they've experienced over the past 14 months. They contribute relatively little to apartment buildings (for example) that are taller than three or four storeys, but they can contribute a lot to the building of individual houses.

    The difficulty with these changes, however, is that they are highly likely to be quite temporary. What has happened in the housing market over the past year or so is that demand for houses - and subsequently their prices as well - has increased sharply, because for families facing the possibility of "lockdowns" they offer considerable advantages over flats and apartments. Yet, in two years' time, it is likely that will have become reversed. That reversal could come from better control of COVID-19 through widespread inoculation, and/or families finding better ways to adapt to lockdowns, as well as - above all - house prices reaching such a peak that multi-unit dwellings are the only pathway to home ownership for many.

    The fear is that, come 2024 or so, with interest rates likely set to rise sharply to at least the 3% level, families perhaps wanting to spend more on overseas holidays, and the possibility of a lively return to the popularity of multi-unit dwellings, that there could be considerable disruption in the construction industry.

    It is understandable that governments come to rely on housing markets as a crutch to get out of periods of economic uncertainty. What often goes missing from both economic and policy discussions, however, is that these moves only - to use the common colloquial expression - "kick the can" down the road.

    That is to say that demand has increased for what has been a cosseted asset class for a particular cultural, economic and social stratum of Australian society. That asset class has certainly been a repository for value, but it is not actually a value-producing asset. Houses can provide many benefits, but they do not contribute to research and development, technological adoption, or even productivity in any general way.

    There is nothing wrong with that, of course. Where the difficulty emerges is when funds are redirected from activities that do contribute to the economy towards investments that are really a matter of pure consumption instead.

    If we know, with some surety, that this is the economic pathway that Australia - and the hardware industry in particular - is walking down, then what can be done to prepare for that future? What the governor of the Reserve Bank of Australia, Philip Lowe, along with many others have suggested is that the excess profits made from this period need to be reinvested in businesses, and in particular in technology.

    Unfortunately, HNN does not really see that happening. If you wanted a neat phrase to describe the potential for the extreme difficulty Australia is likely to face in the near future, from both a government policy and business strategy perspective, it is simply this: at the moment Australia is happy to invest heavily in its past, but not at all in its future.

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    ABS stats: hardware retail revenue moves out of the bubble

    With some states seeing revenues fall by over 20% month-on-month, Australia, the effect of the COVID-19 pandemic seems to be waning

    While hardware retail revenues remain considerably higher than those for 2019, the peak reached during 2020 is now fading. The real question isn't whether revenues will continue to fall from the 2020 highs, but rather how fast they will go down, and what the industry can expect through the key September to December season.

    The Australian Bureau of Statistics (ABS) has released its stats for retail revenue through to May 2021. For hardware retailers, this set of stats is of particular importance, as they send a strong signal that the "bubble" conditions of the past 15 months or so are now coming to an end. While the revenue numbers remain - for most states - elevated over years prior to 2020, they are also significantly down on the numbers for May 2020.

    As the industry exits the bubble, the trailing 12-month numbers have less significance (though they still do point to the overall experience), so HNN has added a fourth graph to its standard series. In Chart 1, we've set out what are essentially the "raw" numbers for the past eight years.

    Looking at the numbers for Australia overall, it is evident that from April 2020 through to December 2020, as well as March 2021, the numbers entered what is essentially new territory for national hardware retail revenue. With the numbers for April and May 2021, they are still higher than is seasonally usual, but in line with the peaks reached from 2016 to 2019 during the September to December pre-Christmas period.

    It is worth noting that while the Australian hardware retail revenue fell by over 12% from May 2020 to May 2021, that May 2021 revenue number is still 21% up on the May 2019 revenue. It has gone down, but it remains substantially up on the revenues for pre-2020.

    One scenario that this does suggest (which we will look at more closely later) is that we could see retail sales gradually "normalising" through the rest of 2021, so that by the time we come to the September to December season for 2021, retail sales will be slightly elevated from the average by 4% to 5%, and then slip back to close to the normal range by February 2022.

    Chart 2 links up with Chart 1, showing the month-on-corresponding-month (MoM) percentage change for these retail numbers, adjusting the changes for seasonality.

    It is very clear that the decline in comparative revenues we saw in April 2021 has been continued in May 2021. South Australia (SA) in particular has seen sharp falls in both periods, falling 14.8% in April, and a considerable 23.7% in May. Victoria (VIC) and Queensland (QLD) both had falls in May of over 13%, while Western Australia (WA) and the Australian Capital Territory (ACT) had falls a touch under 12%. New South Wales (NSW) had the least falls in both April and May, just 1.3% and 7.6% respectively.

    For perspective, though, Chart 3 shows how strong the performance remains to date for hardware retail revenues.

    Comparing the trailing 12 months to May for 2021 and 2020 for Australia overall, there has been an increase of 13.8%, which amounts to a gain of $2896 million. NSW leads in gains, showing up 17.7% or $1077 million. The ACT had a higher percentage gain of 22.8%, up $94 million. QLD gained 15.8%, or $681 million. VIC had the least percentage gain, of 9.1% or $554 million, putting it well behind QLD. SA gained 11.2% and WA gained 12.4%.

    Chart 4 shows the historical percentage change in trailing 12-month revenues through to May.

    The standout statistic for this chart is for VIC. While it has certainly benefitted from a revenue boost, it has done less well than the other states and territories, though this did follow several years where it generally outperformed the other regions. To some extent that might reflect the stronger battering the state - and especially Melbourne - has taken from lockdowns, which has resulted in a higher level of household savings.

    Analysis

    A sufficiently wide date range for retail revenue numbers from the ABS are now available that we can clearly define how long the boom for hardware retailers lasted. It is almost precisely one year, from March 2020 through to February 2021, though one month either side of that range shows increased activity as well.

    For the corporate entities in hardware retail, mainly the Wesfarmers-owned Bunnings, and the Metcash-owned Independent Hardware Group (IHG), this "bump" in retail revenue now creates the problem of explaining a consequent decline in revenue through 2022 and possibly 2023 as well. That could be one factor helping to boost their investments in "inorganic" growth through acquisitions, Metcash with Total Tools Holdings, and Bunnings with Beaumont Tiles.

    For independent hardware retailers, the story is much simpler. There has been a considerable burst in retail sales, much of it in DIY with consequent higher margins, and now it looks like that is starting to coast to an end. Next there is the very tricky management task of ensuring that no business gets lost through a lack of key supplies, while still ensuring that retailers do not end up with excess stock sitting in the storeroom in June 2022.

    This is a particular problem when it comes to the "high" sales season of September through to December. It is possible that, with Australia still nationally in lockdown in terms of international travel, and likely some lingering interstate travel restrictions in place, this season could still run considerably above its historical averages. However, it seems more likely that Australians will count on something more towards pre-COVID-19 normalcy returning. If they are not actually going on vacations at the end of 2021, they could end up counting on going somewhere by mid-2022 at the latest.

    The other factor at work, of course, is the housing market. Some analysts have predicted that, with low interest rates, house prices could grow between 20% and 30% before interest rates finally increase in 2024. A more likely scenario, though, is that at some stage house prices will stabilise or go into decline. One source of that would be seeing widespread vaccination make the possibility of harsh lockdowns less likely by the end of 2022, which could see an acceleration in the take-up of multi-dwelling sales. There are a lot of bargains in that area currently, and for many this is the only option for buying a home, given the increase in house prices.

    The really key numbers that will likely reveal what is going to happen over next spring and summer will likely be those for August 2021. June and July 2021 we would expect to follow a similar pattern as for April and May 2021.

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    It's not enough to recover from the pandemic

    Australia faces new challenges in 2022

    RBA governor Philip Lowe's comments on the problems confronting Australia's economic recovery indicate more investment in technology is needed. Without that, Australia may survive the pandemic, but do less well in a more competitive global economy.

    The governor of the Reserve Bank of Australia (RBA), Philip Lowe, made a very interesting speech on 17 June 2021 to the Australian Farm Institute Conference. As Mr Lowe is often-times wont to do, he chose a slightly obscure locale to release some penetrating insights into Australia's current economic conditions.

    In his introduction, he suggested the apparent topic of his address:

    This morning, I would like to talk about how the economy is now transitioning from recovery mode to expansion mode, and highlight some of the issues that this raises, including for regional Australia. I will then conclude with some comments about the outlook for monetary policy.

    He went on to report the many positives of the current economy, with employment levels high, and both national and farm gross domestic product (GDP) returning to pre-pandemic levels. He pointed out that household savings are very high. He also pointed to an increase in housing prices and rents, and noted that these factors would all play a part in how rapidly recovery got underway.

    How households respond to these changes in their balance sheets will help shape the next stage of the recovery. If households were to run down their additional savings quickly or if higher housing prices spurred more spending than usual, a stronger economic path than the one we have envisaged could eventuate. On the other hand, it is possible that households sit on these extra savings for a long time and restrain their spending because of uncertainty about the future. If so, this would slow the recovery. So this is an issue we are watching carefully.

    Mr Lowe pointed out that there were some concerns that, given higher house prices and increased demand, the economy would be able to deliver the required supply. One positive he noted was that as there was relatively increased demand in regional areas, where there could be fewer constraints on construction. He did note, however, that a tight labour market was nonetheless imposing limitations on growth in construction. This was borne out by a graph he did not present, released later by the Australian Bureau of Statistics. This indicates that nearly a third of construction business are having trouble finding staff.

    He then turned to some of the less fortunate aspects of the current economy. Despite staff shortages, wages are still not gaining.

    Notwithstanding these signs of a tightening labour market, wages growth and inflation remain subdued and there have not been upside surprises. The Wage Price Index increased by just 0.5 per cent over the past year, with wages growth slow in the private and public sectors. And it is noteworthy that even in those pockets where firms are finding it hardest to hire workers, wage increases are mostly modest. There are some exceptions to this, but they are fairly isolated.

    It is at this point that Mr Lowe makes some very interesting observations.

    Most businesses feel they are operating in a very competitive marketplace and that they have little ability to raise prices. As a result, there is understandably a laser-like focus on costs: if profits can't be increased by expanding or by raising prices, then it has to be achieved by lowering costs. This has become the predominant mindset of many businesses. This mindset can be helpful in making businesses more efficient, but it also has the effect of making wages and prices less responsive to economic conditions.

    He goes on to explain what he sees as the potential origin of this condition:

    This mindset became entrenched during the resources boom when the exchange rate appreciated very significantly. When one Australian dollar was worth more than one US dollar, many Australian businesses felt that their Australian dollar cost structure was simply too high. You might recall that through this period many businesses were saying that Australian costs, including labour costs, were leaving them uncompetitive. This experience has left a lasting imprint on many businesses and it has reinforced the narrative about the importance of cost control.

    How is that playing out in the current conditions, which we might define as "semi-stable pandemic"?

    Against this background, the economy is now recovering from the pandemic and some firms are finding themselves facing labour shortages. At least some of these business face a choice: do they increase wages in an effort to attract new employees and put up their prices or do they pursue another strategy?
    Many firms are choosing this second option, relying on non-wage strategies to retain and attract staff. Some are also adopting a "wait and ration" approach: wait until labour market conditions ease, perhaps when the borders reopen, and until then, ration output. For some, this is a better option than paying higher wages and driving up their own cost base. This is especially so if: increases in the cost base are difficult to reverse later on; there is a reluctance to increase prices; and the business expects labour market conditions to ease before too long. By waiting and rationing, firms can avoid entrenching a higher cost structure in response to a problem that might be only temporary.

    Generally speaking, economies that find themselves in this kind of fix tend to get out of it (if they do get out of it) by means of increasing the productivity of businesses and potentially of workers as well. That isn't happening in Australia - in fact, in some cases productivity is declining, notably in construction.

    One reason for that might be the very low level of business investment. Though Mr Lowe is willing to suggest that there are some encouraging signs, most noticeably in tractor sales.

    He is, however, not made giddily joyous by this surge in rural machinery acquisition:

    This pick-up in business investment is welcome, but we have a fair way to go to reverse the decline in investment over the past decade. If we are to build the capital stock that is needed for a more productive economy and a durable expansion, a further lift in business investment is required.
    This should be possible, as there are investment needs and opportunities in many areas of our country. The government has rightly identified the digital economy as one of these areas. The farm sector knows this, with some exciting opportunities in the area of agtech. Ongoing investment in infrastructure and human capital is also needed. Further investment is also required in the energy sector, where technology is evolving quickly, as are the attitudes of investors. The changes in the global energy system are opening up new sources of comparative advantage for Australia. We will need more investment to capitalise on this advantage, with much of this investment being in regional Australia. How well we do this will have a bearing on our future national income and the shape of the ongoing expansion.

    Analysis

    Referring to Mr Lowe's speech, and the subsequent questions he was asked, Katherine Murphy, political editor for The Guardian, quoted Mr Lowe as saying:

    Many international investors are very focused on this issue and it's particularly important for the agricultural sector because up to 70% of agricultural output in Australia gets exported - so you are relying on overseas markets, and increasingly overseas investors are asking about the carbon content of production, and that is a trend that is only going to continue.
    So agriculture has tremendous opportunities here, but we need to find ways to disclose to global investors and global customers the decarbonisation strategy and how successfully we are doing that.
    It is a really important issue and it's going to become more important.

    Ms Murphy commented on what Mr Lowe said:

    Lowe inhabits a universe where climate change is real, the science is settled, and global capital has already made its choice.
    If you inhabit that world, there's very little grey area. You can see that transformation is coming. You can see countries are now in a race to prosper in what Scott Morrison now likes to call the "new energy economy".
    That race is only intensifying.
    Net zero by 2050? Over our dead body, bolshie Nationals tell Scott Morrison

    We could make, really, pretty much the same comments about digital technology in general. Mr Lowe is without doubt quite correct, and he has been pointing out over the past three years at the very least that Australia needs to invest more in digital.

    But just as some people continue to resist making changes which are no longer even as much about climate change, as simply moving to better and more effective technologies for producing electricity, there is a stubbornness in Australian business when it comes to adopting digital technologies.

    The startling fact is that even as Australia continues to dawdle on the path to the digital, countries like the US are emerging from the pandemic through investing vast sums in digital technologies. That's being duplicated - though to a lesser extent - in the European Union and the UK.

    HNN suspects that there are a number of causes behind this lag. One of the major ones is simply that, absent a functioning venture capital sector, the only way to finance developments is through government funding. Yet that funding would seem to follow the dictates of what is known as the "Frascati definition of R&D", which more or less confines development to laboratories and scientists. That ignores areas such as software, which has perhaps contributed something to R&D, like, for instance, the internet.

    Beyond that, though, there is a major reluctance to change the long-established power structures in Australia. Businesses are willing to continue to pursue declining productivity growth and poor future prospects, rather than risk flourishing under a structure that rewards change and innovation.

    Mr Lowe goes to some lengths to describe the pandemic recovery as being one that is distinctly "V" shaped - though he is quick to remind us that we are still in the midst of the pandemic. The difficulty is that such a V is not going to be enough. Australia will emerge from what will likely be two full years of partial isolation from the world to find it has slipped still further behind in technological terms.

    Australia, in other words, needs to compare its performance in recovery not to whether it makes it back to 2019 conditions, but with where the rest of the world gets to in 2022. On that basis, it is highly likely a real recovery is a long way off.

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    ABS National Accounts Stats: Alterations and Additions

    NSW booms, while VIC lags

    The ABS National Accounts figures provide an insight into household spending on renovations. While NSW and QLD had surged ahead, VIC has lagged behind.

    The Australian Bureau of Statistics (ABS) has released its figures for the national accounts. This includes a survey-based set of household consumption stats, including expenditure on alterations and additions, also known as renovations.

    Chart one shows the quarterly numbers for chain volume smoothed to the year ending in the March quarter for the past four years. This shows clearly that the two states that have done the best over the most recent period are New South Wales (NSW) and Queensland (QLD). QLD has continued an established trend, albeit with an extra boost, while NSW has reversed an ongoing decline.

    The two states that show a trend decline are Victoria (VIC) and Western Australia (WA). South Australia (SA) has managed a slight increase, following a mild trend upwards, as has Tasmania (TAS). The Northern Territory (NT) is the most volatile region, but it has been strongly positive for the most recent period.

    Chart 2 shows a more nuanced view of these shifts, giving the percent change for the year ending in the March quarter. Contrasting NSW with VIC, it's interesting to see that while VIC has grown more from 2016 to 2020 than NSW, it has continued its decline for the most recent period, while NSW has shown strong growth of around 14%.

    Similarly with QLD, where its growth spurt for the year ending March quarter 2021 has reached a high growth mark similar to that reached in 2019 and 2016. It is evident that there are characteristics unique to the NSW market that have encouraged strong growth through the COVID-19 pandemic year.

    Chart 3 shows the quarter-on-corresponding-quarter growth for spending on renovations. This illustrates that VIC, throughout the pandemic period has recorded flat to negative growth. For the December 2020 and March 2021 quarters it shows the strongest decline, while all the other regions - with the exception of a slight decline for WA in December 2020 - have shown growth that is reasonably strong.

    Analysis

    It is worthwhile referencing quickly two charts from the Reserve Bank of Australia (RBA) statistical chart pack. These show that business investment has continued its long-term decline, and is back to the level of the mid-1990s recession.

    Similarly, the wage index is still slumping further down, reaching territory not seen since 1950s, though there has been a very slight recent bump upwards.

    As one of the primary forces on the construction market remains the high price of houses, we could be seeing some very complex effects on the renovations market. Prices have reached such a peak in NSW, that this may be driving people to prefer renovation to finding a new home. VIC has, of course, been more directly affected by COVID-19, and undergone lengthy lockdowns which precluded home renovations by outside contractors. QLD, meanwhile, was less affected by COVID-19, and has not reached the high house prices of NSW and VIC.

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    ABS Retail Stats: good times gone?

    Will the retail bubble burst in 2021?

    While growth continues in most states, recent ABS stats indicate that hardware retail sales in Victoria may be slowing. That could be due to factors unique to Victoria, or it could be the first signal of a more general decline.

    The Australian Bureau of Statistics (ABS) has released stats for hardware retail sales in Australia to April 2021. These statistics show the first change for 2021 that could be seen as indicating the end of the COVID-19 "bubble" in hardware retail revenues.

    When bubbles come to their end, we can speak of this as a "soft" close or a "hard" close. In the soft version, the established level of sales continues but growth ceases, or goes slightly backwards. In the hard close, sales tend to revert back to where they were prior to the bubble.

    As Chart 1 shows, the bubble has been very good to most hardware retailers. As the trailing 12-month stats move through the pandemic year, the statistical gain will diminish for the most recent 12 months. At its peak, the number for stats taken from March 2020 to the end of February 2021, the increase is more than $4 billion, and represents growth of over 22%. In these stats, just off that peak, the gain is down to $3.4 billion and 19%.

    New South Wales (NSW) led the gains with revenues of $7205 million, an increase of 21.85%. Queensland (QLD) was boosted by $869 million to $5053 million, a gain of 20.77%. Both South Australia (SA) and Western Australia (WA) had gains of around 17%, while the Australian Capital Territory (ACT) had the biggest percentage increase of over 28%, with total revenues of $508 million. Victoria (VIC) had the lowest percentage gain, at 13.17%, to $6719 million.

    Chart 2 indicates just how strong the gains have been. While VIC's increase for the 12 months to April 2021 is within range of gains for the 12 months to April 2013, the other states and territories exhibit the steepest gains over the past decade.

    Chart 3, however shows some clear signs of the end of ongoing growth in hardware retail sales. It portrays month-on-corresponding-month figures, which have, for the first time since January 2020, dipped into negative territory. The largest fall was in SA, which was down -14.81%, followed by QLD at -7.03%, and VIC at -6.50%. Sales in Australia overall fell by 5.05%. The strongest turnaround was in NSW, where sales for March 2021 showed a gain of 12.07%, but fell by -1.31% in April 2021.

    In Chart 4, we've smoothed the numbers out over three months, for February, March and April, and compared these over the years. This shows a distinct slowing over the most recent period, with growth going back to that of the better years prior to the 2020 bubble. The exception to that is for Victoria, which shows a stark downwards trend from 2020 to 2021.

    Analysis

    The statistical question really comes down to whether the result for VIC represents something individual to that state, or if it is an early indicator of what is to come for NSW, QLD, and potentially several other states and territories. Simply that question itself, however, indicates, that after 15 months of Australia-wide forces dominating the hardware retail sector, we are likely facing a period where individual state and territory forces will see results vary more widely.

    Victoria has, in many ways, been the state most affected by the COVID-19 pandemic, with the longest and most severe lockdowns. That could mean that it will suffer in unique ways, as JobKeeper and other assistance fades away, or it could mean it presages some effects that will make their way more generally through Australia.

    It is still too early to call whether hardware retail is set for a hard or soft correction out of the bubble. One "wildcard" is what happens with the real estate market. To some the soaring prices of dwellings represent a structural revaluing of these assets (despite slowing population growth and increased decentralisation brought about by work-from-home and other changes in the commercial environment). Others see a situation more akin to the Global Financial Crisis (GFC) of 2007/08.

    One aspect that continues to see only limited attention is that, for some reason, market analysts have decided Australians will essentially "never" return to multi-unit dwellings. A reluctance to live in apartment blocks has certainly contributed to the surge in house prices, but that surge has been so extreme that it seems highly likely apartment will see a surge in popularity in the coming financial year. That could trigger the flatlining of house prices for a period, and that flatline could itself trigger a further, widespread decline.

    There is also the matter of the political situation. While many have seen the current government as being reluctant to call an election before 2022, it's quite possible that there will be ongoing post-pandemic economic effects that require a choice between continued support, or introducing a measure of austerity. The government will try to have the election over with before those choices become too difficult, which gives even probability to an election in mid-November 2021 or one in March 2022.

    In terms of the long view, over the entire FY2021/22, HNN would predict that the market will "split the difference" on a hard or soft correction to the hardware retail bubble. Retail sales are very likely to decline from the level of the pandemic, but they will probably not drop to the level they were at pre-pandemic. The first strong indicators of what will happen will come with the September 2021 hardware retail numbers.

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    ABS renovation building approval stats indicate positive market

    After three quarter of significant growth, this growth could continue

    ABS stats for building approvals for private residential dwellings show most states and territories have had three quarters of growth. This bodes well the next financial year.

    Entering the final month of the financial year, many retailers find themselves revisiting the product orders that will be needed during the December quarter. That means forecasting both demand, as well as the capability of the supply chain to deliver.

    Making that prediction is really hard this year, due to the influence of the COVID-19 pandemic. We're beginning to get used to the way COVID-19 "works": periods of zero infection rate, followed by "spot fires" of outbreaks that require the re-imposition of restrictions at different levels. While that's not great for business, we can certainly overcome most of the obstacles.

    What's of equal importance (in business terms) for people working in industries that rely on the construction and renovation industries, is what we might think of as the "secondary effects" of COVID-19. The Australian government reacted to the economic impacts of the pandemic by boosting the construction industry, both through direct grants in HomeBuilder, and by not only radically reducing interest rates, but also committing to low rates through to 2024, at least. That boost has seen house prices rise and construction activity increase, but it has also brought fears of an eventual collapse in the market.

    There are also what we might think of as yet another level to the way COVID-19 has changed things (tertiary effects), where we've seen the pandemic begin to fundamentally alter Australian (and global) society in ways that will likely be long-lasting. For example, the move to "work from home" (WFH). If that persists - as seems likely - that means a big change in expenditure patterns into the future, with homeowners investing more in where they live.

    So, to sum up, we're looking at 1) a relatively moderate negative force, that will be around for the medium term (COVID-19 itself); 2) a strong positive force that will exert a short-term effect (housing boom); and 3) a mild positive force that will persist over the long term (social changes stemming from COVID-19).

    One way to get a glimpse at how those forces are working out in terms of the Australian economy is to look at some statistics. The housing market has been, if anything, over-analysed, and that has produced forecasts that run from a prediction the boom is here to stay for another three years, to an expected price collapse before December 2021.

    A more predictable market to look at is planned spending on renovations. Some of the most revealing stats from the Australian Bureau of Statistics (ABS) are for building approvals related to renovations (which it terms "alterations and additions"). ABS series 87310DO035_202101 provides those numbers for private residential construction.

    Charts 1 through 8 show the percentage change between corresponding quarters (so the quarter ending December 2020 is compared to the quarter ending December 2019) in the number of building applications made for renovations. While regions with smaller populations such as Tasmania, the Northern Territory and the Australian Capital Territory, tend to be volatile, the general trend through the other states shows, in general, strong growth in the December 2020 quarter, and more moderate growth in the March 2021 quarter. That is echoed in the figures for Australia itself shown in Chart 9.

    Further insight is offered if we look at Charts 10 and 11. Chart 10 shows the percentage change on a quarterly basis for both the total value of renovations in Australia, and the total number of renovations in Australia. This shows negative growth in both for the quarter ending December 2019, followed by a surge up to growth of around 5% for both in the March 2020 quarter. In the subsequent quarter, for June 2020, there is slowing growth, with the number of building approvals not growing at all, and the total value of approvals with negative growth of over 5%.

    That's followed by a steep rise, with the number of approvals growing by over 20%, and the value of approvals growing by around 12%, for that September 2020 quarter. That rise continues into the December 2020 quarter, with both value and number growing by around 30%.

    The most interesting shift, however, happens for the most recent March quarter. At this point value continues to grow, increasing by 35%, while the number of approvals grows at a slower (but still considerable) rate of 20%. Chart 11 confirms what Chart 10 indicates. Here we compare the actual number of building applications to the average value of applications (in thousands of dollars). This shows that as the number of approvals grew for the June and September quarters of 2020, the average value actually fell - falling, in fact, below the median value for the period from the June quarter of 2017 to the December quarter of 2020 (which was $87,000). Then, for the March 2021 quarter, this reverses, with the average value lifting to over $98,000, while the number of approvals declines.

    Putting this together, in 2020 there was a proliferation of approvals for lower-value renovations, but this has likely shifted in 2021 to fewer, but higher value approvals.

    Building work done

    Chart 12 shows the percentage change quarter-on-corresponding-quarter for building work done on alterations and additions (based on ABS 8755004). Much of this chart is "as expected, with the majority of states and territories showing continued growth from the September 2020 quarter through to the March 2021 quarter. Except, that is, for Victoria. While that state's growth in building work done is slightly better than the rest of Australian for the June 2020 quarter, it then flatlines through to the September 2020 quarter, and goes into negative territory for both the December 2020 and the March 2021 quarters.

    It's difficult to interpret exactly what is going on in Victoria. It could be that all the resources of the construction industry are focussed on new house builds, which is constraining supply to renovations. Or it could be that Victorians are becoming wary, and beginning to put off major expenditures.

    The problem with this kind of two-quarter anomaly is that it can be read in two ways: either it is "just" an anomaly, and we will see the number get more in line with the rest of Australia; or, it could be the first sign of a trend that could spread to other construction markets as well.

    That said, while there are no guarantees as to what the second half of 2021 will hold, these stats do paint an overall positive picture. That is particularly the case in that we are dealing with renovations. While a potential sharp fall in house prices could see new builds decline, renovations tend to be more resilient, and with a high base already established, could represent a "safe haven" if the housing market declines in the near future.

    But we do need to keep an eye on Victoria over the next quarter.

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    ABS Hardware retail stats to March 2021

    In 12-month terms, sales are up over $4 billion

    March 2021 sales were not so much of a cooling down period, as more subdued ongoing growth on top of the big rises seen in 2020. Victoria was the only state to show negative growth, but that was in part due to the state cycling a very high growth number for March 2020. Overall growth in Australia was up over 21%.

    The Australian Bureau of Statistics (ABS) has released retail statistics for hardware retailing up to March 2021. The overall results remain highly positive. On a trailing 12-months basis to March 2021, total hardware revenues were $24.25 billion, up by $4.24 billion or 21.2% on the previous corresponding period (pcp), which was the trailing 12 months to March 2020.

    Chart 1 shows these statistics for the states and Australia overall.

    In percentage terms, the Australian Capital Territory (ACT) recorded the highest gain, at 32.9%, with New South Wales (NSW) second at 24.6%. Except for Victoria (VIC) the rest of the states recorded gains between 19% and 25%. VIC had the lowest percentage increase over the pcp, at 15.7%.

    In dollar terms, NSW led the field by a considerable margin, with an increase of $1426 million for the 12-month period, followed by Queensland (QLD) at $987 million, and then Victoria (VIC) at $917 million. Western Australia (WA) recorded an increase of $402 million.

    Chart 2 shows how highly unusual the current conditions are. While VIC has come close to its current growth in the past, in 2012, 2014 and 2015, and WA had similar growth in 2013, these growth numbers are largely unprecedented. That's shown by the overall growth in Australia, which stands at 21.2%, while the closest it has come to that over the past 10 years was in 2015, with a 9.8% overall growth figure.

    Chart 3 shows the month-on-corresponding-month figures. As this illustrates, after moderate growth in January 2020, sales spiked from May to July 2020, then began a gradual decrease in growth from August 2020. There has been a further easing of growth for February and March in 2021. However, only VIC has slipped into negative growth.

    Chart 4 shows the comparative growth numbers for the month of March going back over the past three years. It seems likely from this that the slip in growth in VIC is somewhat due to its cycling a very high growth number for March 2020. There is a similar mechanism at work for NSW, which had strong but not outstanding growth for March 2020, recording the lowest in Australia, and in March 2021 has shown stronger growth than the rest of Australia.

    Analysis

    There are two forces at work on these hardware retail figures. The first is simply that there is only so much growth available in the market, and most of that has been absorbed during the strong performances during 2020. That said, it's likely we will see an ongoing drop-off in the comparative growth numbers through the rest of 2021, at least until September, as the high growth numbers of 2020 are cycled in the comparisons.

    The big question that remains, however, is whether in the long-term Australia truly does represent a $24 billion hardware retail market, or whether, by the time 2022 comes around, the nation will begin to see a retreat back to a market worth closer to $20 billion.

    The answer will depend, in large part, on what happens in the housing market. Much of the current surge has been driven not by the shortage of dwellings overall, but by a shortage of certain types of properties. In particular, multi-unit dwellings have worked effectively over the past six to seven years to not only supply demand, but provide a less-expensive comparator for people seeking to buy. If Australia does reach something close to an 80% vaccination rate by the end of 2021, it's possible multi-dwelling sales will return to their previous demand rate, and act to deflate housing prices.

    That said, there are still longer-term trends that will continue to benefit hardware retailers. It remains to be seen how many workers return to full-time office work, but early signs are that most will end up working from home for at least two days out of the week. Similarly, while the opening of international borders (probably for second calendar quarter 2022) will see less money flow to household renovations, it's likely that DIY sales will continue to grow as compared to 2019.

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    ABS: QLD building approvals

    Apartments decline as share of market, but steady on numbers

    Queensland has some unique characteristics in its dwelling construction market. While that market has seen a surge in the past for apartment approvals and construction, this has steadily declined in recent years.

    The Australian Bureau of Statistics (ABS) has released its data for building approvals up to March 2021. The stats for Queensland (QLD) are particularly interesting, as they reveal some unique characteristics about that state.

    Figure 1 is a compilation of charts for both number and value of building approvals. All values are shown in thousands of dollars, and the time periods are for the trailing 12 months to March for each year (YEM).

    QLD-1 shows a distinctive pattern. Numbers of house approvals peaked in 2018YEM, then declined in almost a straight line through 2019YEM and 2020YEM. That is followed by a sharp upwards movement, with numbers coming in close to those for 2018YEM. For apartments, there was a sharp peak in numbers for 2016YEM, followed by a steep decline through to 2020YEM. Townhouses and semi-detached (TSD)houses experienced much milder peaks and declines.

    QLD-2 shows an interesting trend in that while the average value of approvals (total approval value divided by number of approvals) has risen for both houses and TSD, apartments have seen a steep rise in value. That rise in value corresponds almost exactly with the decline in numbers of apartment approvals, suggesting this has shifted to being more of a premium market.

    QLD-3 shows the types of apartment approvals in the state. This has remained remarkably flat over the most recent three years, but there has been a significant shift towards taller (larger) apartment blocks, while mid-size block approvals have steadily declined.

    QLD-4 shows that larger TSD approvals reached a peak in 2017YEM, then declined sharply through to 2020YEM, before a slight recovery. Meanwhile smaller TDS approvals have declined significantly since 2017YEM.

    QLD-5 shows the percentage change in the numbers of building approvals for houses, smaller TDS and larger TDS. Houses saw two years of negative growth, in both 2019YEM and 2020YEM, while TDS in both categories showed steeper declines in those years. QLD-6 shows a similar trend across the value of building approvals.

    QLD-7 is a month-on-corresponding-month comparison of the percentage change in building approval numbers. Perhaps the most interesting characteristic here is the sharp spike upwards in approvals for apartments in December 2020, followed by a small but significant decline in house approvals for January 2021 as contrasted with January 2020.

    QLD-8 shows the value for the same range and type of building approvals, and mostly echoes QLD-7, indicating there was not much of a value shift.

    Analysis

    Chart 1 shows some of the significant shifts in the makeup of building approvals in QLD.

