The Australian Bureau of Statistics (ABS) has released stats for hardware retail turnover through to August 2024.

Looking at these from the point of view of trailing 12-month periods (e.g., the period from September 2021 to August 2022 will be designated "p2022"), for Australia overall there has been mild growth of just over 0.5%. The month of August 2024 showed a mild improvement of 0.1% over August 2023 for the nation.

However, with background inflation running at over 3.0%, and some building products subject to continuing inflation, these increases equate to an ongoing contraction in the market.

Western Australia (WA) showed the strongest growth in percentage terms for p2024 as contrasted with the previous corresponding period (pcp), which was p2023. Turnover for the state increased by 3.7% and $102.9 million to $2863.3 million. In dollar terms, Victoria (VIC) increased turnover by $114.5 million to $6632.4 million, an uplift of 1.8%. Queensland also showed a positive result, up by 1.8% or $97.3 million to $5396.0 million. South Australia (SA) grew by 0.7% to $1761.8 million, an increase of $11.3 million.

The steepest fall for p2024 in percentage terms came from the Northern Territory (NT), which fell by 8.2% or $22.9 million to $255.4 million. The largest decline in dollar terms came from New South Wales (NSW), which fell by $167.4 million to $7472 million, a drop of 2.2%. Both Tasmania (TAS) and the Australian Capital Territory (ACT) fell by 0.7%.

New South Wales

Comparing August 2024 with August 2023, turnover for NSW fell by 1.5%.

As the chart indicates, turnover for p2024 in NSW only exceeded p2023 in September 2023, February 2024 and April 2024. The largest gaps were in November and December 2023, as well as June 2024.

Victoria

Comparing August 2024 with August 2023, turnover for VIC rose by 0.7%.

The strongest improvement for VIC occurred in September 2023, with an increase of 8.9% over September 2022.

Queensland

Comparing August 2024 with August 2023, turnover for QLD rose by 4.3%.

As the chart indicates, in QLD p2024 has consistently outperformed p2023 post December 2023. The strongest gain was in the usually subdued month of February in 2024.

South Australia

Comparing August 2024 with August 2023, turnover for SA fell by 2.6%.

While the August result was disappointing, SA has largely managed to track close behind its p2023 numbers in p2024, with six months tracking above the previous period.

Western Australia

Comparing August 2024 with August 2023, turnover for WA rose by 2.0%.

While the August results was a little disappointing, this followed on from four months - April 2024 to July 2024 - of results that exceeded the corresponding period in the pcp by a substantial amount. The peak growth took place in June 2024, up by 9.2% over June 2023.

Tasmania

Comparing August 2024 with August 2023, turnover for TAS fell by 4.7%.

As with QLD, the most improved month for TAS in p2024 was February 2024, up by 5.4% on February 2023. However, while turnover for p2024 has mostly tracked closely on average to p2023, the results for July and August 2024 show a downwards trend.

Northern Territory

Comparing August 2024 with August 2023, turnover for NT fell by 1.3%.

In the volatile world of the NT's hardware market, p2024 has significantly underperformed p2023. The difference was most marked for September 2024, which was down 15.9% on September 2023. That said, both July and August 2024 are closer to the numbers for p2023.

Australian Capital Territory

Comparing August 2024 with August 2023, turnover for ACT fell by 1.9%.

For the most part in p2024, after seesawing through the first four months, the ACT has tracked close to p2023. The largest month-on-corresponding-month fall, was for December 2023, with turnover down by 5.0%. The best increase was form September 2023, up by 10.4%.

Analysis

The "scoreboard" for the past five years shows a hardware retail market that is pretty much doing what the Reserve Bank of Australia (RBA) wants it to do - steadily declining against a background of inflation which, while remaining stubbornly above the target range, continues to fall.

As a result of this, Metcash released a snapshot of its performance since its FY2024 results which shows a continuing decline in its hardware business. While overall growth is up, driven by expansion and acquisitions, like-for-like (comp) sales are down 1.6% for Total Tools, and 3.7% for the Independent Hardware Group.

The statement accompanying these figures stated:

As noted in the Company's prior trading update (period to 8 September 2024), the external market for the Independent Hardware Group (IHG) continued to be very challenging with Trade activity softening even further. It was also noted that retail store margins in IHG were facing pressure due to the impact of lower volumes on fixed costs. Since that update, there has been additional margin pressure in retail stores in September and October, particularly in Trade due to further sales weakness.

This weakness in retail store sales has been offset by lower-margin wholesale sales. Metcash is responding to the weaker trading conditions in Hardware by implementing additional cost management initiatives and accelerating its strategic initiatives to drive market share gains in both Trade and DIY. Cost initiatives have included a strong focus on all business expenditure, particularly labour, where there has already been a material reduction in hours.

The Hardware business remains ideally positioned to capitalise on any increase in market activity levels.

(It is so welcome to see such clear statements from Metcash, which truthfully reflect its current difficulties, as well as the potential upside in the near future.)