    It's interesting to note that in 2016YEM, houses made up around 50% of the approvals, but this rose steadily since then to 68% in 2021YEM. In other nations, it's common to see a steady increase in the number of apartment approvals as the cost of housing increases. Though QLD tends to be a cost sensitive market, that trend is not apparent, as yet. Nonetheless, there is something of a certain strength to the apartment market in QLD, and it will be interesting to see if it shifts again in 2022 from being more premium-focused to providing less-expensive housing instead.

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    ABS: SA building approvals

    Apartment approvals in South Australia unexpected

    While other areas have seen larger apartment buildings dominate, South Australia has seen mid-size building approvals increase.

    The Australian Bureau of Statistics (ABS) has released its data for building approvals up to March 2021.

    Figure 1 is a compilation of charts for both number and value of building approvals for South Australia (SA). All values are shown in thousands of dollars, and the time periods are for the trailing 12 months to March for each year (YEM).

    SA-1 shows a very strong surge in the number of building approvals for houses in 2021YEM, after strong consistency from 2014YEM through to 2020YEM. Meanwhile the number of approvals for both apartments and townhouse/semi-detached (TSD) dwellings have been fairly consistent, but trended down in 2021YEM.

    SA-2 shows the average value for approvals (total value divided by total number). While both houses and TDS show an ongoing increase, the value of apartments has risen more sharply, albeit in a more jagged manner - perhaps as the market jostles about whether it is about premium living, or value for money. Also interesting is that the average value for house approvals actually goes down in 2021YEM, indicating that there must be growth in lower valued housing.

    SA-3 shows represents the building approvals issued for different sizes of apartment buildings. This shows an unusual patter for Australia, with buildings that are between four and eight storeys growing sharply at the expense of taller buildings. There is also an overall precipitous decline post 2019YEM.

    SA-4 is more in keeping with the pattern in other stages, with the number of approvals for larger TSD dwellings becoming more dominant, and exhibiting some resilience, even after the peak 2018YEM.

    SA-5 shows the percentage change in the number of approvals for houses and two categories of TSD. There is something of a "reversal of fortunes" here, as house approval numbers have bumped along close to 0% since 2015YEM, but then grew sharply in 2021YEM, while TSD numbers declined from 2019YEM onwards. SA-6, which shows the value of those approvals, follows this closely, indicating that the market has not shifted much in this regard.

    SA-7 gives the month-on-corresponding-month view of the percentage change in the number of approvals through the past two years. It illustrates just how whacky the apartment approvals have been. That is echoed in SA-8, which shows the percentage change in the value of approvals.

    Analysis

    When we look at the changes in the value of building types, we can see that SA had one of the strongest shifts in this area across Australia.

    The shift from houses making up 72% of approvals by value in 2020YEM to 81% in 2021 is one of the strongest. This affected the total value of apartment approvals disproportionately. It's difficult to tell what the exact dynamics are that have affected the apartment market in the state. It is counter-intuitive, given that SA is suffering from a shortage of accommodation both in centres such as Adelaide and in more regional areas as well.

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    ABS: WA building approvals

    House approvals continue to dominate market

    Western Australia has seen a strong surge in house building approvals. The one area that has suffered in recent years has been the townhouse and semi-detached category, which continued to decline through to March 2021.

    The Australian Bureau of Statistics (ABS) has released its data for building approvals up to March 2021.

    Figure 1 is a compilation of charts for both number and value of building approvals for Western Australia (WA). All values are shown in thousands of dollars, and the time periods are for the trailing 12 months to March for each year (YEM).

    WA has produced some interesting statistics. It is probably the single state of Australia that has best avoided some of the negative consequences of the COVID-19 pandemic, and that has given some unique characteristics to its approval stats.

    As WA-1 illustrates, the number of approvals for houses has been in decline since 2015YEM, but this was sharply reversed in 2021YEM, with approvals back up to the level for 2016YEM. The number of approvals for both apartments and townhouses/semi-detached houses (TSD) remained relatively constant, however.

    This makes WA-2 all the more surprising, as it shows the average value (total value divided by total number) of house approvals actually declined, while the average value for apartments shot up steeply, with TS showing a moderate to high increase.

    WA-3 shows an actual increase in the number of building approvals for apartments, with a balancing between the largest category and the mid-size category, as smaller apartment building approvals continue to decline.

    WA-4 shows that the steepest decline has come for the TSD category, with approvals reaching a ten-year low. Also surprising is that most of that decline has come for the larger TSD buildings, while one-storey TSD has shown some resilience.

    Both WA-5 and WA-6 show how the house approvals have come to dominate growth, with 2021YEM showing a very strong growth in both numbers and value.

    WA-7 shows the steady trend of increases in the number of approvals since August 2020, while the apartment approvals underwent a very strong spite in September 2020 which was sustained at a lower level in October 2020. The value of approvals, shown in WA-8, has tracked the same pattern.

    Analysis

    Even with the spike in approvals, and despite being a state less affected by the COVID-19 pandemic, WA has coasted towards being more dominated by approvals for houses during 2021YEM, as is shown in Chart 1.

    While WA has always had a strong showing in house approvals, this did go up by nearly 5% between 2020YEM and 2021YEM. With low rental vacancy rates and ongoing demand for accommodation, we could be seeing the signs of a rebalancing towards more apartment approvals through the rest to 2021.

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    Retail update

    Sydney Tools' Lismore store opening

    Yolla Producers Co-operative Society plan to open new retail outlet in Latrobe, Tasmania

    Lismore in north eastern New South Wales is the latest location for a Sydney Tools store following its recent launch in Shepparton (VIC). The 1800sqm store will carry around $3 million worth of stock across 19,500 product lines, according to founding director Jason Bey.

    It is the tool group's 25th store in NSW and 51st in Australia. Mr Bey told The Northern Star that its sales data showed that Lismore was an ideal location to open a store. He said:

    We have seen from people who shop at our Coffs Harbour and Port Macquarie stores as well as online sales data that we have lots of customers in Lismore, Byron and Casino. So we have made a big commitment to the local community to come here and have taken out a long-term lease of around $2.5 million over seven years.

    Mr Bey believes the Northern Rivers is a go-ahead region with a strong future. He said:

    There is a lot of work going on and coming up in the Lismore area. At Sydney Tools we are very confident of our business offering in terms of service, range and pricing for our professional and trade customers.

    The Lismore store is scheduled to open on May 20, 2021.

    Related: In 2020, Sydney Tools had store openings in Garbutt (QLD), Orange (NSW) and Darwin (NT) amongst other locations.

    Sydney Tools setting up shop in Orange - HNN Flash, October 2020

    Yolla Co-Op

    A new Yolla Co-Op store is being proposed for a site in Latrobe (TAS) with a development application (DA) submitted to Latrobe Council for public display and feedback.

    Yolla Producers Co-operative Society general manager Ben Davis said if approval is gained, the Latrobe location would be its third store. He told The Advocate:

    We have been looking for the past six to 12 months for opportunities to grow the Yolla brand. We are currently in the due diligence phase. The location is amazing. You couldn't pick a better spot with highway frontage and easy access for members and the public.
    One of the great advantages of the ... site is its large yard which will make easy for the distribution of bulky goods.

    The company is seeking approval to change the use of the site from a food services and tourism operation to bulky goods sales. Subject to approvals and about $40,000 in changes to the site, Mr Davis said they were hoping to open the new shop in November or December this year.

    The co-op, which has stores at Smithton and Wynyard, has more than 920 members, which includes 270 in the Latrobe and Devonport area. Mr Davis said:

    The business has continued to go from strength to strength over the past eight to nine years. We have a large amount of support and we currently service a lot of that area already with our delivery service and this is a logical next step as a business. If we get through due diligence the objective is to run it as a third shop front for us.
    I hope that people in the area see the benefits of having a rural supply store that is able to provide competitive pricing. As a business we continue to support local communities where we can and will be employing staff.

    The plans to transform the site into a rural merchandise store include removing the garden on the northern side of the building and the children's playground to make room for the storage of bulk goods, such as fencing material, water tanks and irrigation supplies.

    It is expected medium to heavy rigid vehicles will be making deliveries to the store during operating hours, but there is "no reason to suspect that there will be a substantial increase in traffic volumes entering and exiting the site", said Mr Davis.

  • Sources: The Northern Star and The Advocate
  • statistics

    ABS building approvals for NSW and VIC

    While broadly similar, the role of apartment construction is very different between the states

    The numbers confirm what homebuyers have long known: Melbourne/VIC is largely dominated by houses, while Sydney/NSW gives apartments a regular, prominent role. In particular, VIC is trending towards larger, more high-end apartments, while NSW has a more diverse market.

    The Australian Bureau of Statistics (ABS) has released its stats on building approvals through to March 2021. In this article we will look at those stats for new housing in the two "bellwether" states, New South Wales (NSW) and Victoria (VIC), and complete the series for the other states and territories in the near future.

    Most of these statistics, with the exception of the month-on-month numbers, relate to consolidated stats for the year (12 months) ending March 2021 (YEM2021). All monetary values on the charts are expressed in $100,000 numbers.

    New South Wales

    Figure 1 shows a summary of these statistics for NSW.

    The trends that we see here have become familiar when assessing activity in the construction sector during the first year of the COVID-19 pandemic. NSW-1 shows the number of building approvals for houses, semi-detached/townhouses (SDT) and apartments. It's interesting to note that even with the boost we've seen during the pandemic, the numbers for houses have not come back to the levels they held for YEM2016 through to YEM2019. For SDT, there's been a slight recovery. Apartments have continued a broad slide downwards, after their peak in YEM2017.

    Looking at average values (the total value of applications divided by the total number of applications) in NSW-2, however, we see quite different trends. These numbers actually say quite a lot about the structure of the construction industry in NSW. It's more typical, in other nations at least, to see a decline in average values when there is a decline in number of approvals, but not in NSW. Both house values and values for SDT, there has been a broad and continuous climb in value.

    Only apartments have shown a decline and levelling off before, surprisingly, regaining overall value during YEM2021. That said, these are averages, and apartment construction and therefore value varies significantly more than houses.

    NSW-3 illustrates some of what is at work in apartments. The bulk of the market has been carried by those ranging from four to eight storeys, but these have declined since YEM2018, so that by YEM2021 these numbers are close to those for apartments in buildings nine storeys and above. NSW-4 shows that larger constructions also dominate for the SDT category, which peaked in YEM2018, and showed a significant recovery for YEM2021 - possibly absorbing some of the activity from the apartment sector.

    NSW-5 shows the percentage change in the number of applications between one YEM and the previous YEM. It is evident that since YEM2014, there has been a steady decline in growth, albeit with an uptick in YEM2016. However, the growth numbers remained positive (though YEM2019 was less than 0.5% negative) through to YEM2019.

    That ended in a steep dive from YEM2019 to YEM2020. The recovery in YEM2021 has been sharper, but still has not returned to the YEM2014 peak.

    Looking at NSW-6, it's interesting to note some relationship between the growth of the value of building approvals for houses and those for SDT. Growth declined for houses from YEM2016 through to YEM2019, then fell into negative territory for YEM2020. Growth in SDT outperformed that growth through to YEM2019, and there is a broadly equivalent growth spurt for YEM2021.

    NSW-7 and NSW-8 both deal with month-on-corresponding-month numbers. Looking at NSW-7, which shows growth in the value of building applications, it's notable that these numbers were trending negative to flat growth through to August 2020, then picked up to reach a peak for December 2020. The SDT category was somewhat more volatile, and the apartment category was very volatile from February 2020 onwards.

    That pattern in repeated in NSW-8, which details the percentage growth in the number of applications. Again, it's not until August 2020 that significant growth for housing appears, while post that month the volatility for both apartments and SDT increases.

    Victoria

    VIC illustrates something of a contrast to NSW. For one thing, its property market is far more dominated by houses. Figure 2 supplies the charts for this series.

    VIC-1 shows building approval numbers for houses, SDT and apartments. It's notable that the number of building approvals only declined for YEM2020, after holding steady to YEM2019. For YEM2021, the number of approvals for houses has hit a new 10-year high.

    Meanwhile, apartment approvals managed to reach a local high in YEM2015, and then had only a slight decline through to YEM2018, and then declined through to a local low for YEM2021. SDT did a little better, in terms of growth but not actual numbers, with a local high for YEM2018, followed by falls, and only a very slight improvement for YEM2021.

    In VIC-2, the average value of approvals follow a different path. Approvals for apartments actually increased their average value over that for houses, indicating the market has continued to shift towards high end apartment dwellings. It is interesting also that while the number of house approvals increased, the average value of these actually fell through to YEM2021.

    VIC-3 shows how that is working out in the types of apartments that get approvals. The sector is dominated by apartment buildings of over nine storeys, while the share for apartments from four to eight storeys continues to decline.

    Similarly, VIC-4 shows that in SDT, the share of approvals for smaller builds is sliding down, while there was significant growth for builds of two storeys and more through to YEM2018, followed by a decline back to YEM2016 levels in YEM2020, and then a small bump for YEM2021.

    As with NSW, VIC really only recorded one year of negative growth for the rate of building applications for houses, which was YEM2020, as shown in VIC-5. The year before that, however, shows a steep decline negative rate for SDT applications. Applications for apartments outgrew those for houses from YEM2012 through to YEM2018 but went negative in YEM2019 and YEM2020. Looking at the growth rate in total values for approvals in VIC-6, these closely match the numbers show in VIC-5.

    VIC-7 shows the month-on-corresponding-month growth rates for the numbers of new dwelling approvals. In contrast with NSW, the rates for both houses and SDT are relatively stable, but the growth rates for apartments are highly volatile. That's likely a reflection (in part) of the market being taken up by larger apartment projects, so the growth movements come in bigger blocks.

    That behaviour is largely echoed in VIC-8, which shows the month-on-corresponding-month growth rates for the value of new dwelling approvals. The house numbers are very flat, and it's interesting that they reach a peak only in the final month of the series, March 2021.

    Analysis

    One initial conclusion from this work is simply that the NSW and the VIC markets differ substantially from each other. The accepted wisdom has been that homebuyers have become averse to apartments, as these are less suitable to periods of "lockdown" than houses, both detached and semi-detached. In the case of VIC, especially in the Melbourne market, that is likely to remain the case. However, the truth is that for people living in Sydney, choice is more limited, and the lockdowns there were not as severe.

    Overall, though, the problem in both states - and both major cities - is that the property market remains, structurally, somewhat insulated from the kind of market forces that elsewhere in the world work to periodically reduce property prices. One reason for that may be that construction in Australia has a far greater reliance on subcontracting (subbies) than the construction industry in other areas. When the market for housing subsides, investors and the construction industry both pull back in term of housing builds. Because the construction companies have fewer permanent full-time employees, that makes economic sense.

    While that might strike some in the industry as a "good" thing, it does come at considerable costs. Indications are that construction companies that rely on an employed workforce, that can be trained to a high level of expertise (and safety concerns) are inherently more efficient. Australia's construction industry, according to figures from the Productivity Commission, is one of the very few industries that has actually gone backwards, and become gradually less efficient in recent years.

    That is beginning to change, however, with more construction companies signing on to better industry standards and practices. Given the increase in technology today, there is no longer even that much of a competition between the two models of construction company management. Those changes should start to bring about a change, where falling demand will lead to more investment in less expensive projects. However, that will take at least another five years to have any great effect.

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    ABS stats: QLD building approvals

    More distributed growth

    In contrast to other states, Brisbane has a more distributed dwelling market, with regional Queensland sharing the market with the urban Brisbane areas. However, like those other capitals, past booms have been driven more by increases in approvals for multi-unit dwellings.

    The Australian Bureau of Statistics (ABS) has released stats for both building approvals and housing finance through to February 2021. As this is a nearly complete overlap with the pandemic period, it's worthwhile taking a closer look at what these stats reveal about the housing and construction markets.

    This analysis deals with Queensland (QLD).

    Value

    Chart 1 shows the value of building approvals for the trailing 12 months to February. As with both NSW and VIC, the chart indicates that much of the previous surge in building approval value had its origins in approvals for multi-unit dwellings. These reached a peak in the year ending February 2016. House approval value increased steadily until 2018, then fell through to 2020, as did multi-unit approvals.

    As expected, for the year ended February 2021, housing approval value increased sharply, up to 2018 levels, while multi-unit approvals declined slightly from 2019 levels.

    Number

    Chart 2 shows the number of approvals for house and multi-unit dwellings in around Brisbane and in regional QLD. Combining this chart with Chart 1, it is evident that post 2016, as numbers declined, the value of individual approvals increased. It is also evident how, in contrast to both NSW and VIC, houses in regional QLD play a more significant role in the construction industry, at times equalling and even exceeding those for urban Brisbane. However, post 2018, Brisbane had tended to lead over regional QLD.

    For the most recent period, 12 months ending on February 2021, multi-unit dwellings in both Brisbane and regional QLD have declined, while approvals for houses in both areas have increased.

    Number percentage change

    Chart 3 shows the change percentages for Chart 2. As this indicates, the sharpest rise in percentage terms was for house approvals in regional QLD, followed by Brisbane houses. Urban multi-unit approvals also grew, and only regional multi-units sustained an ongoing decline.

    Loan purpose

    Chart 4 shows the amount of loans that have been issued for one of three purposes: existing dwellings, newly erected dwellings, and the construction of dwellings. As with VIC, there was a strong increase in loans for dwelling construction in the final period, trailing 12 months ending February 2021, with purchases of newly constructed dwellings also increasing.

    Chart 5 shows how the numbers in Chart 4 changed. There is very strong growth in loans for construction of dwellings, while both loans for existing dwellings and newly erected dwellings went up by more than 25% as well. This followed on from two years of declines across all three categories.

    Analysis

    The house price index produced by the ABS indicates that house prices in Brisbane have remained at more sustainable levels than those for Melbourne and Sydney, at below 5%.

    That level has proved relatively sustainable since 2013. House prices have likely remained relatively low due to the supply of desirable houses and locations being relatively higher than in Australia's two most populous cities.

    Where the other capital cities have seen a slight increase in regional house approvals, QLD has seen something more inline with a continued strength. At the same time, the peak reached for the 12 months ending February 2016 was driven largely by multi-unit construction in Brisbane.

    As with the other capital cities, commentary about the real estate markets in these areas tends not to take multi-unit dwellings as a contributor to real estate values seriously enough. In both Brisbane and Sydney, the future market is likely to return to multi-unit, which could have deflationary consequences for the rest of the housing market.

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    ABS stats: VIC building approvals

    Decrease in multi-unit, increase in regional house approvals

    If anything, the approvals market is surprisingly cautious as it looks ahead to the rest of 2021. There has been some redistribution of approvals. The biggest news, however, is in the increase in loans for the actual construction of houses.

    The Australian Bureau of Statistics (ABS) has released stats for both building approvals and housing finance through to February 2021. As this is a nearly complete overlap with the pandemic period, it's worthwhile taking a closer look at what these stats reveal about the housing and construction markets.

    This analysis deals with Victoria (VIC).

    Chart 1 shows the value of building approvals for housing and other residential (primarily multi-unit dwellings) for the trailing 12 months to February. The clear indication in this chart is that the growth interruption for the 12 months to February 2020 has been overcome in the numbers for the 12 months to February 2021 in terms of approvals for houses. However, a slide in approvals for "other residential" - mostly multiunit dwellings - has kept the value below the peak reached in 2018.

    Chart 2 shows the number of approvals for house and multi-unit dwellings in around Melbourne and in regional VIC. This shows an increase in approvals for Melbourne houses, and a decrease in Melbourne multiunit approvals. There is also a relatively strong rise in approvals of regional VIC houses, and regional VIC multi-units have remained a fraction of the overall market.

    Chart 3 shows these changes in a more definite form. On a percentage basis, houses in regional VIC have actually outgrown those for Melbourne.

    Chart four shows the amount of loans that have been issued for one of three purposes: existing dwellings, newly erected dwellings, and the construction of dwellings. The surprising feature of this chart is how much loans for the construction of dwellings has grown for 2021.

    Chart 5 gives a clearer indication of the nature of the changes shown in chart 4. Loans for construction of dwellings shot up by over 50%, while the largest category, loans for purchase of existing dwellings, grew by less than 10%.

    Analysis

    There is a persistent line from commentators in VIC that the multi-unit market continues to suffer, with some projections seeing it face further declines in future years. While multi-unit has certainly been reduced considerably, it has still remained a major feature of the market. The rise in regional house approvals backs up the anecdotal reports that, after the severe lockdowns for Melbourne, and in the wake of more work-from-home now being offered by employers, there has been a general move to exurban areas.

    However, it is difficult to predict how long-term these changes will be. As with NSW and Sydney, we're really looking at a market that has produced some improvement from 2020 to 2021. The question is whether, as the market absorbs the stimulus such as interest rates, it continues at its present level, or if the factors that were present in 2019 reassert themselves.

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    ABS stats: NSW building approvals

    In the year to February, 2021 has repeated 2020

    While most have seen 2020 as being a year when there was an extensive shift in construction for NSW, building approvals tell a different story

    The Australian Bureau of Statistics (ABS) has released stats for both building approvals and housing finance through to February 2021. As this is a nearly complete overlap with the pandemic period, it's worthwhile taking a closer look at what these stats reveal about the housing and construction markets.

    This analysis deals with New South Wales (NSW).

    Chart 1 shows the value of building approvals for housing and other residential (primarily multi-unit dwellings) for the trailing 12 months to February. There are three aspects of this chart that are worth noting.

    Firstly, we've been frequently told that the pandemic itself has been largely responsible for the fall in multi-unit construction. However, this chart clearly shows that, at least in value terms, that fall took place prior to February 2020, when the pandemic began. While there has been a slight further fall between March 2020 and February 2021, it is negligible.

    Secondly, it is evident that while there has been something of an increase in the overall value of building approvals through in the final period to February 2021, the total value of the market is nowhere near the highs achieved in 2017 and 2018. That is largely due to the reduction in approvals for multi-unit dwellings. Specifically for private houses, the market has come back to close to where it was in 2019.

    Chart 2 shows the number of approvals for house and multiunit dwellings in around Sydney and in regional NSW. Again, this shows that 2021 is essentially a repeat - overall - of 2020. There is an increase in houses in Sydney, a slight decrease in multi-unit in Sydney, an increase in houses in regional NSW, and a decrease in multi-unit for regional NSW.

    Chart 3 shows these changes in a more definite form. As can be seen while houses are generally faring better, there is also a reduction in decline for multi-units in Sydney after three years of slow decline. It's also interesting that the year to February 2020 showed growth in multi-units for regional NSW, and that these have subsequently had the steepest decline.

    Chart four shows the amount of loans that have been issued for one of three purposes: existing dwellings, newly erected dwellings, and the construction of dwellings. It's clear from this chart that finance for the purchase of existing dwellings has grown sharply, surpassing any prior year.

    Chart 5 gives a clearer indication of the nature of the changes shown in chart 4. All three categories show losses for 2019 and 2020, but all three also recovered in 2021, with construction of dwellings growing at the highest rate (possibly a consequence of the HomeBuilding bonus).

    Analysis

    Generally speaking, most commentators would likely expect to see the pandemic year as providing far more growth than is evident in these charts, for NSW as a whole, but especially for Sydney. What we would have to conclude from this is that the dive in property construction and sales was likely set to be much stronger going into the early months of 2020 than we might previously have known.

    In other words, the corrective work of the sharp reduction in interest rates and stimulus programs such as HomeBuilder might have been necessary just to pull at least the NSW economy out of what could have been a very bad period, when the pandemic added further retardation to an already slowing situation.

    Of course, this also leaves us with a paradox as regards house prices.

    Chart 6 shows the changes in the ABS house price index through to the December quarter of 2020. While the increases do not reach the peaks that have been seen in previous surges, these should have been enough for Sydney to stimulate more growth.

    One conclusion could be that many developers are, to some extent, "sitting out" the current increases, as they still see the future of Sydney as being vested in multi-unit developments. HNN does not understand why there has been a shift for many forecasters towards discounting growth in apartment buildings through the next three years or so. While it is unlikely we will see a surge in this area for the remainder of 2021 (after vaccinations have hit so many problems), it seems likely that by the second calendar quarter of 2022, this market sector will return to favour.

    The simple fact is that much of the most recent property boom in Sydney was built on multi-unit, and it seems clear this is where much future development will occur.

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    ABS stats: Hardware retail sales to February 2021

    Sales continue to grow, but growth slows

    While overall growth rates have remained high, there is a sign of a general slowdown in growth for the month of February 2021, as the statistics begin to lap the first months of strong growth in hardware retail sales at the start of the pandemic

    The Australian Bureau of Statistics has released its retail stats for February 2021. These show that for hardware retail growth has continued at a relatively high rate, but there are beginning signs of a potential slowing to a more normal - though still positive - rate of growth.

    It is worth noting that we are about to enter a whole new period for retail stats, as we will start to lap over the period when COVID-19 first made its appearance. It will be interesting to see how this modifies the generally high month-on-month comparison growth rates. For these February figures, we're seeing a mixed result, but much of that is down to some states experiencing further lockdowns during the month. That said, there is an overall general trend towards the growth rates climbing less high.

    Overall, for Australia, hardware retail sales for the 12 months trailing to February 2021 hit $24.2 billion, an increase of 22.52% or $4.44 billion, over the previous corresponding period (pcp), which was the trailing 12 months to February 2020. The Australian Capital Territory (ACT) had the highest percentage increase, of 35.24%, while New South Wales surged ahead of other states and territories in dollar value, increasing by $1.4 billion, or 24.79%.

    Queensland performed well, with an increase of over $1 billion, or 25.07%. Victoria (VIC) had the lowest percentage increase, of just 18.51%, or $1.1 billion. South Australia (SA) and Western Australia both showed increases of over 20%.

    Looking at the month-on-month percentage change numbers, there is a significant drop-off in terms of gains for some states, led by VIC. The growth between February 2020 and February 2021 was only 4.19%, with WA also showing only 7.19% growth. By contrast, NSW showed growth of over 20%.

    Some of this is due to these months lapping the months at the start of the COVID-19 pandemic, which had started to show strong hardware retail gains. This is likely the result of the lockdown from 12 to 17 February 2021. It is interesting that just those five days of Stage 4 lockdown had so severe an effect on retail sales. WA was probably also impacted by its lockdown, which ended on 5 February 2021, but had some lasting restrictions as well.

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    ABS stats indicate structural change in housing

    Will a resurgence in apartments see the market crash?

    Looking back at building approval stats for NSW, VIC and Australia, it's evident that large apartment building approvals are lower than in the past. If these resurge, there is a risk the overall market could see a sharp readjustment.

    The conditions in the housing market are such that hardware retailers - and many other business sectors - are looking at housing statistics to judge how stable the current surge in the market is, and how/when it might come to an end. Without the cushion of variable interest rates, and with the federal government having already spent widely to boost the market, it is evident that the housing market has unique vulnerabilities over the next 12 months.

    This has brought renewed focus to the Australian Bureau of Statistics (ABS) release of stats for building approvals through to January 2021. In examining these numbers - which now include around 10 months of the COVID-19 pandemic - we need to look to see how the market has been restructured. That might not tell us, immediately, how long running the current surge will be, but we might find some indication of which factors we should take into consideration.

    HNN has chosen to examine in-depth the two major markets, New South Wales (NSW) and Victoria (VIC), as these often work as a bellwether for other markets - though other markets, of course, also have their own unique state and territory economies. We also look at the numbers for Australia as a whole.

    The statistics

    The particular statistics we are looking at is the 8731 series, the tables which detail the number of approvals and the value of approvals for various types of constructions. From these statistics we can also derive the average value of the building types, by dividing the total value by the number of approvals.

    Sticking to only new residential construction we've limited the types of construction to houses, terrace/attached houses, one and two storey apartments, three-storey apartments, and apartments of four or more storeys.

    We are viewing these statistics in two ways, first by comparing the raw numbers for the 12 months trailing to January, and then by comparing the percentage change in these numbers.

    New South Wales

    Looking at the first graph, what is clear is that there was a substantial contraction in approvals for 2019 and 2020, followed by a slight gain for 2021. Most of those losses came in the sector for apartments with four or more storeys, though there was also a significant fall in house approvals in 2020. There has been a slight uptick in house approvals for 2021, but that has been somewhat negated by the continued decline in apartments with four or more storeys.

    The second graph, showing the value of the approvals, follows very much the same pattern, though there is slightly more of an upward bounce in values, as both houses and terrace houses grew in value more than they did numbers.

    The third graph indicates that the greatest volatility in the averages has affected the smaller apartment approvals, with three storey apartments surging and then falling, and one and two storey apartments showing an overall decline. The house, terrace house and four-storey plus categories show steadier values. One reason for that volatility is that the two smaller apartment categories make up only around 1% of the total market, so small changes in approval numbers are reflected in large percentage changes.

    Moving to the charts reflecting the percentage changes, in the first chart for the number of approvals, what can be seen is how much the housing market has been in decline for 2019 and 2020. Approvals were flatline from 2018 to 2019, then fell by close to 20% for 2020, before retuning to around 10% growth in 2021. Terrace/attached houses have followed a similar pattern, but with steeper declines. Three storey apartments have also recovered.

    However, perhaps the most significant feature of this chart is the ongoing decline in larger apartment projects: over these four years the average annual decline has been close to 21%.

    The second chart shows an interesting convergence for 2020 in the decline of value, with every category except terrace/attached houses clustering in a negative 17% to 20% range. For 2021 there is then a broad divergence in response, with both houses and terrace/attached houses gain in value about 10%, while the others remain in negative territory.

    Looking at the third chart, which shows that average approval values are mostly tightly constrained, indicates that while there has been an increase in the number of approvals, the values have been relatively constant into 2021. That would indicate that demand has remained dispersed, including both higher-value and lower-value dwellings.

    Victoria

    The stats for VIC indicate that the housing market has returned to the kind of dominance it had prior to 2014, with the entire lift in the market riding on more housing applications, as shown in the top chart. Terrace/attached housing also rose, but this follows a year of significant declines.

    The second chart shows that, as with NSW, the value of approvals has kept pace with the increase in the number of approvals. In the third chart, the most interesting feature is the increase in the average value of approvals for apartments with four or more storeys. It's an interesting contrast with the slight decline in the value of approvals for houses, and the shallow gain for terrace/attached houses.

    Moving to the charts for percentage change, these show the overall dominance of the house and terrace/attached house in the market. In 2020 they both fell by a higher percentage than did apartments with four or more storeys, but for 2021 both have entered positive territory, with house approvals at more than 15%. This holds true for both the first two charts, with a near equal good to both numbers and overall value.

    The third chart in the series is, however, very interesting, in that it shows a near flatline for the average value of approvals, with houses actually declining slightly.

    Australia

    Looking at the charts for the raw values of building approvals in terms of numbers and values, the first chart shows just how deeply afflicted the market has been by the sharp drop off in larger apartment buildings. If you take those numbers out of consideration (the red portion of the chart), the market shows a simple decline for the year ended January 2020, followed by a steep re-adjustment upwards for 2021.

    Though it is less pronounced, the second chart shows a similar indication. However it is less significant, as the terrace/attached house category shows stronger growth, which helps to amplify the growth in the house category.

    The bottom chart shows one interesting characteristic, which is that the strong growth in the value of applications for apartments with four or more storeys.

    Looking at the charts that trace the percentage change in building approvals, some interesting characteristics of the overall Australian market are revealed. The top chart, for the number of approvals, indicates that the national market was really showing signs of weakness in 2015, and was really sustained from 2014 to 2016 by the high level of growth in apartments for four or more storeys, as well as terrace/attached houses.

    That is further highlighted in the second graph, showing approval value, where the sharp spike in the value of the larger apartment building category is moving against much of the rest of the market. That is followed by a very steep decline, and terrace/attached houses eventually follow it down, as does the house category in 2020. Again, on a national level, we see a sharp upswing in the house and terrace/attached house category, while apartments with four or more storeys remains in negative growth.

    The third graph of average value of approvals shows the same flattening for house, terrace/attached houses and larger apartment buildings, but on a national level it is more pronounced a fall than for either VIC or NSW.

    Analysis

    The first tentative conclusion we can draw from these numbers is that this is a market that is likely be driven more by affordability than other factors. Even with some constraints on supply, there is not a tendency to see the average cost per building approval going up by much, and certainly not at levels that would be historically significant. Affordability is being driven by low interest rates, and a relaxed regulatory approach, as well as high government subsidies through programs such as HomeBuilder.

    The second point to drive home is that the market, outside major markets such as Melbourne and Sydney, really wasn't doing so very well post 2015. The core feature of that was the eventual reduction in the construction of larger apartment buildings. Australian commentators have a curious tendency that allocate that kind of construction to the "not very important" category, but the fact is that, at the height in 2016, building approvals for larger apartment buildings were responsible for 32% of the market by number, and for the year ended January 2021, that was down to 18%.

    One major reason for that reduction was, of course, that staying in an apartment during the various COVID-19 pandemic lockdowns was much harder than having a house with a garden, and was also seen as much less safer. A second reason given today is that people have become more home-focused, with the rise of work-from-home, not to mention teach-from-home, and a lack of opportunities to travel.