It is also useful to refer to just how far the market has come over the past four years or so, as reflected in this chart contrasting p2024 with p2020.

The real concern that HNN has for the market is the extent to which it is, under the surface of these stats, continuing to shift to a new alignment. We've spoken to a number of smaller retailers who are finding hardware retail very tough going at the moment - which, given the overall increase in market size, really should not be the case.

Part of what is happening is that the consequences of mismanaging the building industry over the past 12 to 15 years are beginning to become clear. The recent report by the Victorian Building Authority (VBA) into itself is highly negative, but not nearly as scathing as it perhaps should be. It's not just a matter of a lack of resources, a poor understanding by the people who work there of what they are supposed to be doing, poor performance of tasks such as assessments, and the imposition of impossible bureaucratic roadblocks (especially as regards freedom of information requests), it's also that the design of the VBA itself has not been fit for purpose.

What this means is that simply throwing money at building more homes, as well as setting desirable but fundamentally unachievable targets, is not going to fix the housing problem, nor necessarily see the hardware market return to above-average growth. It is going to take, optimistically, four to five years to fix many of the systemic problems in the building industry.

Outside of that are all the town planning consequences to consider. There are huge investments by various entities in the building and real estate industry in the current (broken) system of how building space gets allocated. Some of that is financial interest, but just as much is purely cultural. From HNN's perspective, what underlies these battles over space is largely the issue that Australia's major cities are now facing strong forces driving them towards some form of further decentralisation. That is less a matter of the now-permanent shift to a fixed percentage of hybrid-based work-from-home, and more a consequence of an ongoing decline in face-to-face meetings between businesses - there simply isn't the time for that.

All this means that those businesses in the hardware retail industry who think that a cut in interest rates will solve most of their problems are likely a little deluded. It will improve matters, but there is not going to be a return to a 2021 Covid-based boom.

The Australian Bureau of Statistics (ABS) has released hardware retail turnover stats to June 2024. The trailing 12 months to June are equivalent to the Australian financial year, so we will be referring to these as FY periods.

As the chart below for retail sales across Australia shows, while the year has not been regarded as being an especially good one for retailers, nonetheless record levels of sales were obtained in four out of the 12 months, and in another two months (July 2023 and April 2024) sales reached the previous equivalent high.

However, with the Consumer Price Index (CPI) running at 3.8% through the FY, it is likely that sales have, in real terms, declined significantly. We say "likely" because the true inflation figure for the year is tough to work out, and we will not obtain a better view of this until the National Accounts figures come out in early September 2024. We've already seen the effect of this in some FY reporting by listed retail companies, where sales have nudged upwards, and earnings before interest and taxation (EBIT) has fallen significantly.

In terms of winners and losers for FY2023/24, New South Wales (NSW) and Victoria (VIC) stand balanced, in dollar terms. NSW is the biggest loser for the year, down by $156.9 million, or 2.1% on the previous corresponding period (pcp) which was FY2022/23. VIC gained $153.0 million, a lift of 2.4% on the pcp.

In percentage terms, Northern Territory (NT) was the sharpest loser, down 9.6%, or $27.1 million on the pcp. Western Australia (WA) showed the steepest rise, of 4.0% or $110.5 million. Arguably, WA was the outstanding state in terms of overall performance for the FY.

Outside of NSW and NT, there were no other declines. South Australia (SA) grew revenue by 0.93%, Australian Capital Territory (ACT) went up by 0.9%, Tasmania (TAS) was positive 0.6%, and Queensland (QLD) was up 0.44%.

Overall, Australia saw an increase on the pcp of 0.5%, or $127.8 million.

New South Wales

It's not surprising that NSW follows the national numbers fairly closely, in that it is the single largest contributor. The two main differences are slightly higher numbers for September 2023 and April 2024.

Victoria

VIC saw revenues for FY2023/24 above the pcp for 10 out of 12 months, with all-time highs for five months: August through October 2023, January 2024 and May 2024.

Queensland

Perhaps the most interesting characteristic of the QLD chart is the stability that has developed over February to June 2024. Both FRY2020/21 and FY2021/22 were volatile in that period, and FY2022/23 had some volatility, but the recent FY is quite stable. That period also saw FY2023/24 well above the pcp, where for the rest of the FY it underperformed, or tracked closely to the pcp. All-time highs were reached in January and February 2024.

South Australia

SA's revenues for the reporting period closely followed those of the pcp, except for higher levels during September and October 2023. Technically, revenues hit all-time highs for eight out of the 12 months, but for both July and August 2023 revenues just nudged ahead of those months in 2022.

Western Australia

Every month of FY2023/24 outperformed the pcp, though December 2023 figures were very close to those of December 2022. The state had a particularly stronger than usual finish to the FY from April through June 2024.

Tasmania

Turnover in TAS followed the pcp very closely, though with a significant drop in December 2023. The state set all-time highs for revenue in April and May 2024, and just nudged ahead of February 2022 in February 2024.

Northern Territory

While FY2022/23 was a relatively good year for the NT, FY2023/24 was less so. The latter underperformed the latter for every month (though February 2024 was close). Instead the FY tracked closely to FY2021/22.