    If the drive for COVID-19 vaccinations proves successful (and that is likely), this aversion to large apartment buildings is unlikely to last. We are probably going to have a good indication by July 2021. If the pandemic is contained, then there could start to be a shift towards that kind of construction as demand increases. One change may be that homebuyers become more interested in larger apartments further from the city centre.

    If we see a surge in that kind of more affordable dwellings, oriented more towards outer-suburban areas, that could create the trigger for a collapse in the current housing market. In short, what we're saying is that the housing market has developed, as a consequence of COVID-19, a structural instability.

    statistics

    ABS: Hardware retail sales to January 2021

    Year on year gain of over $4 billion

    Even as sales surge for hardware retail, uncertainty remains for both retail and the overall economy

    The Australian Bureau of Statistics (ABS) has released its set of retail statistics (8501) for the period to January 2021.

    As expected, the numbers for hardware retailing show continued growth. The numbers for the trailing 12 months to January 2021 show that the hardware market overall has grown at close to 22%, which represents a gain in sales of $4.3 billion over the previous corresponding period (pcp), which was the trailing 12 months to January 2020. (See Chart 1.)

    In percentage terms, the Australian Capital Territory (ACT) was the strongest gainer, up by 33.52%, while in sheer dollar terms, New South Wales (NSW) was on top, with an uplift of $1333 million, a gain of 23.29%. Queensland (QLD) saw a gain of 24.10%, up by $969 million, while Victoria climbed 18.73%, increasing its total sales revenue by $1068 million. Both Western Australia (WA) and South Australia (SA) increased revenue by over 22%. (See Table 1.)

    These sharp increases are clearly visible in Chart 2, which tracks the year-on-year performance. There is not much analysis that can be offered regarding these numbers, except to comment that they remain remarkable.

    Perhaps the most interesting graph is shown in Chart 3, which tracks the month-on-month percentage change in the statistics. What is going to happen over the next three months is that the more recent statistics will "lap" the stats from early 2020, after the initial surge of growth in hardware retail sales. To some extent that can already be seen in the slower (but still quite high) growth shown by VIC.

    Analysis

    The biggest question for the Australian hardware retail industry at the moment is, firstly, whether some measure will be sustainable through to the end of the current financial year, and, secondly, whether in the next financial year we will see a fall in overall retail sales figures.

    Thirdly, of course, is the question as to how - particularly when sales do start to stabilise or even decline - the sales will be distributed between retailers such as Bunnings and the many independent retailers. It's the big question that most businesses, in general, are facing: will the effects of the COVID-19 pandemic mostly wear off by the end 2021, or will they leave permanent traces in the economy?

    A major factor in all of that is what happens to the housing market. Currently, housing prices are experiencing a high level of demand, but, as HNN has repeatedly remarked, if prices do start to decline, there will be no room for intervention by the Reserve Bank of Australia, as interest rates are as low as they can practically go.

    In terms of the general economy, while both consumer and business confidence have "bounced back" from their mid-pandemic lows, they've come back only to "neutral" levels.

    Meanwhile, business investment has continued its five+ year trend of diving ever lower, and looks like it will, this financial year, reach a low level not seen since the mid-1990s recession. Similarly, the wage price index growth is now below 1.5%.

    It is really vital that retailers, even as they celebrate the growth in revenues over the past year, remain aware of the considerable downside risks, especially as we near the end of the JobKeeper subsidy payments. There is little doubt that in two years time, the hardware industry will have undergone some positive changes, but the critical area is to make investments in growth areas over the next year.

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    ABS Statistics: Building approvals to Dec 2020

    Continued growth, but relatively subdued

    House approvals continue to surge, and two- to three-storey townhouses show resilience, but larger multi-unit dwellings decline

    It's a good idea with statistics to sit back from time-to-time, and assess exactly what numbers you are looking at, and what meaning you are seeking in them.

    Overall, for business people, and especially retailers, you're actually looking for two slightly contradictory things. Firstly you are often looking for affirmation that your intuition - based on contacts with customers, suppliers and colleagues - is right. Secondly, you are looking for the anomalies, those sudden shifts or changes that are unexpected, but might indicate a significant change in a market or customer behaviour.

    With the building approval stats supplied by the Australian Bureau of Statistics (ABS) what we're really looking at is both a response to immediate market demand, and an estimation of future market demand by property developers, home owners and the construction industry.

    Chart 1 shows the general shape that we would likely expect from those market forces. After its peak in 2015, the market declined slowly, and then more rapidly into 2019 - triggering a couple of pre-pandemic interest rate cuts by the Reserve Bank of Australia (RBA). During 2020 we've seen the approvals recover somewhat, though not back to where they were in 2018, let alone 2015.

    It is also evident which sector has seen the sharpest drop in approvals, which is the non-house market in the major cities. We can see this in more detail in Chart 2, which shows the same data as in Chart 1, but expressed as the year-on-year percentage change.

    What we can see is that while housing approvals growth boomed somewhat in 2014, in 2015 it was detached and multi-unit approvals, in both major cities and regional Australia, that performed strongly. These then fell to close to no growth over the next two years with only regional non-house dwelling units show strong growth in 2018. There followed, in 2019, a strong collapse in the number of approvals. In 2020, approvals for houses in both major cities and regional Australia grew strongly, while non-house approvals improved for urban Australia, but drifted into further decline for regional Australia.

    Finally, Graph 3 shows some nuances to this data. Housing approvals are showing strong gains on a month-on-month basis from September 2020 through to December 2020, and there is a surprise boost in non-house building approvals in regional areas for November and December 2020.

    One of the major factors we're seeing is a decline in past seasonality, with higher rates of approvals extending into the last months of the year. The numbers for regional non-house approvals are also more likely to be volatile, as they run to fewer than 1000 a month.

    However, we might also be seeing the signs of a maturing in the regional dwelling market, as well. The initial surge in regional dwellings came from people who could afford to buy houses, but it may be that, as both the pandemic and the situations created by the pandemic continue, people with less financial flexibility and fewer resources are also considering moving out of cities. For example, it has become increasingly evident that many employers will continue to support least several days a week of working from home. For younger families, this makes it more possible to buy a home in a less expensive regional area.

    Non-house dwellings

    It is worth "zooming" in a little to see exactly what is going on in the non-house building approval sector. Chart 4 shows this broken down into categories of height and type.

    As is to be expected, the sector that has seen the sharpest decline is for those buildings that are four storeys and more tall. In fact, the only sector that has shown significant growth is for semi-detached, row or terrace houses and townhouses that are two or more storeys, with the same category but for one-storey construction also holding its own.

    Overview

    Finally, Chart 5 shows more of an overview of building approvals from a value of work approved perspective.

    The only really outstanding category remains that for new houses at around 15% growth, though alterations and additions (renovations) is also doing well at around 10% growth. While those are good numbers, in terms of overall residential growth in approvals, that is still sitting at just around 6%.

    Analysis

    If there is anything that really comes through in looking at these numbers is that they indicate the building and construction industry is doing better than expected - but is very far from where it would be in more normal circumstances with a sub 1% interest rate and considerable subsidies for home construction in place.

    As HNN was writing this article, the news came through that Victoria's Melbourne region is once again set for lockdown, with, once more, more stringent restrictions than those of other Australian cities. Many of us - including HNN - have predicted that the pandemic will remain a force through 2021, but it is possible it will be even more significant through this year than previously thought.

    To repeat our ongoing concern here at HNN, the fundamentals underpinning the current high prices for real estate are really not there. If the market does go into retreat, without any means to reduce interest rates at all (negative rates create as many problems as they solve), that could mean we see a crash about mid-2021.

    There is certainly cause for optimism - Australia has managed to radically improve its pandemic performance. But there is also cause for caution and even wariness. That's what is written into these statistics.

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    ABS Stats: Hardware retail revenue December 2020

    2020 was a truly unusual year

    Revenues in hardware finished strongly for calendar 2020

    The Australian Bureau of Statistics (ABS) has released its figures for retail revenues for December 2020. This means that we now have all the data for 2020 as a year, and can provide annual statistics.

    For calendar year 2020, revenues for hardware retail across Australia as a whole increased by just over 20%, as compared to the previous corresponding period (pcp) which is calendar 2019, as shown in Chart 1.

    In percentage terms, the Australian Capital Territory (ACT) posted the strongest rise, of close to 32%, while the other states (excluding the Northern Territory and Tasmania, for which figures are not available), showed increases in the 18% to 22% range. Victoria (VIC) had the lowest increase, of 18.3%, while South Australia had the second highest increase of 21.4%. (See Table 1.)

    In dollar terms, VIC posted the largest increase over the pcp, at $1184 million, followed by New South Wales (NSW) at $1039 million. Queensland (QLD) came in third at $867 million, followed by Western Australia at $393 million. Australia overall saw an increase of $3969 million, reaching a total of $23,632 million for the year.

    The historical trends indicate just how unusual 2020 has been with the rate of increase exceeding that of past calendar years by a considerable amount, as indicated by Chart 2.

    Finally, Chart 3 gives some sense of how the increase in revenue took place across the states and territories, as well as Australia as a whole.

    There was a strong, unified peak in increased revenue for May and June, but this fell sharply for VIC from August to October, due to the lockdown in that state. Australia, as a whole, hovered around 20% increase from August through to December.

    Analysis

    These charts provide the "hard numbers" behind what individual hardware retailers have been reporting after March 2020, with sales surging, and largely driven up and down by the state of the pandemic response during any particular month. While there has been some moderation in these increases, they have continued with some strength straight through to the end of the year.

    Given ongoing strength in housing markets, it is likely that positive numbers will continue through the first calendar quarter of 2021 as well.

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    ABS National Accounts Alterations & Additions

    Renovations do not keep pace with retail spend

    Spending increases for September quarter overall

    The Australian Bureau of Statistics has released its data for Australia's National Accounts through to the September 2020 quarter. This includes a survey-based component that covers alterations and additions (renovations) for private residences. This provides slightly better detail than construction-based data series, as it includes work below $5000 that does not require a building permit.

    Chart 1 shows the consolidated numbers for the four quarters to September over the past 11 years.

    The data reveals more of a mixed picture than might be expected, given the strong rise in hardware retail revenue during the most recent period. Australia overall has failed to reach the same levels as those for 2018, though the 2020 figure is up on that for 2019. NSW shows an increase, but VIC is relatively stable, while QLD shows a mild gain.

    Chart 2 shows these percentage gains in more detail over time.

    The NT shows a very steep gain, but it has a history of volatility. The rest of the states and territories gained less than 5% overall.

    Chart 3 maps out the quarter-on-quarter numbers, comparing each quarter to that for the same period in the previous year.

    Here the gains for the most recent September quarter are stronger, ranging close to 10% for NSW and QLD.

    These numbers are backed up by the ABS statistics for new loans issued for the purpose of making alterations and additions. These are shown in Chart 4.

    This does show that QLD is clearly leading when it comes to growth in loans for alterations and additions, but the activity across the category shows good growth, but nothing like the growth we've seen for sales in hardware retail.

    Analysis

    How do we account for the ongoing surge in sales through hardware retailers, but comparatively low increases in spending on alterations and additions? There are likely two sources of this. One is that with more homeowners venturing into DIY, the actual costs - outside of materials - have been kept low, as they are not paying for tradies.

    The second reason is that it is likely much of what homeowners are doing they would self-classify as "repair and maintenance" rather than alterations and additions. Painting rooms and replacing gutters, for example, would likely be seen as maintenance tasks.

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    ABS retail stats: October 2020

    Strong growth continues for hardware in October

    While lower growth figures for Victoria reflect that state's lockdown status during October, other states and territories performed well, continuing the pattern of growth from August and September.

    The Australian Bureau of Statistics (ABS) has released numbers tracking retail sales. Sales for hardware retail have continued to grow at a high rate in month-on-month terms, and results over the past seven to eight months show continued strong growth in most states.

    Chart 1 shows the sales numbers for the trailing 12 months to October, and Chart 2 shows the percentage change between those 12-month periods. (The ABS has had to temporarily remove Tasmania and the Northern Territory from the most recent data for these series, though this information will be restored at a later date.)

    The Australian Capital Territory (ACT) showed the most growth of over 25% for the 12 months ended October 2020 as contrasted with the previous corresponding period (pcp), which is the 12 months ended October 2019. South Australia (SA) grew by nearly 19%, and Western Australia (WA) by nearly 17%.

    New South Wales (NSW) and Queensland (QLD) both grew by close to 16.5%, while Victoria (VIC) recorded the lowest growth rate at 15.2%. Growth overall for Australia averaged out at 16.4%.

    Chart 3 shows a month-on-month comparison of growth over the 12 months to October 2020, comparing each month to the same month in the previous year. This indicates a slight decline in the growth rate for October, though this is generally back to around the level of growth for August, following a significant increase in September.

    VIC is the one state that does not follow this pattern, with a sharp fall from July to August, as COVID-19 pandemic restrictions came into force, limiting hardware sales to online only for consumer DIY.

    Chart 4 shows a view of the month-on-month data, based on comparing October 2020 to the average of the same month in 2017, 2018 and 2019. This helps to compensate for 2019 being a year when hardware sales were somewhat subdued. This shows that NSW has taken a strong lead for this period, while growth in VIC was much slower, and growth for QLD was robust. The overall figure for Australia was higher than 20%.

    Online

    Chart 5 and Chart 6 show statistics drawn from the NAB report on internet sales. According to that report:

    We estimate that in the 12 months to October, Australians spent $42.2 billion on online retail, a level that is around 12.3% of the total retail trade estimate (Preliminary Oct 2020, Series 8501, Australian Bureau of Statistics), and about 41.2% higher than the 12 months to October 2019.

    Chart 5 shows how that growth has played out, with a sharp spike in April 2020, followed by a second spike in August 2020.

    Chart 6 shows the comparative growth in domestic sales generated online and overseas sales generated online. Growth of domestic sales has completely overshadowed growth in overseas.

    Analysis

    Most hardware retailers are reporting that sales to consumer DIY customers have increased substantially. One reason is that it appears doing DIY/repair in Australia is regarded as a conservative activity to undertake during times of potential economic stress.

    The growth figures for hardware retail sales are uncommonly high. However, they are occurring under conditions where the housing/construction industry has received a strong boost, both from lowered interest rates and from incentive programs such as HomeBuilder. There still remains a question mark over what will happen by mid-2021, when potentially the priorities of the government will shift away from housing.

    The second factor is how well hardware retailers are doing in providing online sales. To a large extent, most retailers have opted for a "wait-and-see" attitude. That has probably cost them in terms of sales during 2020, as we've seen a number of hurried and poorly implemented websites and processes result.

    As with the high overall level of sales, the big question is how much of these online sales will continue, once Australia has distributed vaccines, and COVID-19 is under control.

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    ABS stats: building approvals and housing finance

    Houses surge, while multi-unit dwellings get taller

    The statistics have caught up to the pandemic, revealing the trends that are likely to be with us for some time.

    The Australian Bureau of Statistics (ABS) has released statistics for building approvals through to October 2020, as well as statistics for housing finance through to September 2020.

    ABS: Building approvals ABS: Housing finance

    The harshest effects of the COVID-19 pandemic in Australia became evident in April/May 2020. The Reserve Bank of Australia (RBA) cut the target cash rate by a total of 0.50% during March 2020. The federal government introduced its HomeBuilder program, a near $700 million fiscal stimulus, on 4 June 2020 (and extended it to 31 March 2021 on 29 November 2020).

    This means Australia has by now crossed over into new territory, on two fronts. In terms of actions to stimulate the economy, and particularly housing, the nation is now past the initial stage, where the priority was to prevent a crash through market panics, and moved into the time where the foundations of an economic recovery are being put in place.

    Secondly, the nation is now also at a stage where there are enough statistical data to provide a clearer picture of what the effects of both the pandemic and the early stimulus efforts have been.

    Building approvals

    Chart 1 confirms what has by now become familiar in the building approval stats: activity has not only equalled that of 2019, but slightly improved on it, driven by approvals for detached houses.

    In fact, approvals for houses grew by 5.74% for the trailing 12 months to October 2020, compared to the prior 12 months, while approvals for multi-unit dwellings fell by -2.37%. The total value of housing approved for the current period was $58.7 billion, up from $57.2 billion in the prior period. However, this was a substantial fall from the $70.2 billion total for the period from November 2017 to October 2018.

    Chart 2 reflects those changes. Going back to 2013, there is a spike in multi-dwelling units, and a more modest increase in detached houses.

    In 2014 both houses and multi-units see an increase of over 15%. 2015 sees multi-units spike sharply by 40%. For 2015 through to 2018, houses maintain the same level, while multi-units decline. 2019 shows a significant decline in both houses and multi-units.

    Chart 3 gives us perhaps the best direct read on how the pandemic has played out in building approvals, as it compares each month's number of approvals with the same month in the previous year, going back three years.

    The first serious impact on approvals took place in May 2020, after a positive upward trend in both March and April, likely driven by the interest rate cuts. The July 2020 surge in multi-unit dwelling approvals was probably driven by the announcement of the HomeBuilder grants.

    Building approvals composition

    As we move more into the second pandemic stage, close to "COVID-19 normal", we can see some patterns emerging in the composition of housing types for building approvals. Chart 4 provides an indication of how these have been changing. This outlines the proportion of building approvals held by each category of housing type.

    Overall, one of the major changes has been that for multi-unit dwellings there is a strong tendency to build taller. The share of flats in one or two storeys has declined sharply, and there has also been a decline in single-storey townhouses, though this last remains significant. Detached houses, two or more storey townhouses, and apartment buildings with four or more storeys are the main categories.

    There is also a clear sequence to building composition. Both years ended 2019 and 2020 are somewhat similar to years ended 2011 and 2012, while years ended 2013 to 2018 show a stronger presence of four-plus storey apartment buildings, moderated by the growth of two-plus storey town houses from 2015 onwards.

    Chart 5 confirms these changes, showing the percentage changes between different periods. Two of the most significant declines are for three-storey apartment buildings, as well as one- and two-storey apartment buildings.

    Housing finance

    Again, as we enter into the second phase of the pandemic economy, the stats for housing finance also begin to show patterns. Chart 6 shows the trailing 12 months to September figures for housing loans taken out by investors and owner occupiers.

    There is a surprising similarity between this chart and that for multi-unit dwellings and detached houses. Investor loans peaked in 2017, then fell while owner occupier loans rose in 2018, which followed owner occupier loans down in 2019, and then were almost flat into 2020. Owner occupier loans grew by 17.66% in the period ending September 2020 as compared to the prior period, while investor loans fell by -0.43%. Overall, loans grew by 12.37% on the same comparison.

    Chart 7 shows a similar grouping of results, but this time for first homeowner occupier housing and all housing loans. (First home investor loans data were not collected until relatively recently.)

    The value of first home loans tends to work inversely to the number of building approvals, but for 2020 this relationship has been reversed. First home loans make up over 20% of overall loan values, up from the average since 2010 of 15%. There is a notable acceleration in loans after June 2020, indicating that this is likely due to the HomeBuilder grants. There is also the influence of the First Home Loan Deposit Scheme (New Homes) or FHLDS (New Homes). In the 2020-21 Budget, 10,000 FHLDS places were announced for the 2020-21 financial year, specifically for eligible first home buyers.

    Chart 8 shows the percentage difference between the periods from Chart 7. The most interesting feature is the sharp decrease in 2019, followed by a steep increase for 2020, with investment loans, after two years of negative growth, returning to near parity.

    Finally, Chart 9 shows the month-on-month comparison for housing loan changes. It is interesting that immediately prior to the pandemic, loan amounts were growing as compared to the previous year, before falling steeply in May 2020.

    However, they recovered immediately in June. Owner occupier and first home loans have continued to grow, while investment loans struggled until September 2020, when growth returned.

    Analysis

    The headline good news for most independent hardware retailers is that the housing market looks set to experienced sustained demand in the short term, and much of that demand will be for the types of buildings they would cater to: detached houses and town houses. Larger projects, such as four-plus storey apartment buildings, will continue, but at a reduced rate to that of the past.

    Again, for a short term, that is. However, what about the longer term? One of the issues that eventually must be tackled is what will happen with house prices. The market has conditioned retailers to regard increasing house prices as being a good sign, as it signals increased market demand.

    Yet there is probably not a single hardware retailer in Australia who has not, from time to time, pondered the crazy logic at the core of that notion. After all, hardware retailers make their money, basically, on the number of houses that get built - not the cost of the houses to the consumer. Given strong, indicated, basic demand, wouldn't retailers benefit more from lower house prices, if that meant a higher volume of builds would get under way?

    There is a complex nest of issues around that thought, and it is one HNN will be delving deeply into in our forthcoming issue of HI News. For the moment, though, let's think about the issue of the Australian government and house prices.

    It's a rather curious situation, because just as the lower interest rates will work to boost house prices over the next year, on the other side HomeBuilder is attempting to make those higher prices more affordable.

    While the housing industry - and therefore hardware retailers - may welcome these boosts, the question remains whether this stimulus is going to be helpful in the longer term.

    The purpose behind this stimulus is not, after all, all about housing and construction. Increasing house prices means that homeowners see the assumed value of their prime asset increase, which means that they can draw-down more on their mortgages, if they so choose. That should, the government hopes, translate into increased consumer confidence, and possibly increased spending as well.

    The real problem is just how long this whole system is going to be supported, and what the effect of reducing or removing the support will be. While the good news is that the RBA has guaranteed low interest rates for the next two or three years, the bad news is the RBA cannot cut rates any lower.

    All that is left to support the housing industry in the future is fiscal stimulus. And the core problem with this is that fiscal stimulus of the construction industry is a long-term growth strategy recommended by pretty much no independent economists. Largely because the construction industry is not able to improve productivity quickly, and because the industry has few, if any, real spillover effects - it doesn't help other, adjacent industries become more productive either (as opposed, for example, to software development).

    While time will tell, this stimulus may bring some welcome results in the short term, but create future instabilities that will be very difficult to deal with. That said, what may lie on the other side of a housing price reduction could be very good for hardware retailers - and the rest of Australia as well.

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    Houses increase value over units: RBA

    RBA Governor outlines changes in housing market

    Both statements by RBA Governor Philip Lowe and building work done stats from the ABS show multi-unit dwellings decline in value

    Using statistics to forecast the future has sometimes been likened to travelling in a car, with the navigator peering out its rear window at the landscape passing by, and shouting directions to the driver. That's a little unkind, of course, but it does point to the central problem: it's easy to forecast what is going to happen on the statistical equivalent of a straight road, but when you get to the twisty, uncertain bits, it is a lot harder.

    One thing that does help with this, is to rely on an experienced navigator who has been through some twisty bits before. Which brings us to a speech that was recently made by Philip Lowe, the Governor of the Reserve Bank of Australia (RBA). Entitled "COVID, Our Changing Economy and Monetary Policy", this was delivered at the Committee for Economic Development of Australia (CEDA) Annual Dinner in Sydney on 16 November 2020.

    Property values

    There are two aspects of the Mr Lowe's speech that are of interest to hardware retailers. The first consists of some direct comments made about Australia's property market. Mr Lowe described just how difficult this area is to accurately forecast:

    It is a complex picture here, with the market simultaneously adjusting to: a recession; lower population growth; record low interest rates; substantial government incentives to support residential construction; and changes to the way that people work, shop and live. So there are a lot of moving pieces at present and the effects are very uneven across different types of property and across the country.

    He went on to note that the pandemic has had quite different effects on housing markets in major cities and in more rural areas. Chart 1 is the graph that supports his claims. This shows that while house prices have declined steeply in both Sydney and Melbourne, in rural regions they continue to grow in New South Wales, and have moved to neutral in Victoria. As Mr Lowe points out:

    Many regional centres have been less affected by the virus and some are experiencing increased demand as people work remotely and look for property outside the big cities.

    For the rental market, there has also been something of a divergence in rents charged in major cities between houses and attached dwellings. Chart 2 shows the data that back up Mr Lowe's analysis. He describes some of the influences that have boosted house rental rates and diminished those of apartments:

    The apartment markets are more affected by the lower population growth and fewer foreign students and by young adults staying at home with their parents. There has also been an increase in demand for houses as people work from home.

    Digital and productivity

    Mr Lowe makes an explicit link between the move by business to more digital processes and methods and an increase in productivity.

    In some areas, progress that otherwise would have taken years has been made in a matter of months. The combination of necessity, new technologies and the easing of regulations has made a real difference. Digitalisation is not only helping Australians deal with the pandemic, but it will also boost productivity and can help drive future economic growth.

    He also points directly to the rise in online retail throughout the pandemic, which lifted from a former high of 7% of all retail sales to close to 11%, as illustrated in Chart 3.

    Building work done

    How does this analysis hold up when we look at some of the numbers the Australian Bureau of Statistics (ABS) collects about the construction industry? Its Construction Work Done, Australia, Preliminary series, released on 25 November 2020, details the work actually done around Australia on its construction sites.

    Chart 4 shows the raw numbers for the 12 months to September, based on the original numbers, over a 10-year period to 2020. It shows clearly that there was a peak in 2018, followed by declines in both 2019 and 2020. Once again, it is evident the big variable is in the multi-unit dwelling sector.

    Chart 5 backs up Chart 4 by showing the percentage change between the 12-month periods. Multi-units show a high degree of volatility, ending in decline. This chart also picks up the uptick in Alts, going from a slight decline in 2019, to an increase of 1.9% in 2020 - about the same as its growth in 2016. (The dollar value of Alts is so much lower than house/multi-dwelling construction that this isn't evident in Chart 4.)

    Chart 6 gives perhaps the clearest vision of what is happening during the pandemic period. Multi-unit dwellings have generally continued to decline, while housing, still in decline, has improved slightly. Only Alts have managed to move to positive growth, in both July and September.

    Analysis

    The ABS stats certainly backup what Mr Lowe had to say. Over the past five or six years there has been a gradual "joining up" of the market between apartments and detached houses - though Sydney was one area where those markets had joined up by 2012. As Mr Lowe indicates, the pandemic has led to families re-evaluating, and now valuing houses at a higher level.

    That is, of course, not a bad state of affairs for most independent hardware retailers, who tend to benefit more from detached house construction than from multi-unit dwellings.

    However, even though hardware retailers have seen a boost in sales recently, it is important to note that while the first wave of support during the pandemic has benefitted the construction sector, that won't necessarily continue to be the case.

    Dropping interest rates close to zero, and the nearly $700 million HomeBuilder stimulus were largely emergency measures. The next stage of the recovery needs not to subsidise industries, but to stimulate industries that can contribute real growth to the economy.

    The construction industry is not capable of delivering those growth opportunities. Real growth is, in large part, linked to growth in productivity. Being able to do more with less is what economies have been about since the first industrial revolution in the 18th Century. Yet over the past 12 years and more, the construction industry has not only grown productivity at a slow rate, it has at times actually lost productivity. While tools such as building information modelling (BIM) offer a possibility for better productivity, there are few prospects for growth in this area over the next four or five years.

    Secondly, construction has few - if any - of what economists call "spillover effects". A building consumes a number of resources in terms of materials, person-hours of labour, and so forth, and at the end of the process you have, well, a building. There is nothing wrong with that, but it stands in sharp contrast to something like, as an example at the other end of the productivity spectrum, software development. Every major piece of software that gets developed tends to have some impact on software development elsewhere. So in addition to producing a software product that does something useful, that development improves the process of development itself. Those multiplying spillover effects themselves drive productivity up.

    The other problem with further stimulus spending is that as dwelling prices have grown rapidly, participation in home ownership has fallen. Today over 36% of Australians are in the rental market. Essentially, further fiscal support would mean over a third of Australians would be funding the housing purchases of people wealthier than they are through their taxes.

    That doesn't mean there will not be further stimulus spending for construction on both the state and federal levels, but it does mean it will be moderated. The goal will be to sustain the industry back to near-2019 levels. It's simply not really a primary growth driver.

    So, if we are looking at an extended period when interest rates cannot be reduced further and stimulus may fall off, it is quite likely we will see some kind of price collapse in the residential market. To refer to a data HNN has used before, Chart 7 shows the ABS capital city house price index charted against interest rate reductions. Without those reductions, there are several places where house prices might have continued downwards.

    There is a strong likelihood that we will see something of a residential price collapse, quite possibly between April 2021 and February 2022. Fortunately, with good cashflows in the period leading up to that, most hardware retailers will be in a good position to make it through that eventuality.

    statistics

    ABS stats: Building approvals

    The market recovers, but from what to what else?

    Finding the right chart is essential to getting a better grasp on stats. HNN explores some alternative viewpoints.

    One of the side effects of the COVID-19 pandemic has been an increased awareness of statistics. Most Australians (and certainly every Victorian) today knows what a 14-day moving average is all about, for example. Statistics are likely to dominate economic discussion as well through much of 2021.

    While there has been an understandable concentration on statistics as they directly reflect the effects of the pandemic, it is just as important to better understand the general environment with which the pandemic will interact. So there are advantages in taking a broader view of current stats, to better contextualise what is likely to happen in the future.

    The beauty of charts

    Statistical charts offer a way to quickly understand statistics. (We use the word "chart" at HNN, because the more common "graph" encompasses something a bit more complex in maths. Charts are a specific type of graph.) When used to aid understanding, rather than to shore up an established point of view, the best charts give a boost to our intuition. They are a bit like our favourite photos, really: there's "that" photo which shows how you are with friends, but another special photo that shows how you relate to your partner (or pet, family, car, house, etc.). They are all "true" (mostly), but each highlights a different aspect of who you are. The same applies to stats charts.

    In terms of building statistics, one of the areas that really needs some help from charts is analysing building approvals. Approvals are very important for gauging the "mood" of the housing development industry, and seeing what that industry expects to happen in the housing market in another six to 12 months.

    Chart 1 illustrates the monthly numbers provided by the Australian Bureau of Statistics (ABS) for building approvals up to the end of September 2020. We're using the consolidated numbers for houses and multi-unit dwellings, which include both private and public (government funded) construction.

    The technical statistical term for a chart such as this is: "a bunch of squiggly lines going everywhere". In other words, it's really hard to tell what is going on in this chart.

    Chart 2 shows a technique sometimes used to make these charts somewhat more readable, with the monthly figures consolidated into quarterly (or three-month blocks) of numbers.

    This looks a little better, but does it really help? There is a real problem in taking lots of good data points and blurring them into fewer data points. You lose definition, and can suffer information loss.

    Chart 3, which goes back to using the monthly numbers, shows a much better solution. Here all we've done is to take exactly the same numbers, and "stack" them.

    So, for example, in January 2020 the number of houses approved was 8797, and the number of multi-dwellings was 7349. The bottom shading represents the 8797, and the top shading represents a further 7349, so the very top line for that month represents 16,146, the total dwelling approvals for January 2020.

    The reason this chart works so well is that it clearly shows how the number of multi-unit dwellings relates to the number of houses, and represents clearly the total building approvals at the same time. What we see most clearly in this chart is that, while the housing approvals show some variance, the multi-unit approvals fluctuate much more, and are largely responsible for the peaks and valleys in the approvals data.

    What a chart such as Chart 3 really gives us is a good place to start. It can help us to come up with more charts which provide confirmation and some extra details. One way of doing this is to shift to a much broader timescale. We can do that by using what statisticians calling a "trailing 12-month" period. For example, these ABS stats can end with the trailing 12 months from October 2019 to September 2020. (Sometimes "year-to-date" is used for this timescale, but it is ambiguous, as year-to-date September - for example - can also mean January to September.)

    Chart 4 shows what those numbers look like. Trailing 12-month timescales all but eliminate seasonal variations, which helps to smooth the data.

    It's very clear from this chart that our suppositions from Chart 3 are correct: house numbers are relatively stable, while multi-unit dwellings are more volatile.

    To extend this a little further, we can chart the percentage changes between the trailing 12-month periods, which is what Chart 5 shows. There are some additional details this chart makes evident.

    Perhaps the most interesting is that for the six years between 2013 and 2018 house proposals averaged 5.14% growth, with the lowest dip coming in 2017 at -1.74%. So, in terms of houses, this was not so much a period of decline, as some commentators have suggested, but mild, relatively stable growth.

    The story for multi-unit dwellings is quite different. Over that same period average growth was 11.22%, while growth declined as much as 18%, and rose as high as 34%.

    For the final two years, both dwelling types declined steeply in 2019, but then recovered, with houses managing to return to positive growth in 2020.

    Volatility

    So far, what we've been looking at are trends. The other element of interest in building approvals is what are sometimes called the "spikes": where the data goes sharply up or down.

    To measure the overall volatility of data (how it goes up and down) we typically use something known as "standard deviation" (STDEV). There is a bit of fancy maths to this, but the STDEV of a set of data basically provides an average for how much the data deviates from the data average. As a rule of thumb, something a bit under 70% of results will lie within one standard deviation from the average.

    What we can do, then, is to work out the average and the STDEV, then plot only those months where the number of approvals exceeds the average plus one standard deviation.

    To make it work better, we won't show any data points that are below one standard deviation, and we can express the ones we do show in terms of a percentage of one standard deviation, to keep everything in scale.

    That is what is shown in Chart 6.