Australian Capital Territory

ACT set all-time highs from July to October 2023. After that, the territory closely followed the pcp, with the exception of December 2023, when it underperformed significantly.

Analysis

The chart below shows the percentage change in retail turnover.

While VIC has done well in FY2023/24, it could be argued this is something of a belated compensation for its poor performance in the two preceding FYs. WA remains the only state to have truly indicated growth during the reporting period.

There have been a number of indications that early results from July 2024 indicate a further downturn in hardware retail revenue. Once again, we need to restate the fact that this downturn has been deliberately engineered by the Reserve Bank of Australia (RBA), with the intent of bringing inflation back into the 2.0% to 3.0% range.

While there have been some rather lightweight suggestions by more fringe economists that this is somehow unnecessary, it is clear this is only responsible path to take. Experience in the US economy, where inflation rose even higher than in Australia, indicates that it is both possible to bring inflation down, and to do so with minimum stress on other aspects of the economy, such as employment.

Of more concern, structurally, is whether the high level of spending during the COVID pandemic will prove to be not merely episodic, but in part a bringing forward of expenditure, and hence leave a kind of "hollow" in future hardware retail spending. Though what is more likely is a series of "mixed" trends, where that plays a part as does further expansionary spending. This will likely vary across categories, with spending in "essentials" actually boosted, while more "discretionary" categories slump.

The Australian Bureau of Statistics (ABS) has released its retail turnover figures for the period up to April 2024. For hardware retail they have largely continued the trends of the previous three months, which is to say that while there is limited positive growth, there has also been limited negative growth as well.

In looking at this data we consider them in terms of "periods" running from May to April. So "p2021" refers to the period from May 2020 to April 2021.

Contrasting p2023 with the current p2024, Australia-wide there has been only 0.03% of growth. That's basically flat, with the added caveat that inflation is running at an annualised rate of over 3.5%. To that we can add a "reverse" caveat that some building supplies are going through disinflation, which means the inflation rate for hardware retail is difficult to determine.

The largest percentage gain in revenue for hardware, contrasting p2024 with p2023, was Western Australia (WA), which increased by 3.3%, with revenue up $88.9 million for a total of $2824.2 million. In revenue dollars, Victoria (VIC) was the strongest state, increasing by $136.0 million, or 2.1%, with total revenue for p2024 of $6633.1 million.

Negative growth in percentage terms peaked with Northern Territory (NT), down by 8.0% or $22.5 million to $259.3 million. In dollar terms, New South Wales (NSW) had the steepest fall, down by $208.4 million to $7547.6 million, a drop of 2.7%.

Both Queensland (QLD) and Tasmania (TAS) were close to flat. QLD had a loss of 0.6%, or $30.0 million to $5323.9 million, while TAS had a gain of 0.6%, up by $3.3 million to $607.9 million. South Australia (SA) rose by 1.8% or $30.6 million $1769.7 million.

The Australian Capital Territory (ACT) managed a gain of 1.9% or $9.8 million to reach $538.7 million.

As mentioned above, Australia saw overall revenues lift by 0.03% or $7.7 million, to reach over $25.504 billion. This represents a gain of 24.9% from p2020 to p2024.

New South Wales

The April 2024 result for NSW could be seen as a slight improvement over the March 2024 result. It manages to be above the result for both p2023 and p2021, though it is below p2022.

The weakness in p2024 originates in the four key months from September to December 2023. For the rest of the 12-month period results track closely to p2023.

Victoria

As with NSW, the VIC result for April 2024 falls within the range of the past three years, slightly above the turnover recorded for the same month in 2021 and 2023.

In some ways, VIC has had the most unique pattern of pandemic and post-pandemic retail turnover. The peak period for VIC was p2021, whereas for most states it has been p2022 - the second pandemic 12-month period. For VIC both p2022 and p2023 saw a contraction in turnover. In fact, it is the state that has benefitted - in percentage hardware retail turnover growth terms - the least from the pandemic.

Queensland

The April 2024 turnover number for QLD has proved surprisingly positive, just nudging above the April 2022 result, to produce an all-time high for this month. Similar highs were reached in both January and February 2024.

South Australia

For SA p2024 has been very positive. Out of the 12 months, only four have trailed behind results for p2023, with the other nine months setting all-time monthly highs for the state. This includes the result for April 2024, which just bested the April 2023 result.

Western Australia

As with SA, WA has seen significant growth in p2024. In fact, every single monthly turnover result has set a new monthly high for the state. Contrasting with p2023, the April 2024 result - which was flat to the March 2023 result - exceeded its p2023 equivalent by the largest margin for the period.

Tasmania

Ever since October 2021, hardware retail turnover in TAS has followed a very tight pattern. Results for p2024 closely matched those for p2023 from May 2022 through to November 2022, then underperformed for December 2022. Since February 2024, the results have improved over p2023, with its April 2024 result setting a new monthly high.

Northern Territory

For NT p2024 has performed significantly below p2023, though somewhat in line with p2022. The April 2024 result has shown a significant improvement, after low turnovers from January 2024 to March 2024.

Australian Capital Territory

While p2024 started off well for the ACT, with new monthly highs set from May 2023 through to October 2023, November 2023 through to January 2024 saw it underperform both p2023 and p2022. However, from February 2024 through to April 2024 the results have been very close to those for the two previous periods.

Analysis

The general news reflected by the ABS hardware turnover results for April 2024 is that there has not been much of a significant shift since the previous year. Any real economic news for the sector will emerge with the results starting from August 2024. Those stats won't be available until October 2024.

The April results, however, provide an ideal position to look at the pandemic-based performance of the states and territories. While the initial pandemic surge in sales did take place in March 2020, April 2020 was the first full month in which the pandemic had its effect.

Also, it's arguable that FY2024/25 will be the first full year that isn't pandemic or post-pandemic. Instead, this financial year represents something of a switch back to "normal" - whatever that is going to mean. Which is to say that the traces of the pandemic in the economy - including higher commodity prices - are no longer transient and based on misalignment of supply chains. Instead, they are at least semi-permanent.

We can also reasonably expect the current elevated spending on hardware, the legacy of the pandemic "jump" of around 25% in topline turnover, to continue for at least over the next couple of years. Turnover might drop back to FY2020/21 levels, but even that seems unlikely with the ongoing demand for housing, and the centrality of dwellings in Australia's culture.

This focuses attention away from the fortunate increase in overall revenues, and towards the prospects for future growth. From that perspective, we begin to see the immediate future does not seem so bright as the immediate past.

Take, for example, the chart of period-on-period percentage increases for turnover:

Comparing the pre-pandemic growth for p2020 with the most recent period (p2024) there is a definite downwards trend (with the exception of TAS).

This can be further clarified by the chart showing these percentage change in a stacked bar format:

One surprise is the extent to which VIC has not benefitted as much from pandemic growth as the rest of Australia in percentage terms (excepting NT). But it is also evident that we are seeing a dynamic slowing in growth, and this seems likely to continue through FY2024/25.

From the immediate perspective of independent hardware retailers, this is concerning, but probably not so consequential. The increase in retail sales has given them a much needed lift and enabled smaller stores to reinvest so as to improve their businesses and reduce ongoing operating costs.

It is a different story, however, for the two major retail operations, Bunnings and Metcash's Independent Hardware Group (IHG). Bunnings in particular is under pressure not only because growth has slowed, but because other retail segments is parent Wesfarmers - notably Kmart - have managed to find growth even in a flattening market.

As HNN discusses in more detail in the upcoming issue of HI News, the core problem with Bunnings is that it has reinvested its "windfall" earnings boost from the pandemic, but those investments - Tool Kit Depot and Beaumont Tiles - are longer-term investments, and unlikely to generate contributory returns before FY2026/27. (That's actually a general problem that Wesfarmers is experiencing.) While additions such as a pet food and accessories line are helpful, rejuvenated growth in 2025 will likely require structural change.

For IHG the picture is somewhat different. With the exit of Annette Welsh as CEO of IHG, and the advent of a new (and highly competent) CEO for Metcash overall, much of the "moral imperative" to retain the initial framing of the acquisition of Home Timber & Hardware Group (HTH, aka Danks) in late 2016 has been lost. That framing was that the acquisition would be more about preservation than transformation.

In the new environment, with decreasing growth per-store, it's likely that IHG will increase its acquisition and joint-venture activities in its lead brand, Mitre 10. While this is, to some extent, "non-organic" growth through simple acquisition, it is also a structural shift from wholesale-only to wholesale plus retail margins.

A somewhat feisty debate has developed about what happens now and in the near future with renovations in Australia. The conventional view is that when dwelling construction activity declines, spending on alterations & additions (alt-adds) increases.

However, as we've often pointed out at HNN, we are not currently living in conventional times.

One factor that seems difficult for many to acknowledge is that the Reserve Bank of Australia (RBA) is determined to bring the inflation rate down to something under 3.0%. That means slowing the economy, and part of slowing the economy is slowing the rate of value growth in the housing market, as this represents inflationary consumption.

This struggle with inflation is something of a global condition, and includes the US, much of the EU, and the UK. One important contrast with economies such as the US is the rate of productivity growth over the past few years. To quote from a US Bureau of Labor Statistics press release dated 6 June 2024:

Nonfarm business sector labor productivity increased 0.2 percent in the first quarter of 2024, the U.S. Bureau of Labor Statistics reported today, as output increased 0.9 percent and hours worked increased 0.6 percent. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the same quarter a year ago, non-farm business sector labor productivity increased 2.9 percent, the largest four-quarter increase since the first quarter of 2021, when the measure increased 5.9 percent.

Meanwhile, in Australia, according to a summary from the Australian Bureau of Statistics (ABS) for March quarter 2024 national accounts:

Labour productivity was flat. Output per hour worked was largely unchanged compared to the previous quarter and the March quarter 2023. Overall, we worked similar numbers of hours as the previous quarter, although hours worked in government-supported industries like health, education and social assistance grew faster.