    While this is an interesting chart, it's not all that effective. What we can see in the chart is that many of the data points are "clumped" together. What we could do - and in this case it will genuinely help - is to show the data not as monthly, but in quarters.

    While we're at it, we are currently only showing data points beyond one standard deviation from the average - why not add data points for those that fall one standard deviation below the average as well? That's what is shown in Chart 7.

    What becomes clear in this chart is that we can define four distinct periods. The first is a downside trend in spikes in the aftermath of the global financial crisis, from (in quarters) December 2008 to December 2009. The second follows the fading of the mining boom (a boom in terms of trade), from March 2011 to March 2013, also a downside spike.

    The next two are upside spikes. There is a significant series of spikes from September 2014 through to September 2016, and from September 2017 to September 2018.

    There is a very in-depth story to be told about how these spikes relate to the general market, and the actions of the Reserve Bank of Australia (RBA) in lowering interest rates, as well as the bank's influence on lending guidelines. HNN will be going deeper on this in the next issue of HI News.

    COVID-19 pandemic

    The big question, of course, is what kind of effects from the COVID-19 pandemic can be detected in the data, especially from March through to September 2020.

    To tackle this question, the best tool to use is a month-on-month comparison of growth in building approval numbers. We can graph that over the three years to show how current numbers differ from past numbers during the same seasonal period. That's what we have done in Chart 8.

    For people outside the hardware retail and home improvement industry, it might come as a surprise to see that, while the growth rate for detached houses did go negative in May, it recovered well in June, July and August, and increased by 28% in September.

    The story for multi-unit dwellings is not as good. There was a brief upwards peak in July 2020, but this returned sharply to negative growth for both August and September. While the numbers are not as good as for houses, however, they are close to those for the same period in 2019.

    One major factor in this is that the RBA dropped the cash interest rate by a total of 0.5% in March 2020. The federal government also launched its HomeBuilder program, which has made over $600 million in bonus payments available to new home builders and renovators.

    Analysis

    While this has been a fairly deep look at some aspects of the ABS Building Approvals stats, we really haven't gone nearly as deep as we could. The data the ABS provides is great, but the difficulty is to be able to extract the information that is relevant to the challenges your business faces.

    The process of understanding statistics is seldom achieved by glancing at a single chart. For most of us, you really need at least two or three charts, examining data from different angles, and in the right time and statistical context, to get some sense about what data might really indicate.

    At the moment, looking at the questions that COVID-19 pandemic has created, all that can be said statistically is that the support measures provided by the government to date seem to be working. The real difficulty, as HNN has suggested in the past, is going to be the state of the economy around May 2021.

    A problem deeper than the pandemic, but which the pandemic recovery will need to play off of is that the housing market does not always function as it should. In a more efficient market, when demand decreases due to price rises, those prices should decrease to create more demand. The Australian housing market has become conditioned to the expectation that when it does encounter difficulties, and prices do begin to fall, the market will receive help, usually in the form of reduced interest rates.

    Those interest rate reductions then feed into yet higher house prices, and the cycle starts over again.

    With interest rates currently lower than they have ever been, and unlikely to decline any further, there will not be any help coming from that area, at least not for five or six years. With monetary stimulation all but gone, that just leaves fiscal stimulation, through programs such as HomeBuilder. Those are unlikely to go past $2 billion in total.

    All this means that at some point, the housing market will need to reform itself, and start to act as a more efficient market. There is almost certainly going to be a downwards slide at the point where that occurs. The question is well that transition point can be managed.

    statistics

    ABS Stats: Hardware retail sales

    September 2020 retail stats

    ABS stats show that retail growth improved during September 2020, countering a slight decline in August 2020

    The Australian Bureau of Statistics (ABS) has released its results for retail sales in Australia up to September 2020. HNN has used series 8501, the original data for sub-categories, to chart how well hardware retail sales have progressed.

    Chart 1 shows the total sales for the trailing 12 months to September. It clearly demonstrates that, as compared to the past four years, sales have increased substantially ahead of trend (though the proportion of sales for each state, back to 2016, and specifically between 2019 and 2020, has barely altered). Note that figures for the Northern Territory (NT) and Tasmania are not yet available, and have had to be (unfortunately) excluded from this analysis.

    Retail sales have surged considerably. Australia recorded its highest ever total hardware sales for this time period, at $22,533 million. For the states, New South Wales (NSW) recorded a record $6589 million, just surpassing Victoria (VIC) at $6464 million. Queensland (QLD) had sales of $4630 million, and Western Australia (WA) of $2281 million, while South Australia (SA) recorded $1379 million in sales. The Australian Capital Territory (ACT) saw its sales jump from $371 million to $455 million for this 12-month period, a strongest percentage rise of all states and territories.

    Chart 2 shows these percentage changes on comparative trailing 12 months to September time periods. The grey line represents the ACT and climbs far above the other states and territories - not unusual, as regions with lower populations tend to be more volatile when it comes to percentage changes. That probably also plays a part in the strong performance of SA, with a 17% lift in sales.

    The other states - as well as the overall figure for Australia - are clustered around a 15% growth rate. This is a very strong showing, compared to the previous four years, with WA in particular making a strong recovery from negative growth of 3.6% in 2019.

    Chart 3 continues to be the most interesting of the retail stats, as it details how exceptional the pandemic period has been. This chart shows month-on-month comparisons of hardware retail sales going back two years.

    As we have detailed in the past, there is a very clear peak in sales across May, June and July in 2020. August saw something of a decline for most states and territories, except in NSW, which had declined in both June and July after peaking in May. September, however, shows another upward tick in growth, except for WA. The Australian average for growth in September was 20%.

    Analysis

    Reports from the field indicate that many hardware retailers are, as the expression goes, "flat out" at the moment. HNN's contacts at Hardware & Building Traders are so busy it's been hard for them to find time to speak with us, but the indication is that sales are not only going well, but they are also expanding their network of affiliated stores.

    The big question is, of course, what is fuelling this growth? HNN will be looking more closely at the ABS stats on Building Proposals in our next Flash enewsletter, but the most interesting information will the Building Work Done stats that come out on 25 November 2020. That should give us some better insight into the September numbers, and the shift up from the August numbers.

    What HNN is concerned about, as is likely the case with many retailers, is that we could see a rapid slowdown in construction activity sometime in early 2021. We're working on developing some kind of predictive modelling that will enable us to better predict such an event.

    We do think, however, that the current September figures are a positive sign that we will see some uptick in spending through the holiday season. It's what happens in February 2021 that really concerns us.

    Thanks, ABS!

    HNN would like to express both our appreciation, and, we are sure, the appreciation of our readers for the good work of the ABS in tirelessly assembling these very useful stats. The ABS has worked very hard through the pandemic to assemble these numbers, and other numbers that have helped to guide the government in developing measures to help the economy recover.

    HNN would also note that the ABS has recently updated its website, and done a fantastic job in designing a clear, easily understood website, that is outstandingly useful. We certainly hope that their efforts are rewarded with expanded funding in the future.

    statistics

    ABS Building Work Done

    Clear signs of trouble ahead

    ABS stats that predict work in the pipeline show a clear hit for the June 2020 quarter

    The Australian Bureau of Statistics (ABS) includes in its finalised Building Work Done statistics for the June quarter of 2020 more fine-grained stats on the pipeline of work that is available to be done. This includes stats on building work commenced, alterations and additions commenced, work yet to be done, work not yet commenced, and work in the pipeline.

    At the current point of time, as the construction industry - and therefore the hardware retail trade - are trying to work out how the market will respond to the ongoing pandemic, these are key stats, as any disruption is likely to show up in them first.

    It is, of course, quite tempting to regard the construction market as being in something of a state of chaos. HNN doesn't think that construction is in chaos, nor do we think it will become chaotic - at least in the near term.

    What we do have, however, is a market that is subject to a number of competing influences. What makes it seem chaotic is that none of these consistently dominate. Instead they interact with each other in ways that are not always easy to predict or even analyse.

    The first of these influences is the pandemic itself. For the most part, construction has been less affected than many other business categories - except in Victoria (VIC), and even there it has had a significant but not overbearing impact.

    The second influence is purely on the market itself. There have been some positive outcomes for the dwelling market, in terms of families stuck in lockdown and various forms of isolation have developed a greater appreciation of their homes than ever before. However, the economic influence of the pandemic has been broadly negative. At the moment - and through to the end of 2020 - much of the immediate impact has been directly cushioned by broader and more generous support for the unemployed, as well as programs such as JobKeeper, which help businesses continue to employ workers.

    Thirdly, there has been some direct support for residential construction through the HomeBuilder program, which has provided grants for new home builds and renovations that fit within fairly narrow constraints. Whether that will be continued in its current form into 2021 is still unknown. It's quite possible a different fiscal policy will emerge.

    Fourthly and finally, there has been considerable support provided through the Reserve Bank of Australia (RBA), both with quantitative easing, and a monetary policy that has seen it sharply reduce interest rates. With rates already low, from June 2019 to March 2020 the RBA dropped rates from 1.25% to a historic low of 0.25%, with half that drop occurring in March 2020.

    Basically, the outcome of all this considerable stimulus has been that the economy (and this applies to residential construction) has declined only slightly. The hope is that, if Australia manages to find ways to keep the economy going while restraining COVID-19 infection rates in all states and territories, and if a vaccine is found that at least promises some community immunity by mid-2021, these current settings will be enough for the economy to lift itself out of recession.

    While there is a fair chance that this will prove true of the economy in general, it remains - at least in HNN's opinion - far less certain it will apply to residential construction. The main reason for this is that, while the industry has self-promoted as a dynamic, driven business sector, that is not the reality. From November 2010, when the RBA last raised interest rates by 25 basis points to 4.75%, up until October 2019, there has been a long chain of gradual rate reductions, with most of these at least partly driven by declines in the housing market.

    Eight months before the pandemic first struck, in June and July 2019, the RBA had already dropped interest rates by a total of 50 basis points, followed by another rate drop of 25 basis points in October 2019. So, just boosting housing in 2019 burnt through 75 basis points, leaving only a 50 basis points margin to help deal with the economy.

    With the potential of, at best, an interest rate reduction of 15 basis points left in the future, support for the housing industry would have to come through fiscal (policy) measures. If the government attempts to drive the housing market through measures such as an expanded HomeBuilder program it will encounter resistance, as that stimulus is heavily weighted to benefit wealthier Australians, who do have jobs. It is far more likely that the government will choose to stimulate the housing industry indirectly, by investing in those areas that do represent better growth opportunities than the construction industry. In other words, housing will be treated as a secondary demand market.

    HNN will leave the discussion of why attempting economic stimulus through boosting the housing market is generally a bad idea for a later, more in-depth article. Briefly, the reasons are ably summed up by the economist Claudio Borio, who is head of the monetary and economic department at the Bank of International Settlements. The main problem is that, he has explained, the construction market continues to be a sector with very low gains in productivity - about the lowest of any sector. Money that is spent in housing may distribute wealth to some extent, but it will not lead to a high level of economic growth.

    What the numbers show

    Building work commenced

    Charts 1 through 3 show the stats for residential building work commenced. Chart 1 compares one set of four quarters against the preceding four quarters - though in this case that actually means comparing financial years. This shows that the most recently completed financial year saw a depletion in work commenced.

    That's not a surprising result. The RBA had predicted it, after all, which is one reason why it delivered a 0.75% cut in rates to stimulate the market prior to the pandemic.

    Chart 2 shows that, with the exception of South Australia (SA), every state and territory is in negative growth for the most recent year, though some, such as Victoria, have managed to decline at a slower rate than they did in FY2018/19.

    Chart 3 is perhaps the most interesting of these charts, as it shows an unusually tight clustering of negative growth for June 2020 as compared to June 2019. While the result for June 2019 as compared to June 2018 is even worse, that older result came after over two and a half years without a reduction in interest rates.

    In pandemic terms, the June 2020 growth rates might not be too bad, but if a combined drop of 1.25% only produces this result, it could indicate the limits all stimulus will have in the future as well

    Additions and alterations commenced

    Charts 4 through 6 show the stats for alterations and additions (renovations) commenced. At first glance, both charts 4 and 5 appear to show a reasonably good rate of growth. However, on closer inspection, it looks like Queensland is the only state with a good news story (the Northern Territory is so volatile that it's difficult to see trends). That is confirmed in chart 6. Contrary to expectations that homeowners were investing in renovations, June 2020 has seen a sharp decline in that final quarter.

    It's likely that the reduction in interest rates during 2019 helped to buoy renovation commencements in the first half of the financial year, but the pandemic has had a direct and negative effect in late FY2019/20.

    Work yet to be done

    Charts 7 to 9 show the pool of work yet to be done. If we do see a general fall in building stats over the next year, it's likely that these charts will be the ones pointed to as identifying that trend at its earliest point. In chart 7, it's clear that there is a sustained decline in all the major states. Chart 8 shows a strong clustering of a decline in growth below -5%.

    Again, it is the month-on-month comparison that reveals most directly the likely impact of the pandemic, in chart 9. Only the Northern Territory shows a positive gain, and the average decline is -13% for Australia overall.

    Work not yet commenced

    Charts 10 to 12 show the stats for work not yet commenced. This is perhaps one of the trickiest stats to really understand, as it relies heavily on the outside context. A sharp increase in work not commenced typically means that there has been a rush in approvals, but builders are holding back from construction for some reason. These numbers are very sensitive to regional variations, which actually makes them quite valuable.

    As Chart 10 shows, New South Wales has seen a sharp increase on work not commenced since 2014, with a reduction after 2018, while Victoria shows a gradual increase, and QLD an overall reduction.

    That is more clearly outlined in Chart 11. Chart 12, however, shows an understandable increase in non-commencement for July 2020, as this period would have been very directly affected by the pandemic.

    Work in the pipeline

    If you are looking for some kind of "good news story" for the construction industry that comes out of these numbers, you would find it in Charts 13 to 15, the stats for work in the pipeline. Again, these stats do need some contextual interpretation. Too much work in the pipeline can indicate that the industry is stalling before a downturn, but also too little work in the pipeline can indicate the start of a long and difficult recession.

    The view that HNN prefers to take about these stats is that they represent a vote for the longer-term health of the construction industry. Charts 13 and 14 each show a general decline of work in the pipeline for both the 2018/19 and the 2019/20 financial years. But the third chart, Chart 15, shows that the decline has begun to turn around beginning with the end of 2019 and continuing through June 2020. This could be a sign that the lower interest rates are actually having an effect in terms of longer-term planning for construction.

    In other words, while the immediate vote is for a difficult FY2021/22, there may be more industry optimism for what might come in FY2022/23. Not the best news possible, but it's certainly a lot better than the alternative.

    Conclusions

    The current difficult circumstances could lead to permanent, fundamental changes in the longer term for the housing industry. The lack of room for the RBA to cut interest rates could see the market confront its boom/bust cycle, and realise that the pricing models it has tried to follow are simply not sustainable without that extra boost from monetary policy.

    One factor that could help it out in that way would be a possible trend that sees more people telecommuting rather than driving into cities every day. Not only would we see more distant (and affordable) suburbs become prime real estate, but also ex-urban regions increase in population, bringing with that better schools and other services for communities that are currently struggling.

    Housing in Australia has, quite simply, just been too expensive for its economy. That's not only about people purchasing or renting individual dwellings, it is also about the general level of support the industry has grown used to receiving. Getting to something more sustainable might mean some businesses and families take something of a hit initially, but in the long run, the economy and society would really benefit.

    statistics

    ABS Retail Stats: August 2020

    Growth is reduced, but still exuberant

    While growth in hardware retail revenue has slowed from 35% in June/July to 25% in August, the market remains robust

    The Australian Bureau of Statistics (ABS) has released its statistics for Retail Trade, Australia to August 2020. Overall, the revenue numbers for hardware stores have continued to show a sharp increase over previous periods. The results for hardware retail revenue largely continue the strong growth year-on-year seen since March 2020.

    As the August numbers cover the period when Victoria (VIC) entered into a lockdown that excluded DIYers from shopping in-store, there is - as expected - that state experienced slowing growth, though in overall terms it continued.

    Chart 1 shows the cumulative totals for the trailing 12 months to August over the past 10 years. The most remarkable characteristic is the increase in overall sales for the most recent 12-month period.

    Comparing the figures for the trailing 12 months to August, the Australian Capital Territory (ACT) showed the strongest percentage growth at 19.1%, while VIC grew by the highest dollar amount, showing an increase of $816 million for the most recent period against the previous corresponding period (pcp), which was the trailing 12 months to August 2019. This gave VIC a growth rate of 14.6%.

    New South Wales (NSW) grew by 12.2%, Queensland (QLD) grew by 12.6%, South Australia (SA) by 15.4%, and Western Australia (WA) by 14.2%. (Figures for Tasmania and the Northern Territory are not included in the ABS numbers.)

    Overall, Australian hardware retail revenue come in at $22,187 million, up from $19,554 in the pcp, an increase of 13.5%.

    Chart 2 shows the historical growth rate for the trailing 12-month periods to August. The effect of the pandemic is clearly seen in the sharp upwards trend for the most recent period.

    Chart 3 is perhaps a more revealing graph. It shows the growth rate comparison between a month and the same month in the previous year. The pandemic effect clearly shows in March 2020, and this peaks in June and July. August shows some retreat from the high growth rates, though, at over 25%, this still remains remarkable. It's interesting to note that the decline for VIC in August, though evident is less overall than that for other states.

    Chart 4 provides an overview for how the growth has been distributed through the states as a percentage of overall revenue for each month of the pandemic. This shows clearly that in August 2020, Victoria's overall share of revenue has declined, while NSW and QLD show increases.

    Analysis

    The major concern for hardware retailers is how much of this surge is spending in genuinely "new business", and how much relates to projects being brought forward. It is evidently a mix of these, and the high rates of growth are unlikely to be sustained post December 2020.

    The problem is, of course, how to anticipate demand, and adjust forward ordering so as to have adequate supply, while not risking over-ordering, and being left to remainder stock during a downturn. The retail trade figures for September 2020 will be crucial in providing some guidance to this. A decline to growth below 10% - while still representing a substantial gain - could signal a forthcoming weakness in the market.

    The risk factors currently active vary by state as well as by metropolitan versus rural regions, but essentially come down to whether a vaccine will be developed by the end of 2020, as well as how effective and available that vaccine would be.

    There is also the real potential that there will be a "third wave" of pandemic contagion, in which case we could see these growth numbers invert, as Australians become extremely cautious in their purchases.

    statistics

    Renovation stats

    ABS stats indicate slowdown

    Even after a 50 basis point reduction in interest rates, renovation growth declines

    The Australian Bureau of Statistics (ABS) has released its statistics for the June 2020 quarter of the national accounts. This includes statistics relating to alterations and additions (Alts), which are the equivalent of renovations. These are contained in what used to be known as the 5206 series, and is now known as "Australian National Accounts: National Income, Expenditure and Product".

    Unlike the numbers used in other ABS statistics, these are not drawn from building permit issuance, but derived from household expenditure estimates. This means they account for most expenditures, including those under the building permit level of $5000.

    These statistics have increased importance this year. Not only do they help us to map out some of the potential effects of the pandemic recession, but it is quite likely that Alts will be one of the main areas the government seeks to use to help cushion a likely fall in housing markets during 2021.

    The charts

    Chart 1 shows the numbers for Alts consolidated into the four quarters that make up the financial year, which ends with the June quarter. While spending in New South Wales (NSW) remains elevated over the other states, it has been in decline over the past two years, while Victoria (VIC) has had a small increase followed by a small decline. The big gainer has been Queensland (QLD), which has had a continuous pattern of growth since 2014, though 2017 saw that growth slow. Western Australia (WA) showed modest growth during 2018 and 2019 but declined for 2020. South Australia has shown very slow growth since 2014.

    The consolidated results for the Australian Capital Territory (ACT), Tasmania (TAS) and the Northern Territory (NT) show a recent slight increase.

    (It's very difficult to represent individual results for this group as they are significantly smaller than the other regions. To view the chart for those regions, follow the link below.)

    Additional regions in Australia

    Chart 2 shows these same numbers, but divided by the residential population of each region, for both the most recent results, and for 2011. This is the average per person spend on Alts. NSW has been the biggest loser, though this is partly because 2011 was an exceptional year for Alts in that state. Both TAS and WA have also seen per person expenditure decline. QLD is the biggest gainer, while VIC has shown a sold increase, along with NT and SA.

    Chart 3 shows the percentage share of overall Alts costs for each region over a five year period. The main story is that NSW has declined in share, VIC has stayed pretty much the same, and QLD has gained strongly. WA has shown a slight but constant decline, while the other regions have been relatively stable.

    Chart 4 shows the percentage change between the years shown in Chart 1. Of the nine sets of data, seven show a downwards trend in 2020. Of the two that trend upwards, only one, for the ACT, is in positive growth territory. The regions that continued to show some growth in 2020 are QLD, SA, ACT and NT.

    Chart 5 shows a quarter-on-quarter comparison, with each quarter's results compared to the same quarter's results in the previous year. The NT is the "wild man" of these results, as it has a relatively low amount of spending, which means small alterations lead to spikes in percentage gains and losses; the same is also true for the ACT. Outside of that, there is a very clear clustering in the June 2020 quarter from 0% to -4% change, including NSW, VIC, QLD and - at 0% - SA. WA shows a pattern of ongoing losses for this quarter.

    Chart 6, for context, shows the ABS House Price Index. This chart maps out the quarter-on-quarter changes, and also indicates where interest rate changes have been made. This shows a sharp tick downwards in growth rates for six of the nine data sets, and only one city shows an upwards tick into positive growth, which is Canberra.

    House prices

    Before considering the Alts charts, it is worthwhile taking a closer look at the house price movements shown in chart 6. There has been a persistent theme in the some areas of analysis that the housing market in Australia - and hence the building and construction market it helps drive - has been a strong and vigorous industry, with active drivers in the market brought about by increases in population in key states such as NSW and VIC, and increasing urbanisation in most states.

    Looking at the evidence, this does not seem to be true. For example, the Reserve Bank of Australia (RBA) made three interest rate cuts from June to October 2019, each of 25 basis points, cutting rates in half from 1.5% to 0.75%. The following three quotes are the commentary offered in the RBA's formal statement on the housing market at the time of each cut.

    From the statement for 5 June 2019:

    The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities. Conditions remain soft, although in some markets the rate of price decline has slowed and auction clearance rates have increased. Growth in housing credit has also stabilised recently. Credit conditions have been tightened and the demand for credit by investors has been subdued for some time. Mortgage rates remain low and there is strong competition for borrowers of high credit quality.

    From the statement for 3 July 2019:

    Conditions in most housing markets remain soft, although there are some tentative signs that prices are now stabilising in Sydney and Melbourne. Growth in housing credit has also stabilised recently. Demand for credit by investors continues to be subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.

    From the statement for 5 October 2018:

    There are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne. In contrast, new dwelling activity has weakened and growth in housing credit remains low. Demand for credit by investors is subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.

    These paragraphs are not the portrait of a strong and vibrant industry, but of one in a state of decline that requires boosting through a reduction in interest rates.

    Underlying these weaknesses is a fall in consumer demand and a drop in household spending. One cause of this is a reduction in wage increases. Growth in the wage price index (WPI) in the private sector for 12 of the 13 financial years from 2001 to 2013 was above 3.2% (the exception being 2010), with an average for those 13 years of 3.60%. The average for the subsequent seven years was 2.14%.

    According to Australia's Productivity Commission (PC), the current level of wage increases is actually "correct", in that it is in line with productivity increases, which have been low and deteriorating for some time. This contrasts with regions such as the US state of California, which saw productivity growth during 2018-2019 of 3.4%, and overall wage increases above 4.0%. (California's economy is twice the size of Australia's, so it's a reasonable comparison.)

    The PC suggests that previous wage increases were inflated by the strong terms of trade that Australia enjoyed with overseas markets through the export of natural resources. It's worth referring to the RBA's statement made when it last raised interest rates, from 4.50% to 4.75% in November 2010:

    While there has been a degree of caution in private spending behaviour thus far, the rise in the terms of trade, which is now boosting national income very substantially, is likely to lead to stronger private spending over the next couple of years, especially in business investment.

    In the end, the housing market exists in a kind of "bubble" that harks back to a pre-2013 economy of wage growth and higher household expenditure. That bubble has been maintained by periodical stimulus through interest rate cuts, and largely contained from running out of control through interventions by the Australian Prudential Regulatory Authority (APRA) introducing tougher lending standards when needed.

    Which brings us to the most recent interest rate cut, in March 2020, by 50 basis points to an all-time low of 0.25%. What has now happened, as Chart 6 shows, is that even with that stimulus, growth in the house price index still slowed. Yet there is now almost no room for further stimulus. The RBA has signalled it is ready to cut rates by a further 10 or 15 basis points, but it has also indicated that it views "negative" interest rates as a bad idea, as the outcome would not be predictable. So the resources for continuing to prop up the housing market are minimal, at best.

    There is little doubt that an awareness of this is part of what resulted in the government's housing industry stimulus package, dubbed "HomeBuilder", which poured an additional $668 million into the housing market, adding $25,000 to projects spending over $150,000.

    Alterations and additions

    How are these market forces playing out when it comes to Alts? The strongest trend shown in charts 1 to 3 is the increase in expenditure for QLD, and the decrease in expenditure for NSW. While NSW still dominates overall spending, QLD is catching up with VIC, and leads overall in terms of spending per resident.

    In charts 4 and 5, what is clear is that there is, in most regions, falling expenditure on Alts. That is a little curious, when we reflect that at the same time, we've seen a sharp surge upwards in DIY spending at hardware stores. Of course, though, part of what we are likely seeing here is a degree of displacement. As homeowners buy more at hardware stores to do their own painting, guttering and lawncare, there is a subsequent drop-off in spending on tradies to perform the same tasks. An interior painting job, for example, might cost $2500 when hiring a professional, but the DIY cost is likely to be under $500.

    Another factor at work, of course, is the degree to which pandemic restrictions have limited homeowners from hiring tradies. This has continued with some force in VIC since August 2020, and will show up in the statistics for the September 2020 quarter.

    Analysis

    Looking at statistics these days there are four things that need to be borne in mind and developed. The first is to get a clear picture of what was going on in home building and home improvement markets prior to the pandemic, the second is to determine the nature of the effect of the pandemic on that situation. The third is to derive some view of how the economy is going to function during what has been termed "COVID-19 normal", as we come to terms with providing a higher level of economic activity while maintaining strict safeguards against the Sars-CoV-2 virus. Finally, the fourth element is to work out from these inputs what the future markets will look like post-pandemic.

    To begin with, we need to point to what is, with hindsight, a somewhat unfortunate policy pursued by the federal government during 2019 to deliver a budget surplus. In order to do that, the government held back on stimulus spending, and instead relied on what is technically referred to as "quantitative easing", which translates to lowering interest rates.

    To give a clear example of how stimulus and quantitative easing work together, the government could have chosen back in July 2019 to introduce a boost similar to that provided by its current HomeBuilder package. That might have meant that the RBA did not need to lower interest rates in July and October of that year (though the reduction by 25 basis points in June would likely have been necessary in any case). This would have left the RBA with an extra 50 basis points to utilise in mitigating the effects of the pandemic recession.

    One reason why that kind of balance towards stimulus is a good idea is that stimulus spending works best during the early stages of a downturn. That's because, introduced early, it will tend to have structural effects, boosting revenues so that businesses can reinvest in themselves. Introduced in a late stage downturn, stimulus often simply takes the place of income that has already been lost.

    So what we can say is that while the interest rate reductions of 0.75% during 2019 by the RBA were effective in boosting the housing market, they also created new vulnerabilities. Those vulnerabilities have now been exposed by the pandemic recession.

    Looking through the RBA statements in the second half of 2019, it is evident the central bank was hopeful the economy was undergoing what it termed a "gentle" recovery. It's likely that what the central bank hoped for was an improving economy that would match up with the need for the housing market to break out of the bubble created by previous expectations. There would be some pricing and other consequences, but this would be compensated by improving levels of wages and employment.

    What the RBA and the government are reaching for now is some way of breaking the housing market bubble but mitigating the effects to the extent that the damage is defined and limited. This was actually the intent behind the ill-fated home insulation scheme which commenced in February of 2009 as a response to the global financial crisis. In policy terms it was a very good idea. The government rebated the cost of insulating homes (in 2008 only 61% of Australian homes had insulation), subsequently giving small businesses a boost, reducing energy consumption, and subsidising an increase in the value of houses.

    While the legacy of that scheme as a failed (and politically costly) stimulus is discouraging, it might still point the way to the kind of economic cushioning the government could introduce. The HomeBuilder scheme itself was careful to include as much stimulus for Alts as it was for new home builds, and we could expect that would continue with any future housing market stimulus packages. Future packages are also likely to have a co-investment of less than the $150,000 required for HomeBuilder.

    For example, we could see rebates for such Alts projects as converting kitchens from gas cookers to the more energy efficient and environmentally friendly magnetic induction cooktops. Or even rebates for the installation of smarthome systems that can help improve energy management, such as programmable communicating thermostats (PCTs), which enable homeowners to sign up for energy plans where the providers can alter the thermostat settings in exchange for lower energy rates. This might allow energy suppliers to, for example, increase the air-conditioned temperature of a home from 24C to 27C during a peak demand period, creating better overall energy management.

    What is important to bear in mind for the post-pandemic future is that it is unlikely the housing market will continue as it has been. Far too much of Australia's economic resources have been piled into propping this market up, when it in fact does not generate much in terms of development and productivity gains. While it may continue to prosper in the future, it will likely lose much of its current speculative glamour and return to a more reasonable role as a solid, long-term investment.

    statistics

    ABS Stats: Where next?

    Retail revenue, building proposals and work done

    The pandemic has boosted hardware revenue from April to July 2020 by $1.9 million over the corresponding period. That's welcome, but how long will it last?

    At the moment, what every business owner - and especially every retailer - wants to know in Australia is: what happens next? What does Stage II (and Stage III) of the pandemic look like?

    A series of emergency measures - JobSeeker, JobKeeper, interest rates below 1%, mortgage repayment "holidays" - have kept Australia away from the kind of financial panic which, combined with the pandemic, could have been catastrophic. But, as Australians wait for the delayed Federal Budget to be delivered in October, the signs that are coming from the government seem to be more about uncertainty than anything else.

    The fact is that while there are nations that have handled the pandemic better than Australia - though Australia has, by global standards, done pretty well - the number that have successfully reopened their economies after the pandemic shutdown in March and April is very low. In early May we heard the Australian Prime Minister, Scott Morrison, harangue Australians to "get out from under the doona". Since infections ballooned in Victoria, very little more has been said on the subject.

    For retailers, as we learn more about the Sars-CoV-2 virus, it has become increasingly evident that the classic retail shop (as well as bars and restaurants) represents an almost perfect venue for transmission to occur. Most retail is indoors, crowded, with poor external ventilation, people constantly touching surfaces, and so forth.

    The difficulty, as we've seen in Victoria, is that even if numbers have been brought to a very low level, if they start to grow quickly, the available resources, such as testing and contact tracing, are quickly overwhelmed. What that means in practical terms is that until there is an actual vaccine available, the fight is not about bringing a booming economy back, but creating essentially a subsistence economy, based on very controlled risks, with the likelihood that there will be some three to four week periods when harsher restrictions come back into play.

    Hardware retail

    The Australian Bureau of Statistics (ABS) has released retail statistics for July 2020, though these do not include the most recent numbers for the Northern Territory and Tasmania, so we (unfortunately) have to exclude these. Looking at the first chart for the 12 months to July 2020, we can see an expected pattern.

    Sales during 2020 have been accelerated, resulting in considerable overall gains. The Australian Capital Territory (ACT) is the winner in terms of percentage gain, at 17.28%, but Victoria (VIC) gained 14.42%, increasing revenue by $805 million. New South Wales (NSW) saw a gain of 10.22% and $586 million, while Queensland gained $448 million, an increase of 11.09%. Western Australia and South Australia had growth of 13% and 14% respectively. Australia overall saw hardware retail revenue increase by 12.25% to $21.9 billion.

    The second chart shows the percentage increase for comparative 12 months to July. As you would expect there is a sharp clustering of growth, as the pandemic and the subsequent increase in hardware sales is a nationally defining factor.

    Chart 3 shows a month-on-month comparison between August 2019 to July 2020, and August 2018 to July 2019. While the other two graphs are good for getting an overall context, this graph is perhaps the most interesting in terms of seeing what the pandemic is doing monthly. The peak month for every state except VIC is May. VIC peaks in June, and then declines less than the others moving into July.

    We can predict a high likelihood that we'll see VIC decline fairly sharply for August and September, when those numbers come out, as DIY consumer retail will be shut down. What will be really interesting is to see how much states such as NSW, QLD and WA decline. Will the trendline go down steeply, or will some of the home improvement spending prove to be more "sticky"?

    Building industry

    In terms of looking further into the future, with most independents relying heavily on trade sales, the stats from the building industry are of particular importance. It is always difficult to forecast accurately based on building proposals. Chart 5 shows the number of building proposals for the trailing 12 months to July, and Chart 6 shows the percentage change when comparing those 12-month periods.