Productivity is important because it represents the best "exit strategy" for inflationary economies. If you can make more for less, you gain growth without the creation of scarcities, and growth is likely to be channelled towards activities with higher productivity. Overall, that tends to be deflationary for prices.

Poor productivity growth narrows the options available to the RBA. It is perhaps worth remembering that in mid-2008, with the consumer price index (CPI) indicating that inflation was up around 4.5%, the RBA set interest rates at over 7.0%. What seems to have wiped this from collective memory is that from December 2011 through to March 2021 - just shy of 10 years - inflation as measured by the CPI remained below 3.0%, and from December 2014 to December 2019 it was mostly below 2.0% as well.

Given this history, current interest rates could easily be somewhere around 6.0%. The reason such aggressive interest rate rises are not in play is that the Australian economy overall is not doing well. That relates to the gross domestic product (GDP), which grew at just 1.1% quarter-on-corresponding-quarter for March 2024 - the continuation of a slide that started in December quarter 2022, and well below a desirable rate.

In close to simplistic terms, looking after the economy can be seen as something like looking after a lawn. If you put on lots of fertiliser (economic stimulus), the grass (economy) grows, but so do the weeds (inflation). If you put on weedkiller (higher interest rates) to get rid of the weeds, then the grass will also start to die. What works (somewhat) is a combined weed-and-feed supplement (productivity).

However, that weed-and-feed supplement seems to be in short supply in Australia. At the moment the only way forward for the RBA is to continue to apply the weedkiller in judicious amounts, so that the grass, though affected, does not actually die out.

A second factor at work is that since 2020 Australian society has come to - culturally - place a higher value on housing. The extreme COVID lockdowns were something of a shock, and it will likely be another couple of years before people stop - at least unconsciously - planning for the next pandemic. In particular, that has reduced the attractiveness of multi-unit dwellings, and thus created an even tighter market for detached houses.

Given all this, it would seem evident that the convenient cycle of "house construction goes down, alt-adds go up" is unlikely to be as much a given as it was in, say, the 2010s.

The dwelling market

What is the current state of the dwelling market? Perhaps the best stats to look at are from the ABS dealing with capital city dwelling markets. In this case we're using periods that consist of the June, September, December and March quarters, so p2022 runs from June 2021 through to March 2022.

Median house prices

Let's start by taking a quick look at the median house price for capital cities.

To summarise these charts briefly, there are two separate trends evident. For Sydney, Brisbane, Adelaide and Perth, median house prices have continued to rise. For Sydney and Brisbane there was a decline in median values, or at least a flattening of growth, for p2023, but this has to some extent reversed for p2024. Both Adelaide and Perth show continued growth straight through both p2023 and p2024.

For Melbourne, Canberra, Hobart and Darwin, there was a similar slowdown in p2023, followed by further falls for p2024.

Transfers of established houses

The ABS stats for the number of transfers of established houses (excluding new builds) gives an overview of market activity.

Looking at these charts from the perspective of comparing the number of transfers from p2023 with p2024, the first thing to notice is that with the exception of Darwin and Adelaide, the number of transfers for the most recent March quarter is below the number for March quarter 2023.

Broadening that regard to the entire p2024, Canberra, Brisbane, Hobart, Melbourne and Perth all show at least two quarters in p2024 where transfers were below those for the previous corresponding quarter. On the other hand, Sydney managed to set a seven-year high for transfers in September quarter 2023.

Conclusions

There is variance between the different geographical markets - as you would expect. Overall though, the alarming trend is that, despite the additional increase of 0.25% as recently as November 2023, higher interest rates, comparing p2023 with p2024, have become "normalised" in the markets.

To give some idea of just how "out of kilter" things are, we can look to a speech by the RBA's Jonathan Kearns, head of domestic markets, entitled "Interest Rates and the Property Market", which he delivered in September 2022. He stated:

In the April [2022] FSR [Financial Stability Report] we used a user-cost model to estimate that a 200 basis point [2.0%] increase in interest rates - which increases mortgage payments and so the cost of owning - would lower real housing prices by around 15% over a two-year period. While this 15% decline was commonly reported as being a forecast for housing prices, it was not actually a prediction of how much housing prices would change. Rather it was an estimate of how sensitive housing prices are to interest rates , assuming that all the other costs and benefits to housing don't change with interest rates.

Between April 2022 and September 2022 interest rates increased by 2.25% with little real discernible medium-term effect on house price growth in markets such as Sydney through to 2024. The reason for this likely rests with that last phrase by Mr Kearns, the caveat "assuming that all the other costs and benefits to housing don't change with interest rates".

As mentioned above, one factor that continues to dominate the housing market is the aftershock of COVID. Added to a period of very low interest rates, against a background of three decades of poor management of housing in most states, you end up with a housing market that is somewhat out of control.