    The major feature of these is to outline that the fall for the prior year was much more significant than the fall in the most recent year. It's likely that is a function of lowered interest rates as much as anything else. Builders likely expect there will be lag between when the economy recovers and interest rates rise again, especially as the RBA had indicated it is willing to tolerate a higher rate of interest (we would guess up to 3%) than it has in the past.

    Chart 6 compiles the value of work done for the year ending in the June quarter. As it shows, after rapid growth through to 2016, driven primarily by work on multi-unit dwellings, growth slowed in 2018 and 2019, before showing decline in 2020.

    Alteration & additions (in this case, those that required permits) showed slight but steady growth.

    Chart 7 shows the comparative growth rates for these periods. 2019 shows a consolidation around slightly negative to slightly positive growth rates, followed by a slide down to decreased activity, with alterations & additions falling the least, and multi-unit dwellings falling the most.

    Chart 8 shows a quarter-on-quarter comparison from the September 2016 quarter through to the June 2020 quarter. Alterations & additions show slowing decline in the December 2019 quarter, followed by a lift into actual growth in the March 2020 quarter, and then a return to slight decline in the June 2020 quarter. New houses also saw a reduced decline in the March 2020 quarter, before returning to its December 2019 quarter rate of decline in the June 2020 quarter.

    From this we can determine that while the June 2020 quarter has not been good for the work done numbers, there was already a pattern of decline present. Alterations and additions did get a boost in the March 2020 quarter, but this was surprisingly short-lived.

    Analysis

    Putting this all together, what is the picture that is revealed? First of all, most people would agree that the current recession is likely to be finite, in that it has not been caused by anything structural in Australia or internationally. Longer term effects will include both a reduction in overseas immigration to Australia, as well as reduced birth rates (which affects, for example, people upsizing their dwellings). However, both of those are, to some extent, reversible. We could see increased migration in 2023, for example, and birth rates might catch up as well.

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    statistics

    ABS stats show pandemic effect

    ABS has released stats for retail sales and building approvals in May 2020

    The latest statistical release from the ABS provides a more complete overview of the most critical four months (so far) of the Sars-Cov-2 pandemic

    The Australian Bureau of Statistics has released statistics for retail sales through to May 2020, as well as building approvals through to May 2020.

    Revenue Statistics

    Chart 1 shows the sales for hardware retail in the trailing 12 months to May for each year. (Note that the ABS has not been able to obtain data for some states and territories, so these have been omitted.) The results for hardware retail sales are much in line with expectations, with growth increasing sharply for most states. Overall growth for Australia was 7.81%. The ACT recorded growth of 11.52% with VIC at 9.90% and WA at 9.30%. SA grew by just over 8%, and NSW recorded growth of 6.16%.

    Chart 2 shows the growth in sales for the same trailing 12-month period. This shows that even though the growth rates for the year period were high, they are not exceptional.

    Chart 3 shows a different data picture. This charts the revenue between the months of February and May, and it shows a marked, sharp increase in the revenues during 2020.

    Chart 4 shows how that revenue was distributed through the peak months of March, April and May. While there was only a minor boost in March, April 2020 as contrasted to April 2019 lifted by 5.3%, and May 2020 was up by a considerable 8.8%.

    Chart 5 shows the share of the revenues across the same interval, for 2019 and 2020. It's evident that, while the revenues have increased, the proportion between the states has stayed the same.

    Building Approvals

    While retail shows an increase as the pandemic takes hold, building approvals - which indicate the future of the construction industry - did fall in May 2020 as compared to May 2019, with most of those falls for multi-unit dwellings. Approvals for detached houses held steady.

    Chart 6 shows the approvals for major metropolitan regions across the states. Sydney, which is the market where multi-dwelling and single dwellings are the most integrated, showed an ongoing steep fall in multi-dwellings, while house approvals stabilised. Melbourne - surprisingly - showed mild increases for both multi-dwellings and houses. Brisbane and Perth showed relatively stable numbers in house approvals, and a decline in multi-dwelling. Adelaide, like Melbourne, showed a mild improvement in both houses and multi-dwelling, though the multi-dwelling improvement followed a steep decline in 2019.

    Chart 7 shows how the approvals were distributed across the four pandemic months Australia-wide. Approvals were already in decline through the first half of 2019, and this was continued into 2020. March shows the sharpest decline, but this is compensated for by a more optimistic April. However, May then reverted to caution.

    Analysis

    The concern that many hardware retailers have expressed is that while the early months of the pandemic might have seen sales surge, the future could see a recession - or even a depression - take hold of Australia, resulting in a slide in sales. The May figures are heartening, but it will likely be the figures for August and September that will have the most significance.

    With Victoria finding itself impelled back into "lockdown" as the never-contained virus surges again, the prospects of there being no recovery until a vaccine is found, and/or rapid treatment of COVID-19 is developed, seem high.

    It is evident that at the moment the property development and construction industries are banking on conditions being somewhat unchanged from those of 2019. (The largest recent impact was the slowdown that happened in 2018.) This is likely due to the balance of circumstances: economic prospects have declined, but interest rates are currently at a historic low, and are likely to continue at that low for at least another two years. Of course, being able to take advantage of those rates will depend on an economic recovery, and there are some real question marks over when, or even if (in the medium term) we will have such a recovery.

    We're approaching a stage, in fact, where Australia may have to choose between a severe recession, if it follows the guidance to lockdown, socially distance and protect the health of everyone, or, should it choose to try to restart the economy anytime during 2020, plunge into a full-blown depression, where deflation takes hold.

    In the end however, if Australia does begin to emerge from the pandemic in the second half of 2021, the economy is likely to have very different characteristics.

    statistics

    Effects of COVID-19 on Australian business

    ABS releases June 5676.0.55 series

    Retail shows it has been strongly affected, while construction sees future supply prices increasing. The pandemic is also affecting how customers pay, with a move away from cash.

    The Australian Bureau of Statistics (ABS) continues to detail the plight of Australian business in its 5706 series. According to the ABS summary for the release:

    The collection was conducted through a telephone survey between 10 June and 17 June 2020, with a sample size of 2,000 businesses. The final response rate was 72% (1,431 responding businesses).

    Chart 1 shows the operating status of businesses. As it illustrates, retail has one of the higher rates of modification for its business processes, at 88%, while construction has been less affected at under 60%.

    Chart 2 details what some of those modifications have been. For these three industries, retail has exceeded the other two industries, except in areas relating to staff, reporting fewer changes to staff roles, and fewer general workplace changes than the wholesale industry.

    The three areas where retail is far ahead of the others is in a change in the types of products sold, change in operating hours, and, especially, a change in the way payments are accepted.

    Chart 3 shows the change in revenue for the reported period compared to the previous period. In these three industries, retail leads for both the number of businesses reporting a decrease, and the number reporting an increase in revenue, which indicates how volatile the industry has become.

    Chart 4 shows just how severe those decreases in revenue have been. Retail leads the decline in both the under 25% level and the 50% to 75% level. Wholesale, however, has sustained significant losses in the 25% to 50% level.

    Chart 5 shows the estimates businesses make for how long they can survive in their current cash situation. Both construction and retail indicate some fragility, with close to a third of businesses not able to survive beyond three months under current conditions.

    Wholesalers seem to be more confident, with nearly half confident of surviving beyond six months, versus around a third in both construction and retail. It is worth noting also that 22% of construction businesses remain uncertain about their future, while only 8% of retail businesses say they don't know what will happen.

    Chart 6 shows the current conditions as compared to expected future conditions for retail, construction and wholesale. The top chart shows that the main expected change for retailers is an increase in supply costs accompanied with a decrease in supply levels.

    In the middle chart, for construction, that is echoed with both increased supply costs and decreased supply levels a problem. Added to that is an expected increase in staff shortages. Interestingly, however, local demand for construction is expected to continue at its current level.

    In the bottom chart, for wholesalers, there is an expectation that more businesses will be affected, and that staff shortages will also create difficulties.

    Analysis

    For hardware retailers looking at these numbers, it is pretty evident that businesses do not expect that much change to happen over the next six months. With 60% of retail businesses expecting to fail before September 2020, it is a very glum picture. Most retailers, especially in hardware, are strategising to just make it through to the end of the year, with the hope that either a vaccine or effective treatment will have emerged by then.

    One aspect of this data that is worth going into somewhat is the high level of changed payment types the retail industry has seen arise. This change has not escaped the attention of the Reserve Bank of Australia (RBA). Speaking at a 3 June online event hosted by stock analysts Morgan Stanley, the RBA's assistant governor (financial system) Michele Bullock sketched out what is happening with payments, and the effect the pandemic has had.

    In her opening remarks, Ms Bullock noted:

    Today I want to address the potential implications of COVID-19 for the payments system. While we have until now been thinking about disruption to the payments system mostly in terms of the entry of new technologically enabled service providers, the abrupt changes in payment preferences induced by the health crisis could be a similarly disruptive force. The extent to which it is will depend on whether the changes in behaviour are temporary or permanent.

    She noted that up until recently, disruption was expected to originate with fintech and "big tech" companies. Though, as she illustrated with Chart 7, while awareness of alternative payment methods is relatively high, take up and usage lags significantly. She also commented that cash remained an important means of payment:

    Our most recent consumer payments survey conducted late last year showed that there were still around 25 per cent of consumer payments undertaken using cash, accounting for around 10 per cent of the value of transactions. And while a third of survey respondents did not use cash for any payments, around 10 per cent used cash for all their payments. Cash users tended to be older or people on lower incomes.

    However, Ms Bullock confirmed, the pandemic has changed altered the cash/alternative balance. Many retailers all but ceased accepting cash, aided by a majority of consumers who also saw physical money as a potential vector of infection – filthy lucre, indeed. As she stated:

    As a result of these changes, ATM withdrawals in April were down 30% from the month before and over 40% lower than twelve months earlier.

    The shift was aided by payment vendors lifting the limit on contactless payments from $100 to $200. And there has also been, of course, a shift to online shopping.

    One of the most interesting points that Ms Bullock made was the threat to merchants from the continued move away from cash, as cash provided a form of competitive pressure on the payments market.

    While cash is not costless for merchants to accept, it does provide some competitive pressure on the cost of payments more broadly. So as cash use declines, it is even more important than ever that we ensure competitive pressure remains on the costs of electronic payments to merchants.

    However, she also sees there being additional forces to keep the competitive pressure on payment providers. One is the use of surcharging, which though merchants may not necessarily implement, remains a potent threat. The other major force is, of course, the use of least-cost routing. As she explained:

    Least-cost routing puts some power into the hands of merchants by providing them the ability to route a dual-network debit card transaction through the network that costs them the least to accept. In Australia, for many merchants, this is the eftpos network.
    The evidence is that the growing availability of least-cost routing has increased competition among card schemes through reductions in interchange fees, and this has resulted in a lower cost of acceptance for card payments for some merchants.

    One of the concerns that emerges from an increased reliance on payment systems is how fragile these may be. The RBA in association with the Australian Prudential Regulatory Authority (APRA) is making changes to help ensure stable operations in the future.

    The Bank has already been working with the industry and APRA to develop a set of standard operational performance statistics to be disclosed by individual institutions. The proposed disclosures are intended to focus the minds of banks' executives and directors and ensure that appropriate attention is paid to the reliability of their retail payment services. They will also provide customers with transparency about the operational performance of different institutions. While this work is being delayed a bit by the competing operational priorities created by the current circumstances, it has become even more important.

    For the hardware retail industry, the decline of cash transactions might have far-reaching consequences. While merchants are generally happy to not have to directly handle cash, due both to the need to closely monitor new staff and the general risks associated with cash (including physical loss, robbery, and forgery), cash has long played a particular role in hardware.

    Most hardware merchants are aware that the "black economy" is alive and well, and that some tradies seek to have their income paid in cash. As electronic payments grow, there could be an increase in enforcement, and cash transactions might be more closely monitored by the Australian Taxation Office.

    Equally, however, with electronic money gaining in popularity, consumers might become more open to the use of more exotic forms of payment, in particular Ethereum. Like Bitcoin, Ethereum is a self-regulating currency, but unlike Bitcoin, its aim is not to be a speculative system of exchange, but a kind of "active" money that enables users to formulate simple, effective contracts, with Ethereum acting as a kind of escrow account to help enforce requirements.

    Conclusions

    Increasingly when we look at what is happening in the economy and in the hardware retail industry as a response to the pandemic, there will be a pattern of businesses that attempt to resist change failing, and those that embrace change at least finding some way to survive.

    The changing use of currency is a great example of this. The kinds of changes we expected in another five or six years - the decline of branch services, reduction in the number of ATMs, and a shift to online banking - is happening right now. That will have unexpected, far reaching consequences for all types of retailers. For example, some retailers may be unwittingly reliant on customer foot traffic generated by a nearby bank. When that stops, and the bank relocates to a cheaper location, will they then work out how to leverage the interest in that bank's website to drive traffic to their own website?

    statistics

    Construction's future post-pandemic

    ABS stats indicate some troubles, little cause for alarm

    The stats show continued declines in activity, but these are broadly in line with the December 2019 quarter

    Statistics have become a regular feature of the news as we track the progress of moves to limit the COVID-19 pandemic. While these stats are often immediate and shocking, looking at the effect the pandemic has had and will have on the building industry - and thus on the hardware and home improvement industry - is a different task.

    It's not just that there is a considerable lag in obtaining these numbers - as it will not be until August and September that we see the stats reflecting the true initial impact of the pandemic. It is also that the numbers we do have and will have reflect a more complex picture. They really relate to three possible influences:

  • The underlying pre-pandemic economy, especially as it developed under the government's decision to preference an economic surplus ("back in the black" as the election slogan would have it) over stimulus spending
  • The effect that the bushfires of December 2019 to January 2020 had on the economy
  • The direct and secondary effects of the early stages of the pandemic on the economy
  • Just about all the statistics we currently have, for the March quarter as well as the months of March and April, indicate that the pre-pandemic conditions shaped building industry performance during those periods.

    Alterations & additions

    To begin with, we have the numbers from the Australian Bureau of Statistics (ABS) for Australia's national accounts. These include statistics for "alterations and additions", which include renovations and maintenance work. As these are survey-based, rather than permit-based, they reflect a wider range of this work than those statistics provided in the standard building statistics.

    Chart 1 shows that, basically, the figures for the March 2020 quarter followed in line with developments over the preceding three to five years for each of the three major states: NSW, VIC and QLD. While the March quarter number for NSW was the lowest it has been for 10 years, it is nearly equal to the number for the March quarter of 2019.

    Likewise, for VIC, the most recent quarter was the second highest for any March quarter over the past 10 years. That is in keeping with a growth trend that peaked in 2017, but has only declined mildly since then.

    QLD, meanwhile, recorded its best quarter for alterations and additions in its history. That follows on from a steady pattern of growth since its brief decline in 2012 and 2013. QLD is, in fact, beginning to come very close to the numbers that VIC generates.

    Chart 2, however, reveals some more fundamental, structural problems in the alterations and additions market. This chart graphs the percentage change in growth between corresponding quarters for every state.

    Its most marked feature is the strong coalescence of growth factors for the December 2019 quarter. Similar clustering occurred for the December 2014 and June 2015 quarters. Both these cases happened in proximity to decisions by the Reserve Bank of Australia (RBA) to lower interest rates (down by 0.25% to 2.25% in February 2015, and then down to 2.00% in May 2015).

    At the start of the December quarter, in October 2019, the RBA cut interest rates from 1.00% to 0.75%. The minutes for the review meeting in that month had this to say about the housing market:

    The residential construction sector had contracted further and this was expected to continue for some time. The decline in dwelling investment in the June quarter was greater than had been expected a few months earlier. Higher-density approvals had declined in July, to be at their lowest level in seven years; detached approvals had also declined in July. The Bank's liaison program had continued to report weak pre-sales for higher-density developments. Taken together, this information implied that dwelling investment would decline further over coming quarters.

    During March 2020, the RBA cut interest rates twice, by 0.25% each time, bringing the rate down to 0.25%, in response to concerns about the pandemic. In response to a range of factors, the cluster of the December 2019 quarter broke apart, with TAS, VIC and QLD moving into growth, NSW going neutral, and both SA and WA continuing to decline.

    What we can say about this is that this part of the building industry showed contraction during the December 2019 quarter in response to an economy that was declining. In response to a range of stimuli, different states then responded in different ways. So, the economic woes of Australia, pre-pandemic (low business investment, low wage growth and a falling housing market) were national in nature, but the effects of the pandemic itself (as well as the bushfires) varied regionally.

    Building approvals

    When it comes to building approvals, the numbers indicate that regional factors dominate.

    Chart 3 shows the stats for the greater Sydney area. During the peak in approvals, from 2015 through to 2017, most of the growth is in multi-unit dwellings, though detached houses also show growth. That house approval growth continues through until 2018, then begins to decline in 2019. Approvals for non-house projects decline more sharply.

    In Chart 4, Melbourne shows a similar pattern, though the share of approvals is more evenly divided between house and non-house. What is always surprising about the Melbourne market is that non-house approvals account for far less proportionately than they do for Sydney. While that proportion increases from 2014 to 2017, in 2018 and 2019 it returns to close to the levels of 2010 and 2011.

    As far as the numbers show, the two "pandemic months" of March and April 2020 are simply continuing the same trends seen in 2019: an overall reduction, with non-house approvals falling more than house approvals.

    Chart 5 shows approvals for Brisbane. This indicates that much of the "boom" in approvals took place for non-house dwellings from 2014 to 2016, though approvals for houses also increased. Once again, when we look at activity for 2019, what we see are numbers close to those for 2010. House approvals exceed non-house approvals, and there is an overall reduction in activity. The first three months of 2020 seem to be largely following the same trends as 2019.

    Adelaide, represented in Chart 6, shows a different pattern. It is marked by a sharp decline in activity for 2012, with a decline in 2011 leading into that, a recovery in 2013 leading out. For the period form 2014 through to 2018, there is an almost steady-state rate of approvals for houses and non-houses, with the former dominating. Non-house approvals represent much of the growth during those years, though that begins to decline in 2019. The numbers for 2020 indicate the 2019 trend continues.

    Chart 7 shows building approvals for Perth. This is the only set of building approval stats for a state capital that shows a persistent, ongoing decline in approval numbers over the past four years. Like the other cities, there is something of a "boom" from 2013 to 2015. Non-house approvals increase during those years as a proportion of all approvals, but house approvals continue to dominate. From 2016 through to 2019, overall activity declines, and 2020 seems to be continuation of that decline.

    Hobart shows activity that is contradictory to the other capitals. Chart 8 indicates that it experienced a decline during 2012 and 2013, followed by ongoing growth in approvals from 2014 to 2019. Houses almost completely dominate these approvals, though it is noticeable that non-house approvals often increase during times of decline in house approvals. That happens at the end of 2019, but early 2020 indicates a steep rise in house approvals and a decline in non-house approvals.

    Building work done

    NSW

    Chart 9 shows how the value of building work done for houses and non-house residential has developed over the past 10 years for NSW.

    It's clear that non-house construction has contributed the bulk of growth, accelerating since the second calendar half of 2015, peaking in the first calendar half of 2018. Since that time, however, there has been a sharp decline, back to the initial 2015 level in March 2020.

    Chart 10 breaks out the March quarter data from Chart 9, to illustrate the trend. While the decline in the value of building work done for houses is new, the non-house building work actually began to decline in the March quarter of 2019.

    VIC

    Chart 11 shows the value of building work done for VIC. While both work for houses and non-houses increased from mid-2014, the rate of growth for non-houses has been above that for houses. This growth became a decline in mid-2019.

    Chart 12 shows the data for only the March quarter. Here there is a strong pattern of growth for both house and non-house construction value, which went into a decline for the March 2020 quarter.

    QLD

    The graph of building work done for QLD, Chart 13, shows a very significant pattern. Virtually all of the growth that has occurred since mid-2014 has been in the non-house sector, with this peaking early as compared to the other states, in the second half of 2016. At the same time, while growth has been strong in non-house, the house sector has accounted for more value. The decline form 2017 onwards becomes especially sharp in the second half of 2019.

    Chart 14 shows that the March decline for non-house started in 2016, though it was shallow in 2019, and very steep for March 2020. For the house sector, 2019 saw a shallow decline, which became much steeper for 2020.

    SA

    For SA, Chart 15 indicates the state experienced an earlier fall than the other states, at the end of 2012, and has experienced mild but persistent growth since then. While the house sector dominates, the non-house sector has been growing at an equal rate.

    Chart 16 shows the house sector has experienced slow growth, with only a slight decline for March 2020. The non-house sector has fluctuated around shallow growth, and actually improved slightly for March 2020.

    WA

    The WA situation is unique in Australia. As Chart 17 shows, residential building work done dipped sharply in mid-2012, then rose to a peak in mid-2015. It then fell steeply until mid-2017, and continued to decline through to 2020. While the non-house sector did grow at a higher rate than the house during the "boom" period, it also declined faster during the "bust" period.

    Chart 18 compares the March quarters for WA, and shows the steep slide of the house sector, and the milder decline of the non-house sector.

    TAS

    The situation for TAS is somewhat choppier, as Chart 19 shows. There is a trough for 2013, followed by growth in 2014 and 2015, then a trough for 2016 and much of 2017, followed by more growth through to 2020. It is a market very much dominated by the house sector.

    The stats for the March quarters in Chart 20 repeat that basic pattern, with the house sector growing since 2017, and the non-house sector representing a flat line, with some growth in 2018.

    Analysis

    For context, it's worth taking a look at some of the charts the RBA makes available.

    Chart 21 shows that private dwelling investment has been falling for the past year, despite, as Chart 22 shows, an ongoing increase in house prices, likely fuelled by the sharp decline in interest rates, as illustrated in Chart 23. Low interest rates have not encouraged business investment, as shown in Chart 24, and that is hardly going to get better, as the chart of business sentiment, using figures from NAB, indicate in Chart 25. This ongoing mixture of circumstances has led to record low wage growth, as shown in Chart 26.

    As we said in the introduction, much of the task of working through the stats and getting some idea of what the future might hold comes down to sorting out the nature and impact of various factors. The policy adopted by the current federal government for FY2019/20 was to provide a surplus (put Australia "back in the black"), at, it would seem, almost any cost. That meant curtailing any kind of stimulus spending. That resulted - well before the bushfires or the pandemic came about - in lower and lower interest rates, which continued to have less and less impact on stimulating the economy.

    For most economists, this did not seem a very rational approach, as there is little doubt that it created an increasingly weaker economy through calendar 2019. The conclusion has to be that this path was chosen not for rational economic reasons, but rather for socio-political ones.

    HNN's best guess as to what was going on is that the government more or less put the economy "in the freezer", in the hope that China would begin to grow, fuelling exports, and solving Australia's own growth prospects. Importantly, that growth would occur in "traditional" sectors, such as mining and agriculture. If instead Australia had engaged in stimulus spending, it would have made sense to spend in high growth areas, such as alternative energy, software and data services - sectors which would disrupt the "traditional" sectors.

    Rather evidently, this plan did not work out. Somewhat ironically, in fact, the government has found itself in the role of having to provide massive amounts of stimulus spending. Rather than contributing to real growth, however, that spending now can, at best, help Australia to regain a functional economy - albeit still stuck in slow growth.

    Looking at the current statistics, it seems that what we are seeing is most likely that the pandemic - at least up until May - had not really created outsize, independent effects on the building and construction industries. While there were significant declines in 2020, these declines are largely in line with declines already underway at the end of 2019.

    If we look at building approvals, what we are really seeing is the best guess by property industries as to how the economy will look in 12 to 18 months. With overall declines in approvals, the answer is "not all that good", but it is very far from any kind of real collapse.

    The market is pretty much guessing that the economy for property investment purposes will resemble that of the 2019 December quarter: very low growth, with little prospect for immediate improvement. Added to that will be a reduction in general population growth through to the end of 2021, but there is already a high enough level of general demand to support the industry through the next year.

    The building activity numbers are, for most states, signalling a slowdown. The numbers for the March 2020 quarter are just far enough outside of statistical likelihood to signal they represent a change and not a fluctuation. However, the level of activity is high enough in most states that while a reduction will hurt, it won't reach levels low enough to see people leave the industry, and then generate future problems of shortages in both labour and expertise.

    Recovery effects

    Outside of the immediate effects of the pandemic, there are also the ways in which efforts to help the economy recover will shape the housing industry. The government has already released its "HomeBuilder" scheme, which has bewildered more than a few industry commentators.

    Offering grants of $25,000 to people spending $150,000 or more on a renovation or purchasing a house and land package for under $750,000, it's difficult to understand as a strictly stimulus package. With couples earning as much as $200,000 a year are able to apply for the grant, it's difficult to see how it will be truly additive to activity in the industry.

    There are other, practical measures that could be employed. One proposal put forward by Master Builders Australia (MBA) is:

    Support ongoing building of house and land packages through interest free loans for a component of the cost, for example 25 per cent for title-ready blocks. Housing developers, big and small, will be hit by a dramatic fall in sales for new homes due to anxiety over a potential recession but this will rebound meaning the risk of default on the loan would be minimal. This is needed to keep builders on the job, employing people and paying their tradies.

    Effectively what the MBA is suggesting is a means to better securitise the building industry, on a range of levels, helping to ensure that in tough times it does not collapse through a lack of ongoing credit. That is a sophisticated and very useful approach - but it's not flashy. It's about addressing the needs of the construction industry through direct support, rather than by simply stimulating demand in very limited areas.

    Conclusions

    HNN has suggested in the past that we are living through a time when national governments - globally, not just in Australia - are not adept at helping out the business community, even when this is to society's benefit. There are increasing signals coming from the Australian government that support in recovering from the pandemic will be limited, and that businesses - in hardware and construction in particular - will need to rely on their own resources to succeed.

    There are arguments to be made about whether this reflects a particular ethos, or even a lack of a capability. What is more certain, however, is that the way the effects of the pandemic play out on the economy are going to be more regional than national.

    To go back to Chart 2, which shows the quarter-on-quarter growth rates for alterations and additions as recorded by the ABS for the national accounts, there is that very stark, tight cluster of low growth for the December 2019 quarter, followed by a scattering of different positive and negative growth rates for the March 2020 quarter.

    The clustering was caused by overwhelming national concerns, brought about by a slow-growth economy. The scattering was caused by the effects of both the bushfires and the pandemic, which had widely varying regional results.

    Not to over simplify, but the strategy going forward will be for regions to make sure that in that scattering of responses to the pandemic, they end up on the positive part of the graph rather than the negative.

    How can regions do that? It is a feature of current government that state and local governments tend to have much less discretionary funds available than the national government. But what regional governments do possess is better knowledge about their polity, as well as the ability to ably foster connection and communication.

    One area where HNN could see regional participation working well would be in the further development of exurban areas. We've seen the "work from home" (WFH) movement take off, as a consequence of many workers not being able to risk the office during the pandemic. This could mean that more people would find living at a distance of 100km or more from a city centre both possible and welcome.

    State and local governments could find ways to encourage that kind of community building. Not only would that be a boost to the construction industry, but it would also see more funds flow into regional areas - which, HNN believes, could see very tough times later in 2020.

    The pandemic has already taught many of us new lessons about community, whether that is about being grateful to others who obey social distancing to help keep us all safe, or the neighbour who checks in on your family. It may be that the best way out of the pandemic will be found in new ways of connecting and developing a resilience that is based on local links.

    statistics

    ABS retail stats: March 2020

    Victoria gets big boost

    March retail surged by 18%

    Over the coming year, statistics has a particular role to play in Australia's efforts to recover from the pandemic. While we are likely to receive indications of shifts in hardware retail from anecdotal sources first, stats provides us with a broad-based background to see what really is happening.

    The big question that many hardware retailers have at the moment is how widespread and strong the initial surge in sales by hardware stores was at the start of the social distancing and shelter in place policies adopted across Australia. The Australian Bureau of Statistics (ABS) has released its 8501 series on retail revenue for March 2020. This at least gives us a glimpse of those retail numbers, as the "lockdown" got underway in March 2020.

    Chart 1 compares the historical sales for hardware retailers across Australia, solely for the month of March. Unfortunately, Tasmania and the Northern Territory are excluded, as neither of those two areas were able to supply the ABS with the required stats in a timely manner. As the chart indicates, across Australia sales increased at an unusual rate. The median year-on-year increase for March is 6.57%, but the increase from March 2019 to March 2020 was 18.05%. (The ABS does –- a little confusingly –- make the numbers for Tasmania and the Northern Territory available in total Australia numbers, and when those are included the increase from March 2019 to March 2020 is 17.95%.)

    As the chart also indicates, these increases are not evenly distributed through the states and territories. Victoria had by far the largest dollar value increase, of $109.4 million, up by 23.72%, though the Australian Capital Territory, had a higher percentage increase at 25.0%, which equates to $7.6 million.

    New South Wales (NSW) and Queensland (QLD) had a nearly equal increase in dollar terms, at $57.5 million for the former, and $57.3 million for the latter. This equates to an increase of 12.42% for NSW, and 18.46% for QLD.

    Chart 2 shows the historical March-on-March percentage increases across all the states and territories. To some extent, the increases for March correlate with the degree to which each state and territory was affected by COVID-19 infections.

    In a broader historical view, Chart 3 shows the comparative retail sales for the trailing 12 months to March. Even with the boost from March 2020, the year ending March 2020 only managed an increase of 2.98% over the year ending March 2019. Victoria performed the best, with a 6.83% gain.

    Chart 4 shows these growth figures for the comparative retail sales over the trailing 12 months to March. This very tight clustering of growth indicates there are prevailing national economic concerns that have outweighed concerns local to states and territories. Only Victoria seems to have broken away slightly from the pack, growing faster than the other regions.

    Analysis

    The period of the pandemic for Australia is likely to have three distinct phases. In the first phase we have just gone through, we've had intense shelter in place lockdown and rigorously applied social distancing measures. In the second phase, while there is no vaccine or even an effective viral treatment available, the shelter in place is being eased, and we will likely see some variance in how social distancing is applied. A third phase, when a vaccine is developed and distributed, is highly unlikely to begin until the second calendar quarter of 2021. One other possibility that could happen before the end of 2020, is the development of an effective treatment for COVID-19.

    The question that remains is how each of these phases will effect each individual state and territory. Looking at how the beginning of the first phase affected retail sales, we can see two influences. The first influence was how a region was performing prior to the pandemic, and the second influence was how much the pandemic directly affected the region.

    Victoria performed best because that has been its pattern for the last six months and more, but it was probably also boosted because there were fewer people coming down with COVID-19 during March 2020. NSW had been trailing Victoria in hardware retail sales for some time, and was also hit with more infections. QLD is somewhere between those two, with moderate past performance in growth, and moderate per-capita rate of infection.

    Chart 5 shows how these factors have already played out in the initial phase of the response to the pandemic. Victoria has garnered a large share of the boost to hardware sales in March. Part of that is the momentum the state has developed, but it is also likely to be due to a lower incidence of infections and a higher level of confidence in the actions the state government took in imposing restrictions.

    In the next phase, there will be two duelling economic factors to contend with. The first factor is the rapidity with which each region chooses to ease restrictions. The second factor is going to be, unfortunately, the rate at which infections begin to increase. The health services in all regions are geared up now to cope with more patients, but an infection rate of 50 or more a day is likely to trigger re-imposition of more restrictions.

    This is further complicated by the factor of the rapidity and effectiveness of responses to infection clusters in each region. For example, Victoria has received some criticism for not responding well to some early clusters, but the fact that it has pursued signs of clusters and followed this up with at least some effort at contact tracing may, in the end, be a good sign.

    It is a quite bewildering process for each state to judge just how much to ease restrictions, to maximise recovered growth, while maintaining a margin of safety in terms of the number of infections. It's pretty evident that at the moment the regions will thrive where individual businesses do everything they can to limit risks, and carefully balance risks versus returns. At the moment, in May 2020, caution seems natural, but there are questions whether after a couple months, a degree of reduced caution will set in.

    To read about retail stats, please download the latest edition:

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    statistics

    Forecast 2020

    Housing and hardware retail sales

    While the Reserve Bank of Australia sees a modest recovery, there is little to support that

    February is the traditional season of calendar year forecasting. This is the month when we get just enough stats about the previous year to work up a picture of what has happened, so that we can consider more clearly what might happen next. One of the main activities is, a little paradoxically, looking at everyone else's forecasts, in large part because those forecasts indicate what type of action the government and other entities might be taking.

    Many people who keep watch on the economy have been puzzled about the direction the current federal government is moving Australia in. The centrepiece of this has been the apparent "need" to balance the budget. There have been increasing calls for more stimulus spending to be delivered by the federal government. These have largely been ignored, as increased spending would "unbalance" the budget. Instead it has largely fallen to the states, with Victoria being the most successful, to use infrastructure spending to help trigger more growth in the local economy - though the picture is more complex than that, as we will see.

    One clue to the government's reluctance on stimulus has emerged from recent forecast statements made by Reserve Bank of Australia (RBA) governor, Philip Lowe. The first was Mr Lowe's Statement on Monetary Policy Decision, which explained why interest rates were kept unchanged, published on 4 February 2020. The second was his speech to the National Press Club on 5 February 2020, entitled "The Year Ahead".

    In the first, this slightly curious statement appears:

    The central scenario is for the Australian economy to grow by around 2¾ per cent this year and 3 per cent next year, which would be a step up from the growth rates over the past two years. In the short term, the bushfires and the coronavirus outbreak will temporarily weigh on domestic growth. The household sector has been adjusting to a protracted period of slow wages growth and, last year, to a decline in housing prices, with the result that consumption has been quite weak. Following this period of balance-sheet adjustment, consumption growth is expected to pick up gradually. The overall outlook is also being supported by the low level of interest rates, recent tax refunds, ongoing spending on infrastructure, a brighter outlook for the resources sector and, later this year, an expected recovery in residential construction.

    These themes were picked up and to some extent amplified in the second speech:

    As I have been saying for some time, we are passing through a gentle turning point for the better.
    There are a number of factors contributing to this outlook. The expected pick-up in world growth should help us, the resources sector is in expansion mode again and we are expecting consumer spending to pick up. The outlook is also being supported by ongoing high levels of investment in infrastructure and the likelihood that the downswing in residential construction will come to an end later this year. Further increases in resource exports and continuing solid growth in public demand will also help.

    Later in this same speech he delves deeper into consumer spending.

    Looking back at last year, economic growth was weaker than we had expected. The global slowdown is part of the story, but the most important factor is a domestic one, and that is subdued consumer spending as households adjusted to slow wages growth and falling housing prices. The downswing in residential construction was also a factor.
    Over 2019, household consumption looks to have increased by only around 1 per cent. Given that Australia's population is growing at 1.5 per cent a year, this represents a decline in per capita terms. This is a highly unusual outcome in an economy that has recorded the type of strong jobs growth that we have experienced in Australia.

    It is very difficult to share even the mild optimism that Mr Lowe expresses in these statements. We can say that one of the things that have made him a very good RBA governor is that he has been careful to not set the RBA needlessly at odds with the policies of the government of the day. In that sense, what these statements may give us a read on the government's thinking, as well as an analysis of the potential for 2020 by the RBA.

    Downsides

    To start with, there are quite a number of negative signs in the business statistics. Elsewhere in the second statement Mr Lowe mentions the importance of businesses investing in productivity improvements, and yet business investment as a share of nominal gross domestic product (GDP) is down to levels not seen since 1994 (Chart 1). Business confidence, as measured by the National Australia Bank, is in negative territory (Chart 2). GDP growth has not met forecasts or targets, languishing below 2% (Chart 3). And the tax cut delivered during 2019 did not stimulate the economy by much, being used mainly to pay down household debt.

    Probably the most curious idea to emerge from these statements is that the problem with low wage growth has not been low wage growth, but rather the expectation that higher wage growth is the norm. Wage growth has been below 2.6% for around six years (Chart 4), while for most of the preceding 20 years it was above 3.5%. Any acclimation should have happened before now.

    If this approach is one which has been somewhat foisted on the RBA by the government, and if it matches up with the insistence on a balanced budget, what is the real, perhaps unstated, economic policy of the government?

    In brief, it is likely that current economic policy is to accept what has been dubbed "the new normal" by economists. This is about accepting that growth in GDP is unlikely to exceed 3% for the foreseeable future. The cause of that limit is a global decline in productivity that has been around since about 2005.

    That is a complex topic, but perhaps it is enough to say that it seems likely the current Australian government has simply accepted slow productivity growth. In that context, balancing the budget does make sense, as the alternative is stimulating the economy so as to help investments that improve productivity.

    Risks

    If we forecast this as the approach to the economy we will see through 2020, it seems unlikely Australia will reach even the modest goals the RBA has suggested. GDP growth is more likely to remain under 2.2%. Figuring into that is that the RBA sees the Coronavirus as being the equivalent of SARS. It is far more severe, and is affecting China at a time when that nation is more central to the global economy. Analysts JP Morgan, for example, have predicted the virus will take 0.7% off of forecast Chinese GDP growth, bringing it down to 5.0%. That will have a global flow-on effect.

    The RBA also sees the net effect of the bushfires as being minimal, which dismisses the possibility that December 2020 could be as bad as December 2019. In addition to the negative business statistics we've cited, we would also note that a Roy Morgan poll has determined that Australians are among the most pessimistic nations globally at the moment.

    Residential housing recovery

    The element of the RBA forecast that is of specific interest to the hardware industry is, of course, the state of the residential dwelling market. In the first RBA statement, reference is made to a "recovery". In the second statement, this is moderated to 2020 seeing the end of a "downswing", which arrives late in the year.

    The RBA has published an interesting paper entitled "A Model of the Australian Housing Market", by Trent Saunders and Peter Tulip. One of the most interesting aspects of this paper is that it makes use of building approvals as its major metric. As the paper states, among other factors, approvals provide a better basis for early forecasting.

    One of the paper's conclusions is that the construction market is highly influenced by direct changes, rather than a sustained positive level of crucial factors, such as interest rates or house prices.

    It is changes in interest rates and in existing housing prices that drive construction, not their level. So the direct effects of these variables are temporary. Although discussions of dwelling investment often emphasise levels, our attempts to include these in the model did not fit the data. For example, the ratio of approvals to income has been below average over the past decade, even though the level of real interest rates has been unusually low and the relative price of established housing has been unusually high.

    The irony to this situation is that what creates a bubble in the residential dwelling market is not a growing economy, but one that is in a state of steady decline. The RBA responds by dropping interest rates, this increases house prices, and if that increase is sufficient, it becomes self-sustaining for a time.

    If the RBA's forecast is for a very gradual improvement in the economy, then it is likely that the housing market will remain very subdued. Hence the central bank's very mild suggestion that the decline evident during 2019 might diminish by the end of 2020.

    To read the full article, please download HI News:

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    statistics

    ABS Stats: Hardware retail sales to July 2019

    Victoria surges ahead

    While there was overall growth in the hardware retail sector, Victoria is the only state to post good overall growth numbers

    The Australian Bureau of Statistics (ABS) has released statistics for retail sales during July 2019. Overall retail turnover was down by 0.1% for the month of July in seasonally adjusted terms, following a rise of 0.4% in the previous month.

    The ABS director of quarterly economy-wide surveys, Ben James, summarised seasonally adjusted retail sales in a media statement:

    There were falls in four of the six industries and six of the eight states and territories in July. Cafes, restaurants and takeaway services (-0.6%) led the falls. There were also falls in clothing, footwear and personal accessory retailing (-1.0%), other retailing (-0.4%), and department stores (-0.2%). Food retailing (0.3%), and household goods retailing (0.1%) rose this month.

    For the hardware and garden supplies sector, results were slightly more promising. In unadjusted terms, for the trailing 12 months to July 2019, sales increased by 2.20%, up from 0.97% for results one year prior.

    The Australia-wide month-on-month comparison in unadjusted terms, however, was less positive. Hardware sales rose by 1.74% for the current July, while rises for July 2018 and July 2017 were 2.69% and 4.62%, respectively.

    In terms of the states, Victoria (VIC) has emerged as the highest retail growth state by a considerable margin. In a trailing 12-month comparison, VIC showed growth of 8.56%. Removing VIC from the Australia-wide trailing 12-month comparison shows the rest of Australia with a growth rate of only 0.97%. On the same comparative basis, the Australian Capital Territory showed growth of 5.58%, but all other states and territories failed to exceed 1.2% growth, with Western Australia (WA) down by 7.01%.

    On a month-to-month comparison, VIC grew by 3.58%, which was down on that number for the previous two years, both of which exceeded 7.5%. WA recorded the highest growth for the month, at 4.95%, but this came after a steep decline in July 2018, when retail sales fell by 12.45%.

    Chart 2, which shows the percentage change in trailing 12-month retail sales, shows a clustering of growth numbers, similar to that from 2016, which could indicate the widespread effect of federal elections on retail sales. However, Chart 3, which shows the percentage change in sales for the month of July, shows a tight clustering of growth results for the month that is unprecedented over the previous nine years. This would indicate that there are forces at work that go beyond elections.

    The Victoria story

    Over the past 12 to 24 months, it's evident that VIC has followed a different path to the rest of Australia. While other states and territories have fluctuated in their growth patterns, VIC has - for the most part - shown steady growth.

    Chart 4 shows this growth contrasts with the growth for New South Wales (NSW). The green shaded portion of the chart shows the area where VIC has outperformed NSW.

    Analysis

    The overall economic picture for Australia remains confusing, or, at best, "mixed". Consumer confidence, a little surprisingly, is relatively positive. This is despite growth in household income bumping along at under 1%, and the household savings ratio continuing the decline that began in 2015. The unemployment rate for NSW and VIC is below 5%, Tasmania is over 6.5%, and the other states and territories are all close to 6%. Growth in the wage price index has flatlined well below 2.5%, the lowest it has been in over 25 years.

    Meanwhile business confidence is lower than consumer confidence, pegging at about the average level for the past 20 years. One sign of this doubt is that business investment continues to find new lows, driving its level back toward that of over 25 years ago, in the early 1990s.

    When consumer confidence exceeds business confidence, that means consumers predict a positive future change to be more likely than businesses do. It's notable that Australia's federal government has insisted both that the current poor numbers are not significant, and that the economy is, in fact, doing well.

    This doesn't explain statistical results such as low wage growth and very low business investment. In particular, it doesn't explain why by the end of 2019 it is highly likely Australia's market interest rate will be at a historical low of under 1.0%.

    The danger that is looming is that consumer confidence, based on government statements, could find itself disappointed before the upcoming Christmas period. That could accelerate a downward trend in retail sales, and lead to a defined slump at a time when many retailers expect bumper sales.

    Global trade

    One possible explanation for the confidence the government expresses could be that it expects the mining industry to pull out of a "cyclical" slump. However, that slump has been amplified by the growing trade difficulties between the US and China. The most likely scenario, given that November 2020 presidential election date in the US, is that the US will continue its tough stance through to May 2020, then enter into some kind of compromise trade agreement. Should that happen, any uptick in mining exports will be delayed until near the end of 2020.

    Domestic trade

    It has become apparent that, in terms of spending on home improvement, VIC has become different from the rest of Australia. The state continues to follow the pattern that has been in place over the past six or seven years, where when house prices increase, spending on renovations increase.

    That is not the case in the rest of Australia. That pattern has changed outside of VIC, as money is actually leaving both home improvement and the real estate market.

    An additional trend, as reported by the Australian Financial Review, is that there is less spending at the moment on pre-sale renovations. The reality has always been that the strict dollar-to-dollar return on this kind of investment has seldom been that great. Its real influence has been increasing the chance of sale, rather than the return on sale. With fewer properties offered for sale in most price brackets, it has made increasing strategic sense to not invest in attracting more potential buyers in this way.

    Conclusions

    Looking at the current, slightly contradictory aspects of the Australia economy, HNN would suggest one source of its difficulties is that there are not enough incentives fuelling "inorganic" growth. Organic growth originates from further investments by existing companies in strategies to improve their efficiencies and launch new products. However, globally, most growth value being created today comes from inorganic sources such as the launch of whole new categories of business, or sharp changes in existing categories.

    In an economy rapidly coming to rely more on services than mining, agriculture and manufacturing, there's a need to provide overt support for inorganic growth, even if that does disrupt familiar and convenient incumbents.

    statistics

    Stable house prices create best reno markets

    Renovations respond to price stability

    While it has been commonly thought that when house prices and hence house building declines, renovations increase, this doesn't appear to be true

    Television shows and other sources have tended to buoy Australians' view of themselves as a nation of renovators. Yet as we look at the data provided by the Australian Bureau of Statistics (ABS), it is becoming clearer that, while renovations continue to play a key role in the housing/building economy, it is not as strong a source of growth as in the past.

    Relying on the data for alterations and additions for the past 30 years, produced as part of the gross domestic product estimates, through household surveys, HNN believes that there is some evidence to suggest periods of related renovation activity.

    These periods would be 1989 to 1996, 1997 to 2006, 2007 to 2012, and 2013 to 2019. The most pronounced break in spending trends on renovations, however, comes around 2004 to 2005. Prior to that period, renovation trends upwards in all states and territories. Afterwards, there is a pronounced lack of further growth, a trend that is, strong for New South Wales (NSW), much milder in Victoria (VIC), while the other states and territories are between the two, with most closer to NSW.

    It has become fairly commonplace to directly relate renovation activity to house prices. The general rubric is that as house prices rise, renovation activity declines, and as house prices fall, renovation activity increases.

    Looking at the charts and statistical analysis, however, it seems clear that relationship no longer strictly applies. Rather the relationship we see developing is this: a) When house prices rise, renovation activity falls; b) when house prices fall, renovation activity also falls; and c) when house prices are stable, or increase in a mildly positive range, renovation activity increases.

    We've concluded that there are three main features of the overall housing industry that affect renovation activity: lifestyle aspiration (how a family sees itself living in a house); asset management; and forecast expectations for employment and wages.

    The change in renovation patterns is, we believe, down to the second feature - asset management - becoming more dominant since 2015. This dominance is partly down to the third factor, lower expectations for promotion at employment and a continuing stagnation in wage growth. As economic prospects decline, asset management concerns increase as external earnings are forecast to range from stable to a slight fall.

    In asset management terms, it's fairly evident that if house prices are increasing, there is an active market available where owners of high value properties in stabilising suburbs can sell these and purchase properties in undervalued suburbs with higher potential for asset value, so investment in renovation is likely to be subdued. In a declining market, however, it makes little sense to invest further in assets which are losing their value, thus - again - investment in renovations falls.

    If, however, there is a relatively stable market in house prices, or firm prospects of a continual, gradual increase in house prices, investing in renovations makes good sense in terms of asset management. Simply adding one additional child's bedroom to a house, for example, can increase the house's value by more than the renovation costs, if it lifts the house into a new category of consideration.

    While there were likely signs of this in the period from 2007 through to 2012, it became the main pattern from 2013 to 2019, as economic uncertainty increased. The wage price increase shows growth of under 2.5% for this period, and while the unemployment rate declined, the underemployment rate reached a new, sustained high.

    The stats

    Chart 1 shows the chain-value figures for alterations and additions from ABS 5206.0 - Australian National Accounts: National Income, Expenditure and Product, State final demand, detailed components. The quarterly figures have been converter to figures comprised of the June, September, December and March figures, giving a trailing 12-month number which eliminates seasonal variations. The blue curved line is the five-order polynomial trend line. The coloured backgrounds indicate apparent periods, and the yellow line shows the division that occurred in the market.

    Chart 2 is taken from Core Logic's report for Aussie Home Loans "25 years of housing trends", which can be downloaded at:

    25 years of housing trends - Core Logic

    This shows the median national house price for 25 years, dating back to 1993.

    If you put these two graphs together, it is evident that some of the strongest growth in renovations occurred during a period when house prices were growing at a slow but steady rate. That growth did continue into the period when house prices began to accelerate, but declined after 2004.

    What this means for retailers

    The most important signal for retailers is to pay attention not to the level of house prices, but to their volatility. In volatile uncertain periods, expenditure on renovations is likely to fall. When prices stabilise, regardless of whether this is at the top or bottom of a curve, spending on renovations will likely increase, but only after that stability has been established for more than 18 months.

    Renovation behaviour is likely not to disappear during period of house price decrease and increase, but rather to become somewhat reduced. Chart 3 is taken from a Roy Morgan survey for 2016, details of which can be downloaded from:

    Roy Morgan: Renovation Nation Home Improvement in Australia

    What this chart indicates is that renovations are, in fact, continuing, but they are at a very reduced level: less than 30% of those who did some renovations spent more than $5000 on a renovation project, while nearly 45% did some painting.

    So, as prices go strongly up or down, retailers should consider pushing more for business that falls into the DIY category, and is relatively inexpensive, both in dollar terms and time required.

    statistics

    ABS hardware retail stats May 2019

    Victoria jumps ahead

    While most states and territories had average to poor increases in hardware retail sales for May 2019, Victoria returned a strong result

    The Australian Bureau of Statistics (ABS) has released stats for retail sales in Australia for May 2019. Compared with May 2018, the figures show a rise of around 1.95% for Australia overall, reaching $1648 million. On a trailing 12-month basis, overall Australian sales to May 2019 increased by 2.24%.

    On a state and territory basis, Victoria (VIC) showed the strongest lift in month-on-month figures, increasing by 9.34% over May 2018. This sharply contrasted with all the other regions, with the next highest figure just 1.33% for the Australian Capital Territory (ACT). New South Wales managed only a 0.48% lift, while Queensland increased by 2.26%, with only Tasmania performing worse, with a loss of 2.28%.

    Looking at the states and territories on a 12-month trailing basis, the numbers look better for most regions - indicating that May 2019 had particularly poor results. VIC is still significant ahead, with growth of 8.32%, but the ACT shows growth of 4.97%, and South Australia (SA) lifted by 3.37%.

    Chart 2, which shows the percentage change for trailing 12-month numbers, shows some interesting developments. Both VIC and Western Australia (WA) are breaking away from the rest of the pack, with VIC outperforming, and WA underperforming the average.

    Analysis

    At the moment, it's difficult to really work out exactly why VIC is outperforming the other states to such an extent. It is certainly the state with the largest population gains in recent times, which is a natural driver of construction spending.

    Anecdotally, it does seem there has been an increase in spending on renovations, especially the upgrading of established housing in the inner suburbs of Melbourne which have higher-priced housing. However it will be another three or four months until enough supporting statistics have emerged to indicate where the growth is coming from.

    statistics

    Australia no longer really a renovation nation

    Borrowing to renovate continues to decline

    Australia may still see itself as a "renovation nation", but the truth is that renovation continues to play a diminishing role in expenditure on housing

    It is unusual times for the housing construction industry in Australia. Even as house prices come off the highs they reached during the most recent bubble, the Reserve Bank of Australia (RBA) has cut interest rates to historic lows. Meanwhile, the overall Australian economy continues to struggle on.

    While many economic indicators point towards at least a stable future, two key ones point to trouble ahead: business investment as a share of nominal gross domestic product is at a 25 year low; and wage increases remain about 1% under where they should be. That's helping to fuel declines in both consumer and business confidence.

    The Australian Bureau of Statistics (ABS) figures for its capital city price index were released in June for the March 2019 quarter, shown in Chart 1 (see main image).

    In mid-July 2019 the ABS released, ABS 5601.0 Lending to households and businesses, a new series developed for 2019. These stats include the details presented in Chart 2, for all lending to households for dwellings, and lending to households for renovations, which the ABS refers to as "alterations and additions".

    Putting these stats together both confirms much of what most Australians know about the current housing market, but they also reveal just how much the household economy has changed over the past 15 years.

    House prices

    The capital city price index chart is unlikely to surprise many. It shows an ongoing fall in house prices for major Australian cities since the end of 2017, with those prices falling to 2016 levels by the March quarter of 2019. The decline of prices in Perth (Western Australia) has been slower but longer running than that, as the mining industry in that state started to wind down in 2012. Hobart (Tasmania) has, in contrast, continued to show increasing prices, though that growth has moderated since mid-2018.

    Sydney (New South Wales) prices have grown and fallen the most, followed by Melbourne (Victoria), with the national weighted average closely following Melbourne.

    Household lending

    Looking at Chart 2, it's evident that lending to households for dwellings responded to those falls, but with something of an initial lag. As you might expect, once the fall in lending began in early 2018, however, it went into a steep decline.

    Perhaps the most interesting statistic of all, however, is for lending to households for renovations. Over four years, from mid-2007 up until mid-2011 or so, there seems to be a clear, direct relationship between this and overall lending to households, the two declining and increasing at nearly the same time. From that point onwards, however, as general lending to households enters a stage of steep growth over the next few years, up until late-2014, borrowing for renovation actually goes into a slight decline. That's followed by about a year of growth for renovation lending, while overall household lending at first increases, then dips.

    In the final phase, at the start of 2016, overall household lending increases, and reaches its all-time peak in March 2017, then drifts lower through to the start of 2018. Renovation lending also increases, reaching a seven-year peak in September 2017, after which it begins to drop sharply, and continued to do so until October 2018.

    Analysis

    Since September 2003, lending to households for renovations has been in a steady, persistent decline, even though there are a few upward trend periods along the way.

    Chart 3 shows lending for renovations as a percentage of overall lending to households. At the end of 2008, lending for renovations was at close to 2.7% of lending to households. In 2019, that has come down to under 1.1%.

    Combined with the record amounts being borrowed for housing outside of renovations, it is evident that the broad Australian market has increased its tendency to borrow to buy a new house rather than borrow to renovate an existing one.

    At the same time, however, from the perspective of hardware retailers, the market for maintenance and minor renovations has continued to increase as housing stock has increased, and the number of older houses in need of repair has also grown.

    What is most curious about all this, however, is that renovation remains popular in marketing terms for many hardware retailers. It's the subject of a number of apparently popular TV shows, and is somewhat ingrained into the DIY culture.

    It will be interesting to see whether over the coming years alternate ways to market hardware retail are developed, and what those might turn out to be.

    statistics

    ABS: Value construction work done to March quarter 2019

    Growth slows, but volumes remain high

    While the housing news for real estate investors is not great, for the construction industry it is closer to "business as usual"

    The latest data from the Australian Bureau of Statistics (ABS) indicates that, while house and apartment prices might have dropped, the industry itself has not really suffered.

    The ABS's 8755.0 - Construction Work Done, Australia, Preliminary, Mar 2019 figures, released on 22 May 2019, shows that current activity on building sites across Australia remains healthy.

    HNN has used the Value of Building Work Done, using chain volume measures, for Australia. The chain volume measure means that, while the data is in Australian dollars, it has been adjusted to provide a measure of the volume of orders by taking out any price changes.

    As hardware retailers operate further up the supply chain from building, it is the volume that really affects their bottom line, so these numbers are the best indicator of how current construction is contributing to their revenues.

    The numbers for this data are gathered by the ABS using its quarterly Building Activity Survey. The most recent of these numbers should be treated as preliminary, and the two previous quarters will have been revised as well. This is one of the great services that the ABS does for businesses in the building and hardware sector – it's not an easy task getting this data together just six weeks after the close of the data period.

    Value of Building Work Done relates to construction work which is underway, and has not been completed during the quarter. Completed work is represented in other ABS statistics.

    HNN has used the original data (which means it hasn't been adjusted for seasonality or other measures), and we have consolidated four quarters, ending with the March quarter, into 12-month numbers. The data is extremely seasonal, so this takes out some of the ups-and-downs, and gives a clearer vision of what is going on.

    Chart 1: ABS Work done

    In Chart 1, the blue line, which shows the value of new houses built, shows that while there was a slight decline in activity in the 12 months to March 2018, there has been higher activity in the 12 months to March 2019. It also shows there was a far stronger decline in the years post March 2011 through to the 12 months ended March 2014.

    In the same chart, the green line shows what has been happening with the "not house" category, which is dominated by apartment buildings. This chart shows a very healthy, developing multi-dwelling building market, which climbed strongly post March 2012, up until the 12 months ended March 2017. Since then it hasn't declined, but has continued very slow growth.

    The orange line shows construction activity related to alterations and additions, which are more commonly referred to as renovations. It's important to note that in these statistics these relate only to projects which require a building permit, which are generally those costing over $10,000. On this volume-based measure, this has not been a growth market, but has continued at a relatively good level over the past 10 years.

    Growth

    Chart 2: Percentage change, work done

    Chart 2 takes the numbers in Chart 1 and then derives the rate of growth for each 12-month period over the previous 12-month period. Again, it's worth noting that houses (the blue line) went into decline for the March-ended 12 month periods in 2012 and 2013. As we said above, apartments had a big spike in growth that has slowed, but remained positive. Alterations and additions have had positive growth for seven out of the past 10 years, which is an indication of stability.

    Big picture

    Chart 3: Work done, cumulative and percentage

    Chart 3 looks at the "big picture", combining both house and non-house numbers into a single bar, and showing the percentage of the total that is non-house. This chart shows that much of the boost in business for construction has come from non-house, multi-dwelling construction. While that growth has tailed off for the moment, the overall level remains high in comparison with five years ago.

    It's also worth noting that hardware retailers typically gain only around 5% to 10% of the sales in this sector (for smaller constructions), so reduction in growth is not going to effect them very much.

    Conclusion

    In terms of a "real estate panic", these are the numbers that are influencing many commentators on the market. As usual, their comments are not really about market size, but growth.

    For the hardware retail industry, these numbers show that the volume of work flowing through the construction industry remains at relatively high levels. If there is a falloff expect, it has yet to occur.

    statistics

    House prices fall, renos on the rise

    Panic is, as usual, oversold

    ABS stats for renovations show growth, and that alarm over house prices is misplaced

    Most of us in the home improvement and hardware industry will be familiar with the sometimes frantic predictions of falls in Australia's house prices. This starts with near-panic announcements of price declines, which tend to increase during the first six to 12 months, followed by uncertainty, with a mixture of dire warnings and more optimistic forecasts, followed by a price recovery.

    That was pretty much what we went through from March 2011 through to September 2012, and in a milder form from September 2015 through to June 2016. The current panicky state started around December 2017. While we are still in a state of price decline, this has moderated from predictions of a 20% plunge in values, to falls in the mid-single digits, with some oversold suburbs hitting double digits.

    For our industry, the real point of house price behaviour relates to how future sales of goods will be distributed. Overall sales for hardware retail tend to pretty much track growth in gross domestic product (GDP).

    When dwelling prices are high, and trending upwards, there is increased activity in home and apartment building. When those prices decline, according to a long-held belief in the industry, if GDP is growing at an acceptable rate, expenditure shifts to renovations.

    Graph 1 illustrates all these trends for Australia as a whole. While this is a very regional situation, we're using this graph because it does give a pretty good overall view of the situation.

    The orange line represents the Australian Bureau of Statistics (ABS) numbers for the weighted index for house prices in all eight capital cities. HNN sees the bubble in prices starting with the strong increase in house prices beginning with the December 2016 quarter. This followed a moderated market from September quarter 2015 through to June quarter 2016.

    The red vertical lines indicate reductions in interest on the cash rate by the Reserve Bank of Australia (RBA). There is an apparent relationship between these rate cuts, and the stimulus on the house price.

    In terms of what led to an imbalance in the housing market, the interest cuts in May and August 2016 seem a little dubious. However, what needs to be understood is that the year-ended non-farm GDP growth figure for March quarter 2017 was just 1.8%, and for June quarter 2017 it was just 1.9%. The stimulus the RBA was applying at that time was intended for the broader economy, but, of course, it affected everything, including the housing market which was already sufficiently stimulated. Hence, the bubble.

    In its statement regarding the first of those two rate decreases, the RBA said:

    At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.75 per cent, effective 4 May 2016. This follows information showing inflationary pressures are lower than expected.

    HNN's analysis of this, as we have written in the past, is that the Australian economy had been braked a little too hard as regards inflation, and actually entered a very brief period of deflationary activity — which the economy is still recovering from today.

    At the time of making the second of these rate cuts, the RBA commented:

    Supervisory measures have strengthened lending standards in the housing market. Separately, a number of lenders are also taking a more cautious attitude to lending in certain segments. The most recent information suggests that dwelling prices have been rising only moderately over the course of this year, with considerable supply of apartments scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Growth in lending for housing purposes has slowed a little this year. All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished.

    Unfortunately, that's not how it worked out — though the RBA was still definitely correct in cutting rates, given the state of the overall economy. The interest cuts contributed to five quarters of strong growth in house prices, with the ABS price index going up by nearly 11%.

    The current "housing price crisis" consists of this: from the peak in December quarter 2017 through to the recent figures for September quarter 2018, the price index fell by 2.85%.

    That would indicate that the price index would still have some way to fall before the RBA gets around to considering another cut in interest rates. If the index continues to fall, down below the level of December quarter 2016, cuts might come up for consideration. Even if that did happen, we would think the rate cut would be another 25 basis points, and happen in July/August 2019, after the Federal Election. It seems more likely, however, that prices will stabilise, and no rate cut will be required.

    The other interesting aspect of the graph, from the perspective of our industry, is the green line, which traces the ABS statistics on alterations and additions, which we would all call "renovations". These numbers are derived from household expenditure estimates, and so track most renovations, including those that don't show up on building permit applications.

    What we see here is a very sharp fluctuation, with spending dropping back to 2014 levels in the second half of 2017, before rebounding sharply to the highest level we've had in the September 2018 quarter.

    If we were to estimate why this happened, we would suggest it was a response to the increase in prudential oversight on lending. For example, a typical way of funding a renovation is through a line of credit loan, which is by its very nature interest only, but secured by the value of a property. With interest-only loans receiving increased scrutiny, these could have been more difficult for borrowers to obtain — at least initially.

    Probably what we are seeing in the graph for recent quarters is a combination of factors pushing up the spending on renovations. The first is that if regulations depressed lending for a time, there is a "catch-up" factor at work, as delayed projects get the go-ahead. Secondly, with the drop in house prices, more homeowners may be thinking of renovating rather than selling to trade up. Finally, with the drop of house prices, there has been a decline in building activity, making trades more available on the market, thus reducing the prices they might charge.

    What happens next?

    It's likely house prices for December quarter 2018 will show a further decline, while renovations will indicate a levelling-off, or slight decline for that quarter. The March quarter of 2019 will show similar trends, though house prices will further stabilise.

    The results for the June quarter of 2019 will be crucial to interest rate settings. Given strength in other measures of the economy, we could expect anything from a mild decline to a mild increase, which will be very much a function of the number of properties offered for sale. If that is the case, interest rates will remain stable.

    Renovation activity will be an interesting indicator to watch. HNN thinks this is likely to track numbers such as wage growth over the next year or two, as householders take a more conservative approach to credit. In general, 2019 is likely to be a more cautious year, as consumers — especially renovators — seek value for money, and more substance than flash in their home renovations.

    That should mean an uptick in some standard home maintenance categories, such as paint, as well as an increase in less expensive renovation items, such as lighting, plumbing fixtures, cabinetry hardware such as handles, and DIY storage projects.

    Other areas where we could see growth would include smarthome, both for controllers and appliances, as well as an increase in the sale of heat pumps for heating and cooling, spurred by the recent brutal summer we have endured.

    Percentage change quarter-on-quarter for alterations and additions, by state and territory =

    statistics

    ABS Hardware Retail Revenue

    Growth, but in a narrow range

    Comparison of growth in hardware retail revenue over recent financial years reveals a trend, and it is set to continue for the next two years

    With the June 2017 retail revenue statistics now available from the Australian Bureau of Statistics (ABS), it's possible to look back over the 2016/17 financial year, and to contrast this with previous financial years.

    As the chart below illustrates, the proportion of revenue earned by each state has been relatively stable. More recently, NSW has gained ground, while VIC has lost ground. SA, after relatively lean times in 2012/13 and 2013/14, has recovered, as has Western Australia (WA) after its lean years in 2009/10 and 2010/11.

    >http://hnn.bz/retail-sales-allstate-June2017-ytd.jpg}Hardware retail sales}http://hnn.bz/retail-sales-allstate-June2017-ytd.jpg

    The following chart provides a closer look at the proportional contributions of the states for 2016/17, the previous year, 2015/16, and the pre-GFC year, 2006/07.

    >http://hnn.bz/retail-sales-allstate-June2017-comp-bars.jpg}Proportional contribution to annual retail sales by each state/territory}http://hnn.bz/retail-sales-allstate-June2017-comp-bars.jpg

    In the two most recent years, virtually the only change has been that Victoria (VIC) has lost 1%, and New South Wales (NSW) has gained 1%. For 2006/07, the contributions by South Australia (SA), Western Australia (WA) and Tasmania (TAS) were much higher that those of recent years, reducing the proportional contributions of VIC and NSW. So, in recent years, there has been an increasing centralisation of revenues to both VIC and NSW.

    Using the original data provided by the ABS (rather than trend data), Australia overall reported its most subdued growth for the past seven years, with the national hardware retail industry growing by just 3.14%. The states that were the least subdued were the Australian Capital Territory (ACT), with growth of 16.09%, SA with growth of 6.64%, and NSW with growth of 6.06%. Both Queensland (QLD) and VIC reported quite low growth, of 1.09% and 0.96% respectively. Only the Northern Territory (NT) reported negative growth, with revenues falling by 8.18%.

    The next chart, which looks at growth, provides some further insights into these changes. The top five states have continued to consolidate their position in a growth range between 0% and 7%, while the two smallest (by total hardware revenue) territories have broken out of this, with the ACT gaining, and the NT losing.

    >http://hnn.bz/retail-sales-percent-change-june-2017.jpg}Percentage change in revenue}http://hnn.bz/retail-sales-percent-change-june-2017.jpg

    Real estate and hardware revenue

    If we accept that growth in the housing industry, driven by ever-higher real estate prices, has had a big influence on hardware retail expenditure, then we could think that these increasingly restrained growth rates reflect something that is happening in real estate, which in turn is driving changes in the housing market.

    One possibility is that the real estate markets are not so much in a "downturn", or that the "real estate bubble has burst", but rather that we are seeing a market finally reach a state close to equilibrium. To understand such an equilibrium, it's necessary to first consider what disrupted the market in the first place.