The renovation market

How has all this played out in Australia's renovation market? As HNN has discussed in the past, measuring alt-adds is something of a difficult task. In this case, we're looking at three sets of ABS stats. The first and simplest is the stats from ABS building approvals, the original monthly data that relates to approvals granted through to May 2024.

The second set of stats is from the same basic series, but instead of original data, it is quarterly data for chain volumes. Chain volumes adjust for price differences (brought about by inflation and other causes). Chain volumes thus tend to provide a more "pure" reflection of demand.

The third is derived from the National Accounts stats relating to final state/territory demand. For those stats we're also using chain volumes.

NSW

While these charts tend to look both dynamic and confusing, in the end this chart shows that the value of alt-add approvals for NSW has been relatively stable over the past three periods. There was a decline of just 0.3% for p2024 over p2023, and an increase of just 1.6% for p2023 over p2022.

That said, the manner in which that value is delivered is radically different, with the noticeable spike in December 2021 probably a consequence of influences related to COVID lockdowns.

Equally, the activity for April and May 2024 (not covered by the other quarterly stats) is interesting as it suggests an increase in these approvals.

Dealing with much of the same data (excepting April and May 2024), this shows a quite different outlook, with the value for approvals in p2024 falling somewhat below those for p2023, and p2023 very much below p2022.

This shows roughly the same situation as the previous chart, though the increase from p2022 to p2023 is moderated, and the decrease from p2023 to p2024 is much larger.

As the Sydney market has shown ongoing increases in house values, this supports the legacy forecast that an active house market will see a decline in spending on alt-adds activities.

VIC

Again, while this chart looks slightly chaotic, p2024 is only 1.3% above p2023, and p2023 has lost just 1.0% on p2022.

This shows the extent of the actual decline in alt-adds from the highs of p2022, though there is an uptick for p2024 for March quarter 2024.

Looked at through the lens of national accounts, there is far more synchronicity between p2022, p2024 and p2024. The decline for p2024 is also more marked, especially for December quarter 2023.

Here we see something of a contradiction to the legacy analysis of countervailing markets for houses and alt-adds. Even as the housing market declines, so too does the alt-adds market.

QLD

The original data for QLD shows that new highs were achieved in six of the 12 months of p2024. That's despite the fact that median house values continued to increase. Overall, approvals for p2024 were 8.0% up on those for p2023, while p2023 were up 1.3% on p2022.

In this case the chain volume measurements reflect the original data, with p2024 following a similar pattern to p2023, but at a higher value level.

There are broad similarities with the previous chart, but with an interesting lift for activity in the December quarter.

Again, this broadly supports the legacy view regarding countervailing markets.

SA

It seems evident looking at this chart for SA that p2024 was a year of high growth for alt-adds. Seven months show new highs, and one month matches the previous high. In fact, overall p2024 grew by 12.8% over p2023, while p2023 grew by 4.1% over p2022.

In this case, the chart for chain volumes casts the previous chart's data in a new light. Overall for p2024 there was a 2.0% decline over p2023.

This chart essentially corroborates the previous chart, cancelling out the lift for December quarter 2024

Given the ongoing strength in the SA housing market, this again supports the legacy view that housing and alt-adds markets are countervailing.

WA

As this chart clearly indicates, alt-adds have grown significantly in WA. For p2024 the state grew by 31.4% over p2023.

That picture of growth is moderated using chain volume measures, but it still remains significant, with p2024 growing by 17.4% over p2023.

National accounts using chain volume measures moderates this increase slightly, but still shows a breakaway December quarter 2024.

WA represents a different departure from the legacy view. The house market is flourishing, but so is the alt-adds market.

TAS

This shows a general increase for alt-adds in p2024 of 8.0%.

This chart largely accords with the previous chart. Adjusted for chain volume, the increase in alt-adds for p2024 over p2023 remains around 8.0%.

Again, this chart broadly reflects the two previous.

The data for TAS broadly supports the legacy view. With a declining house market, alt-adds spending has increased.

NT

The sharp rise in October 2023 all but guarantees alt-adds for p2024 are above those for p2023. In this volatile market the increase for the 12 months is 27.9%.

The chain volume measure is more clear, indicating p2024 outperformed p2023 outside of the December quarter.

The national accounts do show a more mixed picture, with p2024 underperforming p2023.

Darwin and the NT are difficult markets to understand. Both the performance of the overall housing market itself and alt-adds are somewhat mixed.

ACT

With alt-adds building approvals touching on seven year lows for seven of the 12 months, it's clear that this sector is performing below p2023 during p2024.

This chart largely supports the conclusion above, but with unexpected strength in December quarter 2023.

This chart draws a very clear picture for underperformance for p2024 as compared to p2023.

With the ACT housing market in decline, this goes against the legacy view of how that market relates to alt-adds. However, as with NT, this is a highly volatile market.

Analysis

What these stats for alt-adds demonstrate is that this area is somewhat complex to understand and forecast at this point. It is certainly the case that the pattern which has dominated much the 2000s and the 2010s - of dwelling investment shifting between house building and renovations depending on market conditions - still has a major effect on the market.