    The next two charts indicate what might be the disrupter. The chart below shows the number of persons employed full-time in manufacturing, FIS and IMT.

    >http://hnn.bz/employment.jpg}Employment by industry}http://hnn.bz/employment.jpg

    The next chart shows the trend for what is known as "Gross Value Added" (GVA) for manufacturing, construction, information media and telecommunications (IMT), and financial and insurance services (FIS). GVA is essentially the contribution of an industry to Australia's gross domestic product (GDP).

    >http://hnn.bz/GVA-manufacturing-FIS.jpg}Gross Value Added by select industries}http://hnn.bz/GVA-manufacturing-FIS.jpg

    The employment chart shows the steep decline in manufacturing employment. While employment for IMT remains flat, and FIS shows moderate gains, both of these also produce substantial "halo" employment opportunities.

    As can be seen in the chart for GVA, growth in manufacturing moderated to almost nothing in 2004, then entered a decline in 2013. Meanwhile, FIS has, since 2003, entered into a period of high growth. IMT has not grown as strongly, but it has produced consistent growth, despite a flat period from 2010 to 2013.

    Construction has largely kept pace with the growth in FIS.

    In short, what has been happening over the past 12 or 14 years is that a big part of the Australian economy has transitioned from being manufacturing based to being services based. This has exerted two influences on population distribution.

    The first influence is that by its very nature, manufacturing is decentralising. You don't open a factory in the middle of a city, or even in its immediate suburbs. Instead, you choose an area some distance from the city, on a major transportation hub. People who work in the factory naturally choose to live close by to reduce their commuting time.

    Thus significant population centres outside of the main city grow.

    As manufacturing first reduced its total employment due to increasing automation, and then further reduced employment as businesses shrank or ceased entirely, the attraction of these remote centres was reduced. This was combined with the second influence, the increase of employment in FIS. FIS, of course, will exert pressure to create urban centralisation.

    The service industry relies on multiple, internal and external layers of services. The providers and facilitators of these layers need some degree of co-location, as this helps with both service reliability and the ongoing development of those services.

    What has happened, then, over the past 12 years or so, has been a revaluation of urban land. It held one value in a city economy where manufacturing played a major role, and another value where manufacturing played only a minor role, and FIS played a major role.

    The signals that are currently coming from the real estate market indicate that this process of revaluation is entering its "infill" stage in Sydney and Melbourne, and elsewhere in Australia. In this stage, revaluation is largely completed, while there remain some areas - formerly neglected - that will continue to be re-valued.

    Forecasting

    How will this affect future revenues for the Australian hardware/home improvement retail industry? It is quite likely that the kind of constrained growth that the industry has seen over the past two to three years will continue for another three to four years, with annual growth rates for the states with higher revenue levels delivering between 3% and 6% annual growth. The states and territories of NT, ACT and TAS will vary outside of this range, subject to local influences.

    By the end of that time, it's likely that cities will be entering into the final stage of the manufacturing to service economy transition They will begin to develop significant centres of decentralisation - effectively semi-urban clusters that specialise in particular service areas. These will, in turn, open up new areas for real estate development, and new housing projects, driving annual growth rates over the 6% mark.

    statistics

    HNN Index for week ending 18 December 2015

    Index springs back

    There has been an overall lift in share prices

    After falling steeply last week, the HNN Home Improvement Index has recovered strongly, and seems set to finish the year close to the level of the underlying ASX 200 index.

    The Index closed the week at 939.15 points, up nearly 36 points on the previous week, and close to the level it was at on 20 November 2015. Meanwhile, the underlying ASX 200 index also rallied, but not as strongly. On the comparative scale, it rose by nearly 15 points to close at 950.1. In unindexed terms, the ASX 200 rose by 77 points to close at 5106.7.

    The strongest performer in the index stocks for the week was James Hardie, which increased its share price by 7.9%. CMIC also did well, lifting by 6.9%. Wesfarmers and Downer EDI recorded price increases of over 5.2% for the week.

    HNN will be revising the basis and weighting of the Index for 2016, and will be publishing a comprehensive summary of sector performance in January 2016.

    Adelaide Brighton linked to $3bn play

    Building materials provider Adelaide Brighton is believed to be working with investment bank Credit Suisse, as speculation continues about a potential $3 billion sell-off of the Australian and New Zealand operations of LafargeHolcim. Speculation remains that a divestment of the division is being considered by its Swiss head office as part of a global review of non-core operations, with a decision to be made within the first quarter of next year.

    Adelaide Brighton linked to $3bn play - Business Spectator

    CIMIC Group to buy back 10% of shares next year

    Australian construction major CIMIC Group will buy back 10% of its stock over the next year as the shares are said to be at an attractive position now. This decision was made despite the group's share price crashing more than 20% in the last six weeks. CIMIC is majorly owned by Hochtief, which is further controlled by Spanish builder Actividades de Construccion y Servicios SA.

    CIMIC Group to buy back 10% of shares next year - International Business Times

    CSR seals Tesla Energy deal to sell Powerwall

    CSR has expanded into home batteries, sealing an alliance with battery maker, Tesla Energy, to sell the Powerwall system to Australian households through its Bradford division. Anthony Tannous, executive general manager of CSR Bradford, said the move to broaden the product range came after keen interest from home-building developers and consumers. It is a logical add-on to the company's solar business.

    CSR seals Tesla Energy deal to sell Powerwall - Fairfax Media

    Lendlease factory to spearhead $1b construction disruption

    Lendlease will open a factory in Sydney next year with plans to manufacture $1 billion worth of pre-fabricated building material over the next five years. The start-up manufacturing business, to be called Design Make, will have a $15 million investment. It represents the most significant step taken so far by Lendlease to stay ahead of the next wave of innovation in the sector, which is shifting more building production from the construction site to the factory floor.

    Lendlease factory to spearhead $1b construction disruption - Fairfax Media

    ACCC launches action against Woolworths for alleged unconscionable conduct towards suppliers

    The ACCC claims Woolworths sought to make up for an expected profit shortfall in December 2014 by seeking what it referred to as "Mind the Gap" payments from more than 800 suppliers. It is alleged that the supermarket sought approximately $60.2 million in Mind the Gap payments from the suppliers while in a stronger bargaining position than them.

    ACCC launches action against Woolworths - ABC
    statistics

    ABS hardware retail sales October 2015

    Good growth

    Only the ACT recorded a decline, with South Australia posting a 15% lift

    Overall hardware retail sales in Australia performed strongly during October 2015. The only state to record negative growth was the Australian Capital Territory, which fell from $30 million in sales for October 2014 to $29 million in October 2015, a loss of 5%.

    South Australia had the strongest performance, posting a 15.1% lift over the previous October, followed by Tasmania with an over 14% increase, and Queensland with a close to 10% increase.

    Victoria continues to post slow rates of growth, coming in at close to 3%, while New South Wales posted growth of 6.6%, close to the national Australian growth rate of 6.31%.

    >http://hnn.bz/graphRetailStatsOct2015scaled.png}ABS retail statistics for Australia}http://hnn.bz/graphRetailStatsOct2015scaled.png

    Online retail

    The NAB Online Index fell by 0.6% for October 2015 as contrasted to September 2015. On a year-to-year comparison, NAB estimates that sales are 5.7% higher.

    Total online retail expenditure is estimated at $17.9 billion for the 12 months to October. This indicates that online now has a 7.2% market share of total retail spending.

    Media, fashion and grocery & liquor all recorded good sales growth, with media posting an over 20% increase. Homewares and appliances fell by 2%.

    statistics

    HNN Index for week ending 20 November 2015

    Going up?

    Index sharply corrects much of its losses from the previous week

    The HNN Home Improvement Index for the week ended 20 November 2015 closed up by 25 points at 941.37 points. The underlying ASX 200 Index rose even more, closing up 38 points on the comparative index. The actual index closed at 5256.1 points, up by 205 points.

    Nine stocks in the HNN Home Improvement Index rose by more than 5% during the week. Myer Holdings and UGL Limited both rose by more than 9.5%. Bluescope Steel was up 9.2%, and Super Retail Group rose by 8.6%. Downer EDI and GUD Holdings rose by almost 7%. JB Hi Fi, the Goodman Group and Harvey Norman all rose by 5.5%.

    Bluescope Steel

    BlueScope Steel confirms profit lift, warns of pressures ahead

    BlueScope Steel has confirmed it is on track for a sharp lift in underlying first-half earnings but has warned of increased margin pressures in the second half of the year. The steelmaker reaffirmed its late-October guidance for a 40% increase in earnings before interest and tax to about $50 million for the six months to December.

    BlueScope Steel confirms profit lift, warns of pressures ahead - The Australian

    Charter Hall Group

    Charter Hall sees earnings grow 21% in FY15

    A decade after listing on the ASX, property funds manager Charter Hall has recorded a statutory profit after tax of $117.9 million, up 43.6% for the 2015 financial year. Speaking at the company's annual general meeting, Charter Hall chairman, David Clarke, announced the company had posted earnings growth of $98.8 million for the last financial year.

    Charter Hall sees earnings grow 21% in FY15 - Money Management

    James Hardie

    James Hardie warns on FY profit

    James Hardie has detailed a near flat profit result in the second quarter, while delivering a strong lift for the full first half. The slowing growth has seen it warn it may fall short of analyst expectations for the full-year. In the three months to September 30, James Hardie delivered a net profit of $US130.2 million ($A183.1m), up just 2% on last year's corresponding result. Over the first half, however, the building materials supplier saw net profit rise 22% to $US128.8 million.

    James Hardie warns on FY profit - Business Spectator

    Myer Holdings

    David Jones discounts crimp Myer's performance

    Discounting at David Jones has limited sales growth at Myer by as much as 2%, according to analysts, who believe the upmarket department store is still benefiting from "acquisition accounting". One analyst said it would be difficult for David Jones to sustain its current sales growth without the discounting that was a legacy of South African Woolworths Holdings' $2.2 billion acquisition of the business in 2014. He believes these price reductions had cut as much as 2% from Myer's like-for-like sales performance.

    David Jones discounts crimp Myer's performance - Fairfax Media
    statistics

    HNN Index for week ending 13 November 2015

    Sliding down

    No stocks performed particularly well

    The HNN Home Improvement Index for the week ending 13 November 2015 closed down 56 points to end at 916 points. Its performance was slightly worse than the underlying ASX 200 index, which closed down 31 points on the adjusted scale to close at 939.8 points. In real terms, the ASX 200 fell by 164 points to close at 5051.3.

    There were five stocks in the index which lost more than 5% of their value during the week. Bluescope Steel had the worst performance, closing down by 12.7%, followed by GWA Group, which lost 6.5%. CSR fell by 5.7% and CIMIC (Leighton Holdings) fell by 5.5%. Westfield was also down, by 5.8%.

    Breville

    Breville says Nov-Dec trading crucial

    Appliance maker Breville is counting on a sprinkle of Christmas cheer to lift its performance, amid challenging business conditions. Chairman Steven Fisher told shareholders at its AGM recently: "The key trading period of November and December is always crucial to the group's results, not only for the first half but also for the full year. It is too early to provide more definitive guidance."

    Breville says Nov-Dec trading crucial - Yahoo! Finance

    Charter Hall

    Acquisitive quarter boosts Charter Hall's earnings outlook

    Charter Hall Group's joint managing director David Southon says an acquisitive first quarter helped the property fund manager raise its full-year earnings guidance. Charter Hall said it expected operating earnings per share to be boosted by between 7% and 9% for the year to June 2016. It had previously forecast earnings growth of between 5% and 7% a share.

    Acquisitive quarter boosts Charter Hall's earnings outlook - The Australian

    *CIMIC Group

    Devine tells shareholders to take no action on CIMIC takeover

    CIMIC, formerly Leighton Holdings, has finally moved to clean up its investment in troubled developer Devine with a $58 million takeover bid for half the company it doesn't already own. CIMIC's offer comes after Devine chief executive David Keir resigned and another profit downgrade. In a statement, CIMIC management said the deterioration in Devine's performance prompted it to take action.

    Devine tells shareholders to take no action on CIMIC takeover - Financial Review

    Woolworths

    Woolworths should keep BIG W and Masters, says former boss

    Woolworths should persevere with its struggling BIG W and Masters chains to avoid a replay of the value-destroying sale of Dick Smith to private equity investors, according to former Woolworths executive chairman Paul Simons. Simons told Fairfax Media that the Masters home improvement chain was "worth persevering" with because there was room in the market for another major player, and Woolworths had already "done the hard yards" by investing more than $2 billion and securing more than 50 sites.

    Woolworths should keep BIG W and Masters, says former boss - Fairfax Media
    statistics

    ABS hardware retail statistics for September 2015

    QLD, SA lead the way

    Australia's overall growth for September 2015 is up 7%

    According to statistics from the Australian Bureau of Statistics (ABS), hardware, building and garden supplies retail revenue for September 2015 reached $1582 million, an increase of 6.88% over the previous corresponding period (pcp), which was September 2014. South Australia had the largest percentage increase, up 16.97% over the pcp, followed by Queensland with a 12.86% increase.

    New South Wales, Western Australia and the Northern Territory all had increases between 5% and 8%, close to the national average. Victoria had subdued growth of 2.24%. Tasmania and the Australian Capital Territory both declined in contrast to the pcp.

    According to the ABS, the following describes activity for household goods:

    In current prices, the trend estimate for Household goods retailing rose 0.3% in September 2015. The seasonally adjusted estimate rose 1.0%. By industry subgroup, the trend estimate rose for Electrical and electronic goods retailing (0.5%) and Hardware, building and garden supplies retailing (0.3%) and fell for Furniture, floor coverings, houseware and textile goods retailing (-0.1%).
    The seasonally adjusted estimate rose for Electrical and electronic goods retailing (2.2%) and Hardware, building and garden supplies retailing (1.1%) and fell for Furniture, floor coverings, houseware and textile goods retailing (-0.8%).

    Online sales

    The National Australia Bank (NAB) index for online sales indicates that sales were 5.7% higher for September 2015 as compared to September 2014. The index showed growth of 1.1%, compared to just 0.6% in August 2015.

    Fashion fell in terms of sales, but all other categories showed an increase. Grocery and liquor sales grew by 1.9%, and homewares grew by 1.4%.

    statistics

    HNN Index for week ending 16 October 2015

    Slight gain against background loss

    Home improvement stocks prove more resilient than ASX 200

    The HNN Home Improvement Index for the week ended 16 October 2015 rose slightly by six points to close at 961.64. The underlying ASX 200 index fell by 11 points to close at 5268.2, or 980.1 points on the adjust scale, an adjusted fall of 2.2 points. As a result the HNN Index marginally outperformed the ASX 200.

    Metcash and Myer both managed strong performances, with the former gaining by 11.9% and the latter by 11.2%. UGL also increased by 5%.

    Brambles

    Brambles Q1 sales dip

    Supply-chain logistics company Brambles has posted a slight fall in first-quarter sales revenue, due to the impact of a stronger US dollar. Brambles earned sales revenue of US$1.322 billion in the three months to September 30, a 2% decline on the previous corresponding period. Constant-currency sales revenue rose 8%.

    Brambles Q1 sales dip - Business Spectator

    Goodman Group

    Goodman Group puts $350m of assets on sales block

    Goodman Group has put $350 million worth of Australian logistics assets on the block, as more portfolios hit the market. The move will see the group look to offload about seven assets in Victoria, Queensland and South Australia. Goodman had already sold about $650m worth of property to the Charter Hall Group, as well as several large individual properties.

    Goodman Group puts $350m of assets on sales block - The Australian

    Myer

    Can Myer CEO Richard Umbers can turn the retailer around?

    According to Citi, linking Myer CEO Richard Umbers' pay to sales growth per square metre is a smart move and reflects how serious the company is about expanding its focus in that area, although Myer hasn't disclosed its total square metres since it listed. Umbers has to grow sales per square metre by 30% from the 2015 financial year to 2018 to receive 100% of his total shareholder return target.

    Can Myer CEO Richard Umbers can turn the retailer around - Financial Review

    Wesfarmers

    Coles sales growth tipped to slow

    While the supermarket giant is faring better than its rival Woolworths, analysts expect Coles has had a slower start to the financial year. Deutsche Bank research analyst Michael Simotas expects like-for-like sales growth at Coles of 3.1% in the three months to September, down from 4.3% in the first quarter of 2014/15.

    Coles sales growth tipped to slow - SBS News
    statistics

    HNN Index for week ending 9 October 2015

    Stocks climb

    After a several weeks of declines, the ASX climbed strongly during the week

    The HNN Home Improvement Index for the week ending 9 October 2015 closed 28 points higher at 955.89. The underlying ASX 200 index rose 227 points in real terms to close at 5279.7. In comparative terms the ASX 200 rose 42 points to close at 982.3, close to its level for 1 July 2014.

    Home improvement stocks rallied strongly during the week. UGL climbed by 14.5%, followed closely by Metcash, which closed at 14.0% higher. Downer EDI rose by 9.3%, Bluescope Steel by 7.5%, and Breville was up 6%. CIMIC ended up 5.4% at the end of the week.

    Bluescope Steel

    BlueScope Steel workers back ground-breaking deal

    BlueScope Steel employees have endorsed a ground-breaking workplace agreement after their union leaders accepted that hundreds of job losses, a wage freeze and a restructuring of work practices were needed to prevent the closure of the steelworks at Port Kembla. BlueScope management referred to the three-year deal as "game-changing".

    BlueScope Steel workers back ground-breaking deal - Australian Financial Review

    Goodman Group

    Goodman Group in $2bn British property pact

    The Goodman Group has struck up a GBP 1 billion ($2.1bn) partnership in Britain with two of its major partners. The trio of the Goodman Group, the Canada Pension Plan Investment Board and Dutch group APG Asset Management revealed the Goodman UK Logistics Partnership.

    Goodman Group in $2bn British property pact - The Australian

    Wesfarmers

    Target on track for transformation

    Target boss Stuart Machin said the chain is well advanced in its transformation from a loss-making business to a strong performer, with new store formats and an improved online platform winning over shoppers. It has opened 10 of its new larger format stores to date and boosted its online brands after making a deal with British fashion retailer New Look.

    Target on track for transformation - Business Spectator

    Woolworths

    Supermarkets slash private label prices to drive sales

    Coles and Woolworths have both slashed private-label prices to drive sales and convert more shoppers to their home-brand products. Woolworths cut prices on its premium private-label range in the three months to the end of September, according to Deutsche Bank research, slashing 9% off prices which Coles cut by 7% in the same period.

    Supermarkets slash private label prices to drive sales - Sydney Morning Herald
    statistics

    HNN Index for week ended 18 September 2015

    Slight climb

    While the HNN Index flattened out, the underlying ASX 200 continued a moderate recovery

    After pulling out of its steep dive last week, this week the HNN Home Improvement Index climbed slightly. It rose 3 points to 937.5 points. Meanwhile the underlying ASX 200 index continued a recovery.

    On the adjusted index, it rose 18.5 points to reach 962 points. On the market, the ASX 200 climbed nearly 100 points to reach 5170.5 points.

    UGL managed to increase its share price by more than 5%, while Metcash fell by more than 5%.

    Boral

    Construction union ordered to pay up to $9m to Boral over industrial dispute

    The Construction, Forestry, Mining and Energy Union has been ordered to pay up to $9 million in damages and legal costs to Boral following the union's boycott of the construction company. The Victorian Supreme Court also banned the CFMEU from stopping workers from using Boral products at any Victorian worksite, and from interfering in the supply of Boral's goods and services. The injunction lasts for three years.

    Construction union ordered to pay up to $9m to Boral - ABC

    Breville

    Breville brings buying directors to the boil

    Breville recently reported slightly lower sales and earnings for the June year and the share price has returned to levels last seen in 2013. Five of the seven directors have taken the opportunity to increase their stakes, spending close to $1 million between them.

    Breville brings buying directors to the boil - Fairfax Media

    Brambles

    Brambles shares slip on market update

    Pallet maker and logistics giant Brambles has reaffirmed a plan to increase capital investment and maintained its soft earnings forecast from a month earlier. Brambles told an investment market briefing in California that it is anticipating organic growth investment of US$1.5 billion over next four years, with growth capital expenditure heavily weighted toward well-established businesses.

    Brambles shares slip on market update - Business Spectator

    CIMIC Group

    Thiess India chief executive exits CIMIC

    Construction group CIMIC has fired the head of its Thiess India business, Raman Srikanth, as its new management team tries to distance itself from corruption allegations. He is one of the most high-profile executives in CIMIC's international operations to leave the company since Spanish construction group ACS acquired Leighton Holdings in early 2014.

    Thiess India chief executive exits CIMIC - Fairfax Media

    Metcash

    Metcash launches grassroots campaign to fight Aldi incursion

    Grocery wholesaler Metcash has kicked off a grassroots campaign to defend the market share of IGA retailers in South Australia and Western Australia. Aldi is preparing to open two distribution centres and the first of as many as 120 stores in South Australia and Western Australia early next year.

    Metcash launches grassroots campaign to fight Aldi incursion - Fairfax Media

    Super Retail Group

    Super Retail Group CMO departs

    Super Retail Group's marketing leader, Kevin McAulay, has left the ASX-listed retailer and will not be directly replaced as the group undertakes a major reshuffle. The shared services marketing function is being decentralised, with many of the roles realigned to existing business teams and functions.

    Super Retail Group CMO departs - CMO Australia

    Wesfarmers

    Goyder's boys bank bonuses

    Coles managing director John Durkan made $4.6 million in his first year in the role, eclipsing the pay of all other Wesfarmers divisional bosses except Bunnings' John Gillam. Mr Gillam's $4.8 million pay was 63% performance-related. He hit 93% of his bonus target.

    Goyder's boys bank bonuses - The West Australian

    Woolworths

    Woolworths builds solar portfolio to 1.2MW

    Woolworths is quietly building up one of the biggest aggregate rooftop solar arrays in the country, with more than 1.2MW so far installed on 27 of its retail sites. The increased investment in rooftop solar has been noted by market analysts in recent months, notably with trade in renewable energy certificates held by the company.

    Woolworths builds solar portfolio to 1.2MW - Renew Economy
    statistics

    HNN Index for week ended 11 September 2015

    Slight recovery

    Stocks still below the level set for 1 July 2014

    The HNN Home Improvement Index for the week ended 11 September 2015 recovered slightly after the previous week's steep decline, closing up nine points at 934.47.

    The underlying ASX 200 Index also climbed, though not as sharply. It closed at 5071.1, up nearly 30 points. On the adjusted scale it closed at 943.5, up 5.7 points.

    No stocks lost more than 5% of their value. High performance stocks included UGL which closed up by 7.4%, Pact Group Holdings which rose by 6%, and Boral which lifted by 5%.

    CIMIC Group

    CIMIC's cut-price bids edging out competitors

    The restructuring of CIMIC, the construction group formerly known as Leighton Holdings, is paying off for its Spanish owners 18 months after it was acquired, as the company wins a series of big transportation contracts including the design and build of a new tunnel for Sydney's M5 motorway. However competitors on projects claim the company is winning with cheaper bids.

    CIMIC's cut-price bids edging out competitors on transportation contracts - Fairfax Media

    Metcash

    Magellan sounds death knell for Metcash, gives succour to Woolworths

    Leading fund manager Hamish Douglass says the Australian grocery industry will remain profitable enough to support three major players but wholesaler Metcash could disappear entirely within 10 years and Woolworths should consider ditching Masters and BIG W.

    Magellan sounds death knell for Metcash - Fairfax Media

    Stockland Group

    Stockland partners with Metro for Brisbane apartment exposure

    Diversified property group Stockland has made a small but significant investment in the private Metro Property Development's Newstead Towers in Brisbane and is preparing a similar backing for Metro's Brisbane Casino Towers project. Stockland's investments, which will be worth more than $40 million, are part of its strategy to increase its exposure to higher-density residential property.

    Stockland partners with Metro for Brisbane apartment exposure - Fairfax Media

    Wesfarmers

    ACCC wary of Coles' Supabarn takeover

    A proposed takeover of nine Supabarn stores by Coles in NSW and the ACT has piqued the interest of the Australian Competition and Consumer Commission, which says it has found potential concerns about limited competition. It said it has received around 60 submissions from consumers about the proposed acquisition, and has asked for further comment to help it assess the risks the takeover poses to competition.

    ACCC wary of Coles' Supabarn takeover - Business Spectator

    Westfield

    Westfield Warringah Mall gets $310m facelift

    The Westfield Warringah Mall shopping centre in Sydney's northern beaches is set to get a $310 million facelift. It will include a new two-storey mall parallel mall, the addition of about 70 stores and a new reconfigured, smaller, Myer department store. The remainder of the Myer space will be let to international and local fashion outlets as well as retailers of electronic devices and tablets.

    Westfield Warringah Mall gets $310m facelift - Fairfax Media
    statistics

    HNN Index for week ending 28 August 2015

    Losers and gainers

    A rollercoaster week that resulted in net gains

    The HNN Home Improvement Index for the week ending 28 August 2015 rose by 8.5 points to close at 967.1. The underlying ASX 200 index also rose, by 49 points to close at 5263.6, or up 9 points to 979 on the adjusted scale.

    Over the past three weeks the ASX 200 fell at a steeper rate than the HNN Index, bringing them closer to alignment. Both are now trading below the level they were at on 1 July 2014.

    In a roller coaster week on the markets, three stocks showed a significant decline, and three showed strong gains. The losers were Super Retail Group, down by 8.9%, Breville Group, down by 6.4%, and Boral, which dropped 13.2%.

    The gainers included GWA Group, up 13.2%, CIMIC (formerly Leighton Holdings) up by 6.1%, and Bluescope Steel, which rose by 23.9%.

    Adelaide Brighton

    Adelaide Brighton posts record half year profit

    Adelaide Brighton posted a statutory net profit after tax of $82.6 million for the six months to 30 June 2015. This is an increase of 61.3% over the previous corresponding period, a record result. Revenue for the period was $678.1 million. The improved result was due to higher cement and lime volumes, improved prices, proceeds from property transactions and 2014 acquisitions in South Australia and north Queensland.

    Adelaide Brighton posts record half year profit - Manufacturers' Monthly

    Boral

    Boral lifts profit to $257 million

    Boral has lifted its full year profit by just under 50% to $257 million. Excluding significant items, which included a $115 million gain on the sale of Western Landfill business and costs associated with the disposal of East Coast Bricks and a restructure, net profit rose 45% to $249 million in the year to June 30. However revenues dipped 15.2% to $4.4 billion.

    Boral lifts profit to $257 million - Yahoo Finance

    Charter Hall Group

    Charter Hall charts expansion course as profit surges 43%

    Charter Hall aims to expand its suite of funds to increase assets under management and deliver higher earnings growth through the property investment business. In the past year, it has undertaken a significant number of acquisitions across office, industrial and retail sectors, which has led it to boost funds under management by $2.1 billion, or 18%, to $13.2 billion.

    Charter Hall charts expansion course as profit surges 43% - Fairfax Media

    Metcash

    Metcash expects tough trading conditions in food and grocery to continue

    Metcash chief executive Ian Morrice told shareholders at the annual meeting recently that difficult trading conditions experienced in food and grocery are expected to continue in the new financial year. Morrice said while the grocery wholesaler's balance sheet had been strengthened by capital initiatives like selling the automotive business and key programs such as Price Match, Private Label and Diamond Store refurbishments, this was not enough to offset food and grocery headwinds in 2015.

    Metcash expects tough trading conditions to continue - Fairfax Media

    Pact Group

    Pact Group flags more growth

    Pact Group posted a profit of $67.63 million in the year to June 30, a 17.24% increase on $57.69m a year earlier. Revenue in the period rose 8.03% to $1.253 billion. The packaging group, backed by Melbourne billionaire Raphael Geminder, in June made its biggest acquisition since becoming a listed company with the $80m purchase of Barry Smorgon and John Tisdale's packaging company Jalco.

    Pact Group flags more growth - The Australian

    Westfield

    Westfield on track despite NY delay

    Westfield Corporation made a net profit for the six months to June 30 of $US466 million. Funds from operations of $US380.3 million were in line with its forecasts. The opening of the $US1.4 billion Westfield World Trade Center, which is being constructed by the New York Port Authority and then leased by Westfield, has been pushed back to the first half of the next financial year.

    Westfield on track despite NY delay - Sky News
    statistics

    HNN Index for week ending 21 August 2015

    Downward slide is ongoing

    However the ASX 200 fell further

    The HNN Home Improvement Index for 21 August 2015 fell by 17 points to 958.68 points. The ASX 200 fell by 142 points, or 26 points on the adjusted scale to 970.2. These numbers mean the indices have fallen below the level they were at on 1 July 2014. The ASX 200 was worse affected than the HNN Index.

    Surprisingly, some stocks still did rise. GWA Group managed a 6.6% gain, and UGL Ltd rose by close to 8%. Losers included CSR and Charter Hall Group. Myer Holdings and JB Hi Fi fell by over 7%.

    Boral

    Boral closer to deal on bricks arm

    Boral could be edging closer to striking a deal with an offshore party to sell or partly divest its bricks business in the US. Adviser Macquarie Capital is said to be in talks with various prospective investors surrounding the assets within the US division. Analysts' valuation estimates range from $US750 million (AUD$1 billion) to $US1.23 billion.

    Boral closer to deal on bricks arm - Business Spectator

    Breville

    Breville investors shrug off poor Australia/NZ results

    Investors have shrugged off Breville Group's poor performance in Australia and New Zealand and are hopeful that the turnaround in the small appliance maker's key US market will continue. Breville revealed that 2015 full-year net profit fell 4.3% to $46.68 million and revenue declined 2.7% as it rolled out a new business management software system and discount retailers pushed their home-branded products in Australia/New Zealand.

    Breville suffers full year profit sales decline - Sydney Morning Herald

    Charter Hall Group

    Investors rush to Charter Hall auto fund

    Investors have been quick to back Charter Hall's Direct Automotive Trust, with the fund manager raising $43 million in the first four days of the fund's existence. Charter Hall head of direct property, Richard Stacker, said the new trust was a "good fit" for the business, which has been forecast to provide income at 7.5% in the first year.

    Investors rush to Charter Hall auto fund - Money Management

    Fletcher Building

    Fletcher Building full-year profit falls to $NZ270m

    Fletcher Building said its full-year net profit after tax fell 20% to $NZ270 million (AUD$300 million) from $NZ339 million a year ago. Operating earnings in the year ended June 30 fell 15% to $NZ503 million from $NZ592 million, the company said, while revenue edged 3% higher to $NZ8.66 billion from $NZ8.4 billion.

    Fletcher Building full-year profit falls to $NZ270m - Sydney Morning Herald

    Stockland

    Stockland FY underlying profit up 9.4%, meets forecast

    Stockland Corp Ltd posted a 9.4% rise in underlying annual profit, helped by strong demand for housing, while its retirement living and logistics businesses were also buoyant. Underlying profit rose to $608 million compared to $555 million a year ago and in line with a $607 million estimate of 10 analysts polled by Thomson Reuters. Funds from operations, a measure of underlying and recurring earnings, increased about 15% to $657 million.

    Stockland FY underlying profit up 9.4%, meets forecast - Reuters
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    HNN Index for week ending 14 August 2015

    Slide continues

    The reporting season for FY 2014/15 brings little reassurance

    The HNN Home Improvement Index for the week ending 14 August 2015 fell by 18 points to 975.62. The underlying ASX 200 index fell still further, down by 118 points to close the week at 5356.5.

    On the scale indexed to the HNN Index, it fell by 22 points to 996.6. This indicates that both indices are now below the level they were at on 1 July 2014.

    All was not bad news, however. Super Retail Group climbed by 5.9%, and JB Hi-Fi managed to gain an even 6.0%. Metcash lost most of its previous gains over the past weeks, falling by 9.0%, while Downer EDI also fell by 6.8%.

    Charter Hall Group

    Charter Hall pays $180m on project to house Aurizon

    Charter Hall Group will fund the $180 million development of a new office tower on the fringe of Brisbane's central business district. It is expected Charter Hall will forward-fund and then own the office complex that Consolidated Properties plans to develop at 900 Ann Street to accommodate the 20,000sqm of space that listed freight company Aurizon intends to pre-lease.

    Charter Hall pays $180m on project to house Aurizon - The Australian

    CIMIC Group

    Cimic Group's Leighton unit wins $267m Auckland contract

    Cimic Group's Leighton Contractors unit has won the NZ$267 million contract to upgrade Auckland's Southern Corridor to improve traffic flows on State Highway 1 between Manukau and Papakura. The project involves building about 11 kilometres of additional lanes, upgrading 16 bridges and constructing six new bridges.

    Cimic Group's Leighton unit wins $267m Auckland contract - Scoop NZ

    Goodman Group

    Demand for houses puts Goodman Group in box seat for land sales

    The booming housing market has delivered $1.1 billion in sales for the Goodman Group as it sells down non-core industrial land to residential developers. Goodman chief executive Greg Goodman said the group had sold only a fraction of its land for urban renewal and had enough to keep selling for the next 10 years.

    Demand for houses puts Goodman Group in box seat for land sales - Fairfax Media

    GUD Holdings

    GUD Holdings in good shape

    GUD Holdings management foreshadowed a "substantial uplift" in its profit for the upcoming year at its full year results in late July. GUD's net profit soared by 88% to $33.2 million in the 12 months to June 30, a result managing director Jonathan Ling attributed to freight and logistics efficiencies as well its joint venture with United States consumer giant Jarden Corporation.

    GUD Holdings in good shape - Fairfax Media

    Pact Group

    LiquiGlide partners up with paint packaging manufacturer Pact Group

    LiquiGlide Inc. has an exclusive agreement with Australian sustainable packaging manufacturer Pact Group Holdings. By implementing the patented slippery coating technology, Pact Group, will explore innovative new paint packaging solutions that will allow consumers to use more of the paint they purchase while reducing the environmental impact associated with residual paint.

    LiquiGlide partners with Australian-based Pact Group - Plastics Today

    Westfield

    Westfield sells stakes in two Chicago-area malls

    A group of investors is teaming up to acquire major interests in two local shopping malls owned by Westfield Group which has been paring back its US real estate holdings. Sources in the real estate department at Westfield, who asked not to be identified, say the company is selling a 79% stake in Westfield Hawthorn in Vernon Hills and a 49% stake in Westfield Fox Valley in Aurora.

    Westfield sells stakes in two Chicago-area malls - Chicago Business
    statistics

    ABS retail turnover for June 2015

    Hardware continues to grow

    New South Wales and Queensland lead growth numbers, with South Australia recovering strongly

    According to statistics from the Australian Bureau of Statistics (ABS), overall retail trade figures for June 2015 rose more than was expected by most economists. Retail turnover rose by 0.7% in seasonally adjusted terms, while economists had mostly predicted an increase of 0.4%, which had been the increase for May 2015.

    For household goods, retail sales rose by 2.2%, and for hardware and building supplies grew by 2.8%, in seasonally adjusted terms.

    Comparing the current turnover numbers for hardware and building supplies with those for the previous corresponding period (pcp), which was June 2014, overall Australian figures grew by 12.34% to $1.382 billion.

    South Australia produced the strongest growth in percentage terms, increasing to $77 million from $53 million, a rise of 45.54%. This follows six years of steadily declining June sales, starting in June 2009.

    New South Wales increased the most in dollar terms, to $391 million from $350 million, an increase of $41 million or 11.60%. Queensland grew by $37 million to $298 million, an increase of 14.38%.

    Only Tasmania showed a sales decline compared to the pcp. The state lost $3 million, falling to $31 million, an 8% decline.

    Online sales

    The National Australia Bank (NAB) Online Retail Sales Index reported good growth in online sales during June 2015. NAB reports a 2.4% increase for the month in seasonally adjusted terms. It estimates that online retail sales today are 10% higher than they were a year ago.

    NAB estimates that the total spent online in the 12 months to June 2015 was $17.3 billion. This equates to 7.1% of amounts spent at equivalent physical retailers during the same time period.

    Growth in online sales during June 2015 was particularly high in homewares and appliances, which grew at 25.9% on the pcp. "Daily deals" declined sharply, down 23.1% on the pcp.

    statistics

    HNN Index for week ending 7 August 2015

    A fall, but not a collapse

    Harvey Norman and Myer fare well despite overall market slide

    The HNN Home Improvement Index has followed the underlying ASX 200 on its rollercoaster ride, closing down 27 points at 993.98 for the week ending 7 August 2015. The ASX 200 fell by 225 points to reach 5474.8, or 1018.6 on the index scaled to match the HNN Index, a fall of 42 points.

    As this indicates, while the HNN Index fell, it did not fall as far as the ASX 200. UGL fell by 11.8%, and Downer EDI lost 16.4% of its share value. However, Harvey Norman Holdings rose by 5.4%, and Myer Holdings was boosted by 7.1%.

    BWP Trust

    BWP Trust posts impressive results

    Revenue was up 14% on last year, from $127.4 million to $144.9 million. Profit before gains on investment properties was up 10%, from $92 million to $101.6 million. The gains in the fair value of all BWP's properties was up 90%. The Trust reviewed rents on 20 store sites over the last financial year. The average rent went up 8.2% at each of these sites.

    BWP Trust posts impressive full-year results - Money Morning

    Charter Hall Group

    Tullamarine sold to car dealer

    Fairfax's former Melbourne printing plant will become a car distribution centre after a $16 million deal was recently closed. Entrepreneur Bobby Zagame, owner of numerous prestige car dealerships, will use the six hectare site in Tullamarine as a pre-delivery process centre and distribution facility. The $16 million price paid is $4 million less than the $20 million property group Charter Hall was reportedly set to pay as part of a $55m deal for both sites.

    Tullamarine sold to car dealer - ProPrint

    Downer EDI

    Downer wins $680m Carmichael contracts

    Adani's Carmichael coal project in Queensland has given Downer EDI two letters of awards for mining services contracts worth $680 million. Downer was selected as the preferred mining services and infrastructure provider on the project in December last year.

    Downer wins $680M Carmichael contracts - Mining Monthly

    Myer Holdings

    Are you being served? Myer cuts to lift its game

    Myer's new chief Richard Umbers' new strategic direction will see Myer reduce its store footprint over time. Staff and unions are understandably not happy about plans to reduce permanent staff in 42 stores and cut the hours of part-time staff, warning service standards will deteriorate further.

    Are you being served? Myer cuts to lift its game - Fairfax Media

    UGL

    UGL wins Australia's Tangara passenger rail fleet modernisation contract

    Australia's Transport for New South Wales (NSW) has awarded a $131 million contract to UGL Unipart Rail Services to provide technology upgrades for the Tangara passenger rail fleet. UGL Unipart Rail was formed by UGL and Unipart Rail to deliver the Sydney Trains Level 3 maintenance contract. UGL holds a 70% shareholding in the joint venture company.

    UGL wins Australia's Tangara contract - Railway Technology
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    HNN Index for week ending 17 July 2015

    Index climbs steeply

    Metcash, CIMIC and UGL lead rally

    In a slightly startling turnaround, the HNN Home Improvement Index surged during the week ending 17 July 2015. It gained over 43 points to finish at 1013.79, indicating that it is now above the level it was at on 1 July 2014.

    In doing so, it closed ground comparatively with the underlying ASX 200 index, which rose 178 points to close at 5670.1 points. On the comparative scale, this was an increase of 33 points.

    Eleven of the index stocks recorded an increase of over 5% for the week. Leading the pack was Mitre 10 owner Metcash, which rose by 10.4%, followed by CIMIC Group (formerly Leighton Holdings) which climbed 7.9%, with UGL close behind, posting an increase of 7.4%.

    Bluescope Steel rose by over 6%. Super Retail Group, Adelaide Brighton, Boral, GWA Group, James Hardie and Woolworths all posted gains of between 5.3% and 5.9%.

    >http://hnn.bz/hnnIndexJuly17-2015.png}HNN Index for week ending 17 July 2015}http://hnn.bz/hnnIndexJuly17-2015.png

    Charter Hall Group

    $46m of industrial, retail sales

    Mining services and manufacturing firm Bracken has sold its Bassendean engineering facility to Charter Hall in an off-market sale and leaseback deal worth about $32.8 million. It will lease back the seven hectare site which comprises 31,000sqm of covered floor space from the property group for a 15-year period.

    Bracken sells its engineering facility to Charter Hall - Business News WA

    CSR

    Residential construction drives positive outlook for CSR

    CSR says its outlook is positive as housing starts look to climb to record levels, with more than 200,000 expected in fiscal 2016. Managing director Rob Sindel said an increasing number of people wanted to live closer to where they worked, which is fuelling demand for multi-residential housing closer to city centres. The sector now represents around 45% of all Australia's new dwellings.

    Residential construction drives positive outlook for CSR - Sourceable

    Metcash

    Metcash gets a boost with new supermarket boss

    Metcash has appointed retail "hard" man Steven Cain to lead its supermarkets division. He replaces Metcash's long-serving supermarkets chief executive Fergus Collins, who left the business in March after 13 years. Cain is understood to have earned a reputation for being a tough operator during his time as group managing director at Coles a decade ago.

    Metcash gets a boost with new supermarket boss - Sydney Morning Herald

    Myer Holdings

    New chief Richard Umbers prepares Myer for major surgery

    Robust sales figures released by David Jones' South African owners, Woolworths, are a reminder of the challenges facing rival Myer as its new boss Richard Umbers prepares his strategy for fixing the business. The skills of his new executive team will be the key to this and Umbers is not going to outline his game plan until they get their feet under the desk. This includes finance chief Grant Devonport who starts soon. Myer is also recruiting for a new chief digital and data officer.

    New chief prepares Myer for major surgery - Australian Financial Review

    Wesfarmers

    Coles takes fresh food battle to Woolworths

    Coles has cranked up the marketing battle with Woolworths by muscling in on the fresh food battleground once ruled by its competitor. Creative agency Big Red is behind a TV campaign called Coles Fresh which shows brand ambassador Curtis Stone promoting the freshness of its product. The positioning mirrors that of Woolworths which for years marketed itself as "Woolworths, the Fresh Food People".

    Coles takes fresh food battle to Woolworths - Mumbrella

    Woolworths

    Woolworths chairman Ralph Waters under pressure

    A confidential poll of some of the country's biggest and most powerful fund managers rates the performance of the Woolworths board among the lowest of the ASX 100 companies. There is strong speculation among key fund managers that Woolworths chairman Ralph Waters will resign in 2015. Some believe it will be after the company releases its full-year earnings on August 28.

    Woolworths chairman Ralph Waters under pressure - Australian Financial Review
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    HNN Index for week ending 10 July 2015

    Downward trend continues

    Uncertainty over Greece continues to depress market

    The HNN Home Improvement Index for the week ending 10 July 2015 fell by over 12 points to 970.16. The underlying ASX 200 index fell by close to 54 points to close at 5492, or 1021.8 on the HNN adjusted index, down 9 points.

    Metcash and Bluescope led the declines for the HNN Index stocks, with the former losing 5.8% of its value, and the latter declining by 12.8%. DuluxGroup also did not fare well, showing a decline of 4.5%.

    One of the few of the Index stocks that showed any signs of upward movement was BWP Trust, which rose by just under 1.3%.

    Breville

    How Breville is facing its 2015 challenges

    In an interview with Appliance Retailer, Breville's general manager Mark O'Kelly describes the challenges the company is facing in 2015. It plans to drive category success through innovation and new product launches. He believes connectivity in small appliances will become increasingly important.

    How Breville is facing challenges in 2015 - Appliance Retailer

    Charter Hall Group

    Fairfax Media sells printing plants for $55 million

    Charter Hall Group has purchased Fairfax Media's two printing plants in Sydney and Melbourne in a deal worth about $55 million. Fairfax had originally hoped to reap almost $70 million from the combined sales of its Tullamarine site in Melbourne's northwest and the larger Chullora facility in Sydney but they are now both in due diligence at the lower sum.

    Charter Hall buys Fairfax Media printing plants - The Australian

    CIMIC Group

    CIMIC Group awarded Hong Kong border control contract

    CIMIC Group has been awarded a contract by the Government of the Hong Kong Special Administrative Region to construct a boundary control point on the border between Hong Kong and China. The revenue to CIMIC will be approximately $1.2 billion.

    CIMIC Group awarded Hong Kong contract - ABN Newswire

    Goodman Group

    International: Goodman grows in China

    Goodman Group has signed two new leases with French sports apparel and equipment retailer Decathlon for the construction of approximately 1.69 million square feet (157,000sqm) of prime logistics space in China.

    Goodman grows in China - Commercial Property Executive

    Metcash

    Metcash's biggest IGA chain sees light at end of tunnel

    Australia's largest independent grocery chain, Ritchies Stores, is forecasting its first profit growth in four years. Ritchies chairman Fred Harrison said earnings for the 12 months ending June, which will be lodged with ASIC in December, had risen for the first time since 2011, underpinned by stronger same-store sales growth and better gross margins.

    Metcash's biggest IGA chain sees light at end of tunnel - Sydney Morning Herald

    Woolworths

    Woolworths trails Coles on grocery prices: Macquarie analysis shows

    Woolworths is failing to close the gap on Coles when it comes to prices. Despite launching a $500 million price slashing strategy in May, new figures from Macquarie Securities suggest Woolworths' grocery prices were still flat in the June quarter at the same time as Coles got cheaper for shoppers.

    Woolworths trails Coles on grocery prices: Macquarie - Sydney Morning Herald
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    HNN Index for week ending 19 June 2015

    Index drops below 1000

    While the ASX 200 showed continued improvement, the hardware retail industry declined slightly

    The HNN Home Improvement Index for the week ending 19 June 2015 fell by six points to reach 999.40, close to parity with the 1000 score which reflects the market on 1 July 2014. Both Wesfarmers and Woolworths declined through the week, while the surprise outstanding upside performer was Metcash, which gained 5.9% on the market.

    The underlying ASX 200 index climbed for the week, ending nearly 52 points up at 5,597.0, or 1,041.3 on the HNN Index adjusted scale.

    Charter Hall

    Charter Hall in battle for retail assets

    Charter Hall Group has added Katherine Oasis Shopping Centre in the Northern Territory to its portfolio. The Katherine centre is being sold by Federation Centres, which held it at about $27.5m on an 8.5 per cent capitalisation rate, at the end of December. The centre, marketed by Savills, spans 7162sqm.

    Charter Hall joins fray for hotly contested retail assets - The Australian

    Cimic

    CIMIC in US$500m debt buyback

    CIMIC Group, formerly known as Leighton Holdings, has offered to buy back up to US$500 million of debt due to mature in 2022, after the group's John Holland divestment generated surplus funds. The buyback forms a part of CIMIC's strategic review and will help to reduce the group's interest costs.

    CIMIC's US$500m debt buyback - Business Spectator

    Downer EDI

    Downer signs contract with NBN Co

    Downer EDI is one of the construction partners that have been signed by NBN Co under a new contracting model. The contracts cover around four million homes and businesses which are scheduled to be connected with fibre to the node, fibre to the building or fibre to the premises.

    NBN gets new contract model - Sourceable

    Fletcher Building

    NZ$550 million sale plan for Fletcher

    Fletcher Building announced it intended to divest itself of Rocla Quarries, its 50% joint venture stake in Sims Pacific Metals, Fletcher Aluminium, Tasman Sinkware and Fletcher Insulation. It also signalled more investment in Tradelink, Laminex, Formica and residential construction.

    NZ$550 million sale plan for Fletcher - Otago Daily Times

    Lend Lease

    Lend Lease in Chicago residential plan

    Lend Lease Group in a joint venture with Chicago developer CMK has submitted plans to build five towers with nearly 2,700 residential units on a 7.3-acre riverside parcel of land in the South Loop neighbourhood of Chicago. The largest building, on the north end of the site, would have 47 stories and include 626 units.

    2,700 homes planned on South Loop site - Crain's Chicago Business
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    HNN Index for week ending 12 June 2015

    Index makes minor recovery

    Shares in Myer Holdings experienced the only major decline for the week

    The HNN Home Improvement Index for the week ending 12 June 2015 recovered slightly from its previous downward trajectory, rising by 4 points to reach 1,005.59. The underlying ASX 200 index rose by 47 points, or 9 points on the adjusted index.

    Myer Holdings was the only stock in the index to decline sharply, falling by 6.5%. UGL and Harvey Norman both climbed by 7%. Bluescope Steel rose by 6.2%. James Hardie and GUD Holdings both rose by more than 5%.

    Bluescope Steel

    BlueScope denies Port Kembla steelworks closure, admits cost cut push

    BlueScope Steel has denied reports it intends to close its Port Kembla steelworks. However the steel giant has admitted the site is under review and it needs to cut costs to remain competitive with imports. The Illawarra Mercury reported that unions were meeting with BlueScope because of the closure of Port Kembla, with up to 1000 jobs at risk.

    BlueScope denies Port Kembla closure - Sydney Morning Herald

    Downer EDI

    Downer EDI switches to renewables

    Downer EDI has won a $130 million deal to build another wind farm project at Ararat, northeast of Melbourne. The project, still subject to final financial approval, is expected to produce enough electricity for up to 123,000 homes.

    Downer EDI wins $130 million deal to build another wind farm - Business Insider

    Goodman Group

    Goodman Group's $42 million New Zealand development

    Goodman Group will develop four new sites in Auckland, with a total project value of $NZ45.8 million ($42 million). When developed, the four industrial sites will take in a total of 27,112sqm of lettable area, which is expected to generate revenues of $NZ3.4 million for the New Zealand-listed Goodman Property Trust.

    Goodman Group's New Zealand development - The Australian

    Woolworths

    Woolworths unveils budget telco brand

    Woolworths has returned to the telecommunications market and launched a budget mobile offering called Woolworths Connect. It has been available since 15 June, and offers two prepaid options each running on the Telstra 3G network.

    Woolworths launches budget telco brand - The Australian
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    HNN Index for week ending 29 May 2015

    Index continues to track ASX 200

    BWP Group, Lend Lease and Bluescope post over 5% gains

    The HNN Home Improvement Index for the week ending 22 May 2015 rose by 10.6 points. The underlying ASX 200 index climbed by 112 points, or 21 points on the adjusted scale.

    Outstanding performers for the week included BWP Group, Lend Lease and Bluescope Steel. All of these stocks posted gains for the week of over 5.4%.

    Adelaide Brighton

    Company AGM announcements

    Adelaide Brighton has provided positive guidance for the 2015/16 financial year at its annual general meeting (AGM). It said it expected cement and clinker product sales volumes should be "similar to or greater than" levels in 2014/15.

    The company sees increasing costs due to the weakening Australian dollar, and gas costs in South Australia. However, it also expects to see cost savings from a lower petrol price, the elimination of the carbon tax, and ongoing benefits from business changes made in 2014/15.

    Additionally, it expects to make land sales during calendar 2015 which should produce revenues of around $44m.

    Adelaide Brighton expects sales gain - Business Spectator

    Charter Hall Group

    Hostplus backs Charter in pubs play

    A new freehold pub fund from Charter Hall Group will target the purchase of $200 million worth of ALH Group pubs. There are 54 pubs in prospect, with 46 of them including a Woolworths-owned liquor store. Hostplus is contributing $90 million, and Charter Hall $10 million.

    Hostplus backs Charter Hall's foray into pubs - The Australian

    CIMIC Group (formerly Leighton Holdings)

    CIMIC preferred developer for Brisbane site

    The Queensland government has nominated CIMIC as its preferred developer for a waterfront community in Brisbane. The new waterfront urban precinct at Northshore is located six kilometres from the Brisbane CBD.

    CIMIC named as developer for waterfront site in Brisbane - MyWealth Commonwealth Bank

    DuluxGroup

    Mitre 10 New Zealand leaves Dulux for Valspar

    In the most recent saga of the paint wars, Mitre 10 New Zealand has switched paint brands from Dulux to Valspar. Dulux has indicated this will have a minimal (circa 1%) impact on its revenue. This will not impact Dulux sales into Mitre 10 in Australia. Deutsche Bank analysts, however, believe the loss, though small, will be difficult for Dulux to recoup in the current financial year.

    DuluxGroup in the Australian Financial Review

    Fletcher Building

    Diversity in the workplace

    In an energetically worded personal note, the CEO of Fletcher Building, Mark Adamson, has written a piece in the New Zealand Herald urging companies to further pursue diversity in the workplace. He writes:

    By creating a diverse and inclusive work environment, Fletcher Building will ensure it keeps attracting high-quality employees whatever their gender, ethnicity or sexuality.
    Fletcher Building in the New Zealand Herald

    Lend Lease

    Crown Casinos enters $1 billion deal with Lend Lease

    The Crown Casino at Barangaroo South near Sydney will be built by Lend Lease. The deal is worth around $1 billion. Development of the casino still awaits approval from the New South Wales government.

    Lend Lease for Sydney Casino - SBS

    Lend Lease changes name to Lendlease

    Lend Lease will roll out a variation on its current name, changing it from two words, "Lend Lease", to a single word, "Lendlease". The name change will be accompanied by a shift in visual branding as well.

    Lend Lease in Marketing Magazine

    Stockland Corp

    Stockland to construct aged care facility

    In a deal with Opal Specialist Aged Care, Stockland will be responsible for the construction of a $33 million aged care facility in Sydney at Ashfield, an inner west suburb.

    Stockland in the Sydney Morning Herald

    Super Retail Group

    Super Retail adopts Manhattan Associates software

    Super Retail Group is to adopt Distributed Order Management software from US-based technology supplier Manhattan Associates. This is part of the move by the group to make use of a single distribution centre. The software and the move to the single DC will help the company reduce transportation and inventory costs, Super Retail Group has stated.

    Super Retail Group in NASDAQ

    UGL

    UGL gains BP contract

    UGL is to enter into a joint venture contract with BP to maintain the latter company's 17 Australian fuel terminals.

    UGL and BP contract in SBS

    Westfield

    Westfield opens retail incubator in San Francisco

    Mall retailer Westfield has opened a 3,450 square metre facility in Northern California where retailers can try out physical/digital hybrid retail ideas. Named "Bespoke" the facility is attracting retailers such as Shoes of Prey, which are making the journey from purely online retail to mixed physical and online retail.

    Westfield in The Australian
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    Hardware retail turnover March 2015

    All regions show growth

    South Australia rebounds after two difficult Marches

    The Australian Bureau of Statistics reported strong growth throughout most of Australia for hardware, building and garden supplies retailing for March 2015. All regions showed growth of more than 4.9%, except for the Northern Territory, which recorded growth of just 0.6%.

    South Australia improved on March 2014 by 30%, lifting from turnover of $60 million to $78 million. This has returned the state to the turnover level of 2012, following on from two years of lower turnover.

    Queensland also showed strong growth, reaching $288 million in sales, a 15% improvement over March 2014.

    Overall growth for Australia in this category was up 10.9%.

    For all of retail, the ABS reports that in trend terms Australian turnover increased by 4.3% in March 2015 as compared to March 2014. Tasmania and Queensland showed the highest increases.

    Online

    According to the NAB Online Retail Sales Index, seasonally adjusted sales rose by 0.8% in March 2015. NAB estimates that online sales for March 2015 are 8% higher than sales for March 2014.

    Overall spending on online retail in the 12 months ending March 2015 is estimated at $16.8 billion, which would represent 6.9% of the spending at bricks-and-mortar retailers.

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    HNN Index to 8 May 2015

    Downward trend continues

    Most of downward trend due to poor retail conditions outside hardware

    The HNN Home Improvement Index for the week ending 8 May 2015 fell by a further 9.54 points, the fourth week of decline. The underlying ASX 200 index fell by 54.6 points, or 29 points on the adjusted scale.

    With its value close to 1000, the index indicates that few gains have been made since 1 July 2014.

    The best performer for the week was Downer EDI, which rose by over 5%. The worst performer was Woolworths, which fell by more than 5%.

    The following are significant events from the week.

    Charter Hall Group

    Slow grocery sales affect Charter REIT

    The states of Queensland and Western Australia helped to drag down the results for Charter Group's real estate investment trust (REIT). While growth excluding those states came in at around 3%, including them brought the growth number down to 1.6%.

    The lack of growth is largely traceable to a tightening of the market in the supermarket sector, according to analysts.

    Charter Hall slow growth - The Australian

    Fletcher Building

    Fletcher provides steady earnings guidance

    In an investor presentation, Fletcher pointed to a good market in both Australia and New Zealand, but forecast its earnings for financial year 2014/15 would come in at the lower range of its prior estimates. The range suggested had been NZ$650 million to NZ$690 million.

    Fletcher earnings guidance - National Business Review

    JB Hi-Fi

    Strong Q3 results

    JB Hi-Fi has reported an increase of 6% in its sales for Mary 2015 compared with the previous corresponding period. This was largely driven by sales from its Home format stores, which sell whitegoods in addition to standard JB Hi-Fi products. Sales at those stores increased by 11.8%.

    JB Hi-Fi has affirmed its previous earnings guidance. Its previous forecast was for $3.6 billion in sales, and net profit of between $127 million and $131 million.

    JB Hi-Fi Home store sales - The Australian

    Metcash

    Job losses declared

    Metcash will let go of 60 workers, adding to the 76 people let go in March 2015. A spokesperson indicated the firing came as a result of an efficiency review. Sources have indicated that Metcash intends to centralise many roles to its Sydney offices. The announcement was followed by a decline in the share price.

    Metcash slashes jobs - Fairfax Media

    Woolworths

    Third quarter results and investor strategy day

    Woolworths released its third quarter results during an extended strategy day briefing for analysts. HNN will cover this in more detail during the coming week.

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    Customer satisfaction results for hardware

    Roy Morgan research shows new leaders

    Female consumers at hardware stores have higher levels of satisfaction

    The latest Roy Morgan customer satisfaction data (for February 2015) relating to hardware and auto parts indicates that last year's overall winners, True Value Hardware and Autobarn have been overtaken by rivals in recent months.

    In hardware retail, less than one per cent separates the customer satisfaction ratings of Bunnings and Mitre 10 in February, while 2014 Hardware Store of the Year, True Value Hardware, is close behind in third place.

    Repco is currently leading auto retail, scoring a customer satisfaction rating of just over 88%. Autobarn (winner of the 2014 Auto Store of the Year) is in second position with 87%, just ahead of Supercheap Auto. 

    Customer satisfaction February 2015: Hardware and auto stores

    >https://farm6.staticflickr.com/5450/16585940164_5d3db95468_n.jpg}Customer satisfaction result for hardware stores, February 2015}http://www.roymorgan.com/findings/6179-new-customer-satisfaction-leaders-hardware-auto-201504170227

    Source: Roy Morgan Single Source (Australia), March 2014-February 2015 (n=15,990).Base: Australians 14+

    Although a greater proportion of men than women shop at the hardware stores measured in the Customer Satisfaction Awards, women are consistently more likely to be satisfied customers. This gender difference is especially evident in the satisfaction levels for True Value Hardware (91% of women vs 86% of men) and Masters (90% of women vs 82% of men).

    A higher proportion of men also shop at auto stores and, in the case of Repco and Autobarn, are considerably more likely than female customers to be satisfied with the service they receive. However, the opposite is true for Supercheap Auto, which achieved a 90% satisfaction rating among its female shoppers (compared with 85% of men).

    Michele Levine, CEO, Roy Morgan Research, said:

    There's never a dull moment when it comes to customer satisfaction ratings for our retail categories - auto retailers and hardware stores...While both categories had very convincing overall winners last year, the playing field has shifted since then, with new leaders emerging in the first couple of months of 2015.
    While men account for the majority of customers at hardware stores and auto retailers alike, they are not necessarily more satisfied than women. In fact, the hardware chains appear to be doing a particularly good job of keeping their female shoppers happy, as does Supercheap Auto.
    Despite the almost photo-finish between Bunnings and close contender Mitre 10, their satisfaction ratings vary subtly among different generations of customers. Bunnings does best with pre-boomers and generations Y and Z, while Mitre 10 has the advantage with baby boomers and generation X shoppers.
    Updated every month with data from our comprehensive Single Source survey (the largest of its kind in the world), our customer satisfaction ratings provide a regular reminder that shoppers appreciate, remember and reward good customer service.
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    HNN Index for 10 April 2015

    Home improvement outscores ASX 200

    Retail stocks have a good week on the markets

    The HNN Home Improvement Index managed to marginally outperform the ASX 200 during the week of 6 April to 10 April 2015. The index rose by 17 points to 1036.47, while the ASX 200 rose by 13 points on the adjusted score, and in its original form by 70 points to 5968.4.

    Adelaide Brighton

    Adelaide Brighton CEO predicts slowing sales in SA

    Adelaide Brighton chief executive Martin Brydon has indicated he expects sales of pre-mixed concrete may fall by as much as 6% in South Australia for the 2015/16 financial year. However, he also believes residential housing will remain strong, securing much of the company's revenue in that state.

    Housing boom misses SA: Australian Financial Review

    Breville Group

    New CEO appointed

    Breville has appointed a new CEO. HIs name is Jim Clayton and he will assume the post on 1 July 2015. Trained as a lawyer at the University of Texas, his background includes management consultants McKinsey, private equity firm Symphony and LG Electronics. His salary is reported to be $800,000 a year, plus incentives.

    Breville's new CEO: Appliance Retailer Breville's new CEO and the Internet of Things: BRW

    DuluxGroup

    DuluxGroup faces $NZ15.2m provision in tax case

    New Zealand's Internal Revenue Department and DuluxGroup have settled a tax dispute, with DuluxGroup taking a $NZ15.2 million provision. The dispute involved the use of convertible notes by DuluxGroup subsidiary Alesco NZ. New Zealand courts quashed an appeal by DuluxGroup and declared that the principal use of the notes had been to evade paying taxes. Other Australian companies, including Qantas and Telstra will face similar charges.

    Downer EDI

    Downer EDI refreshes branding

    The contracting company is to no longer use its familiar tyre-tread logo. Instead it has an abstract logo in blue, white and green. This is accompanied by the slogan: "Relationships creating success". The rebranding is seen as a part of the company's repositioning as a problem solver for its customers.

    Downer EDI gets a makeover - Fairfax Media

    A video about the new brand:

    Link to YouTube video

    Fletcher Building

    Fletcher shares may be re-rated due to $A exposure

    The strength of the New Zealand dollar versus the Australian dollar could see several New Zealand companies receive downgrades, including Fletcher Building. The company is also suffering from downturns in mining and infrastructure spending.

    Fletcher re-rating: Otago Daily Times

    Leighton Holdings

    Leighton awarded $160m contract

    The company has won a contract to extend the Mitchell Freeway in Perth, Western Australia by six kilometres. Design of the extension will begin in April 2015, and construction will commence in mid-2015.

    WA contract win: Perth Now

    Leighton wins contract in Qatar

    A Leighton subsidiary has secured a US$608 million contract to build five water reservoirs in Qatar. The reservoirs will be the largest of their kind in the world, each holding 100 million gallons of water.

    Leighton wins Qatar contract: Commonwealth Bank MyWealth

    Lend Lease Group

    Lend Lease reaches settlement over botched job in US

    Lend Lease has agreed to a US$50 million settlement with the Lower Manhattan Development Corporation. The settlement relates to a civil dispute over the demolition of the Deutsche Bank building, near Ground Zero in Manhattan. The original contract was for US$82 million, but blew out to US$266 million.

    Myer Holdings

    Speculation about takeover spikes up stock

    Speculation that the Solomon Lew-owned Premier Investments might seek to acquire a controlling interest in Myer sent shares in the troubled department store retailer higher. Private equity house Archer Capital is thought to also be considering a takeover bid. Analysts do not believe Premier would benefit from such a takeover.

    Myer shares surge: Courier Mail

    Wesfarmers

    Wesfarmers' Coles to pay $2.5 million fine

    Wesfarmers will pay a $2.5 million fine after its supermarket division, Coles, falsely advertised that it had freshly baked bread that had in fact been "par-baked" some months previously. A spokesperson for Wesfarmers claimed the deception was not deliberate, but the result of poor communication.

    False fresh bread claim: The Australian

    Woolworths

    Woolworths to sell 10 petrol stations

    Woolworths will sell and then lease back 10 petrol stations located in New South Wales and Queensland. The goal is to free up funds invested in the properties to fund development elsewhere in Woolworths.

    Woolworths sells 10 petrol stations: Sydney Morning Herald
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    Home building drives construction growth

    Apartment sector continues to grow

    However engineering construction activity contracted further in March

    Australia's economic shift away from mining to housing gathered momentum in March as detached home construction and apartment building expanded strongly over the month, according to the Australian Industry Group-Housing Industry Association Australian Performance of Construction Index.

    The AIG-HIA Performance of Construction Index jumped 6.2 points in March to just scrape back into expansionary territory at 50.1. The 50-point level separates expansion from contraction. It is the first time since October last year that it has been in the black.

    A 10.4-point surge in house building to 55.8 led the improvement. This represents a return to growth after three months of contracting. The apartment sector (led by Sydney, Melbourne and Brisbane) kept growing solidly at 54.9. This is the healthiest pace of expansion in four months. The Australian Industry Group's head of policy Peter Burn said:

    Renewed strength in house and apartment building drove the Australian construction industry back into growth territory in March.

    A rise in new orders in house building (work in the pipeline) also returned to growth in March (up 8.2 points to 50.6 points) after declining over the previous four months. The report said that "growth in house building sector is likely to be sustained in coming months".

    Apartment new orders also strengthened with the sub-index rising by 4.7 points to 52.4 points, its first increase in six months.

    In contrast, engineering construction, much of it mining-related, slid again to a 10-month low of 41.2.

    Commercial construction also declined, but at a slower pace than in February, rising 5.2 points to 47. Burn said:

    The lift in these residential construction sub-sectors from already healthy levels more than compensated for a steeper fall in engineering construction in line with the retreat from investment in mining-related projects and further weakness in commercial construction.
    While new orders for residential construction look positive for the near term, the time is now ripe for higher levels of investment in commercial construction and particularly in infrastructure.

    The new orders sub-index rose 12.1 points to 50.8, the first time this critical bellwether of future activity has been positive in five months.

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