However, it's also true that a range of other forces are likely at work as well, as in demonstrated by both VIC and WA, as well as the ACT. HNN would speculate that in some markets, expenditure on alt-adds has increased due to the ongoing surge in the housing market. At some point, the price of new houses becomes simply inefficient, and homeowners realise they can obtain the features of a new house on their existing property at a lower cost through alterations and additions.

Similarly, given high average house prices and increasing cost of living pressures, alt-adds have become the best coping mechanism for many homeowners. Economic uncertainty has enhanced the value of taking a more conservative approach.

All this means that alongside the behaviour in some markets of switching between the housing and alt-adds markets based on current prospects, there is an additional behaviour where when the housing market surges, the alt-adds market does as well - though to a lesser extent.

The Australian Bureau of Statistics (ABS) has released its Producer Price Indexes through to March quarter 2024. The charts in this series are taken from statistics for "Input to the House construction industry, six state capital cities".

As the main chart above shows, the general trend has been for housing construction inputs to begin a steep rise in June quarter 2021, which continued to around December quarter 2022, and then have increased at a slower rate.

Timber categories

The chart for the timber categories, as a weighted average of the six state capitals, shows three trends: the standard trend described above, an extreme increase that has been maintained, and a sharp increase that has trended down since December quarter 2022.

Timber windows follow the extreme trend, with an extreme rise that has not declined, while structural timber rose to a high index, before continuing to decline through to March quarter 2024.

Tile and brick categories

The chart for the tile and brick categories, as a weighted average of the six state capitals, shows a range of trends. Ceramic tiles, it turns out, saw milder price rises than other categories, and a decline during both September and December quarters of 2024, before rising again in 2024.

Terracotta tiles were relatively stable through to September quarter 2021, then rose sharply in price through to December quarter 2022. The other three categories began a more gradual price increase in June quarter 2021, and have continued to increase in price since then.

Building materials categories

The chart for building material categories, as a weighted average of the six state capitals, shows three unique trends.

Sand has seen the steepest rise, cement a more moderate increase, and ready-mixed concrete a more subdued lift. The increases came later than in other categories, beginning around June quarter 2022.

General materials categories

The chart for general materials, as a weighted average of the six state capitals, shows a constant, continued increase in price indexes September quarter 2021 onwards.

Plumbing materials categories

The chart for plumbing materials, as a weighted average of the six state capitals, shows three sets of trends.

Sheet metal sanitaryware shows the sharpest increase, which began in September quarter 2022. Taps and valves, as well as copper pipes and fittings, shows the least rise in price index. Plastic pipe and fittings remains relatively subdued until March quarter 2022. The rest follow a relatively slow and gradual increase in price indexes.

Metal materials categories

The chart for metal materials, as a weighted average of the six state capitals, shows a basic trend, with two exceptions.

The general trend sees the upswing in the price index start in September quarter 2021 and continue through to March quarter 2023 before flattening out. The two exceptions are steel beams and sections, as well as metal garage doors.

The former starts to rise steeply in June quarter 2021, hist a peak in September quarter 2022, then declines through to December quarter 2023, and is almost flat for March 2024.

The latter rises very steeply in June quarter 2022 through to September quarter 2022, then rises more gradually through to December quarter 2023, before flattening into March quarter 2024.

Electrical materials categories

The chart for electrical materials, as a weighted average of the six state capitals, shows some distinct trends.

While switches and distribution boards, as well as the "other" category, have been relatively stable after a price index bump in June quarter 2020, electrical cable and conduit also rose in June quarter 2020, then started a very steep climb in June quarter 2021 through to June quarter 2023.

Analysis

The good news here is in structural timber and steel beams and sections, both vital categories for dwelling construction, which came down in price through calendar 2023. However, other construction input prices have remained stubbornly high. Some, like metal garage doors, and speciality items, but others, such as timber windows, are common to most construction jobs.

The Australian Bureau of Statistics (ABS) has released retail turnover for hardware stores through to March 2024. We will review the data in terms of trailing 12-month periods, from April to March. So p2022 will refer to the time span from April 2021 to March 2022.

Growth in the most recent period was subdued overall. The highest percentage growth was from Western Australia (WA), with 2.4%, an increase of $64.5 million to $2.806 billion. The highest value growth was in Victoria (VIC), with a gain of $94.0 million, representing a lift of 1.4%, to $6.618 billion.

South Australia (SA) was not far behind WA, with an increase of 2.1% or $36.9 million to $1.767 billion for p2024. Australian Capital Territory (ACT) grew by 1.9% to $0.539 billion, a gain of $9.9 million. Tasmania (TAS) was close to flat, lifting 0.1% to 0.606 billion, up by just $700,000.

The largest percentage loss was from the Northern Territory (NT), which was down 7.2% or $20.1 million to $0.260 billion. In value terms, New South Wales (NSW) lost the most, down by $260.8 million or 3.4% to $7.527 billion. Queensland (QLD) fell by 1.3% to $5.304 billion, down $71.5 million.

New South Wales

The NSW chart for hardware retail sales shows that while p2024 did manage to set two all-time highs - for September 2023 and (curiously) January 2024 - it did trail significantly behind p2023.

While the March 2024 result is below those for both 2022 and 2023, it is still above that for 2021.

Victoria

While p2024 was not quite as good as p2022, it did improve on p2023.

The sales for March 2024 were nearly identical to those for both 2021 and 2023, but well below those for 2022 - as well as 2020, the initial COVID-19 spike.

Queensland

For QLD, the March 2024 result came in below March 2022 but above March 2023.

The lift from February to March 2024 was smaller than in the two previous years, but February 2024 sales set an all-time record in sales as well.

South Australia

As with QLD, the lift from February 2024 to March 2024 was subdued in SA, while February 2024 set a new sales record for that month.

Up until February, except for the peak in December, p2024 closely followed p2023.

Western Australia

WA's performance for p2024 is somewhat unique. With the exception of April 2023, it set new eight-year local records for every month.

Tasmania

Since October 2021, TAS has seen sales for each period closely follow a narrow track. While p2024 was substantially down on the two preceding years for December, it managed to set a new high for February 2024, and finished up on p2023 in March.

Northern Territory

Overall, p2024 was down from p2023, but slightly improved over p2022.

The March 2024 sales, however, were closer to the pre-COVID-19 results.

Australian Capital Territory

As with TAS, the ACT has established a fairly narrow post-COVID-19 track, and p2024 closely followed this.

Analysis

The chart for hardware retail sales across Australia provides a good reference point.

For p2024 hardware retail turnover Australia-wide fell by 0.6% to $25.425 billion, a drop of $146.3 million. It's a result that is safely between the results for p2022 and p2023. In terms of general trends p2024 does seem a further advance on a slightly reduced seasonality, with an increase in both January and February sales resulting in less of a lift in March. Similarly, the end-of-year surge is drifting out early to September. Of course, weather patterns also play a part in these shifts, but some of these weather patterns may become more permanent.

Somewhat revealing is the chart for percentage change in hardware retail over the past six years.

Glancing over this chart, it's evident that the unusual state/territory is actually VIC. It's the only region where the yellow bar, marking p2023, shows negative, and the only actual state where the light blue bar, marking p2022, is negative (as it is for both NT and ACT as well).

The Australian Bureau of Statistics (ABS) has released its Building Activity stats through to the end of December quarter 2023.

As the big question for hardware retail is exactly where the residential construction industry is headed in 2024, the numbers of most interest are those for building activity commenced and building activity not yet commenced.

The first - commenced - gives some clue as to how much housing activity actually got going during the most recent quarter. The second - not yet commenced - indicates how much work is in the pipeline.

The data is presented in calendar years.

New South Wales

The first chart for New South Wales (NSW) paints a fairly clear picture of a slowdown.

In the first two quarters of 2023, the number of commencements remain above only the initial COVID-19 year of 2020, then dive still lower in the third and fourth quarters, to set a seven-year local low record.

Turning to commencements for other residential, the picture is slightly better, but not all that encouraging.

While June quarter 2023 shows an encouraging upwards spike, this is followed by a sharp decline to September and only a mild recovery in December quarter.

Building activity not yet commenced is a more complex measure to understand.

While the continuing gain seems encouraging, given the context of work commenced, it probably is not. Given the low level of commencements, this is less likely to be due to overload of the construction industry resources, and more due to delays from other sources.

Victoria

As with NSW, houses commenced for Victoria (VIC) shows a clear slow-down, setting three local seven-year lows for 2023.

For other residential commencements are more nuanced. While a seven-year local low is reached in June quarter 2023 follow more of the trajectory of 2021, lifting above the numbers reported for 2022.

While there is a degree of seasonality to the increase in the value for not yet commenced building for VIC, it's also likely we are seeing some of the same non-construction factors at play in the increase through the September and December quarters.

Queensland

While Queensland (QLD) shows a counter-seasonal lift in the number of commencements for June quarter 2023, this quickly slides down to seven-year local lows for both the September and December quarters.

Other residential might look to be in similar dire straits, but that's not really the case.

The number of commencements for 2023 is around only a 100 less than for 2022, showing ongoing demand.

Again, for not yet commenced there is an increase.

In this case, the full year of 2023 sets a local seven-year high for every quarter

South Australia

While the commenced houses for South Australia (SA) numbers could not be described as "optimistic", they certainly tell a better story than those for the east-coast states.

More or less 2023 is basically a return to pre-COVID-19 levels of commencements.

The story is a little less sanguine for other residential commencements. While the sharp spike for September quarter 2023 is impressive - and shows a degree of resilience in the market - in fact the overall level of commencements is nearly equal to those for 2020 (the green line).

We see the same pattern - even exaggerated a little - for net yet commenced value during 2023 for SA: a set of new local seven-year highs.

Western Australia

For Western Australia (WA) the best description of the number of houses commenced stats might be that it has not only fallen back to pre-COVID-19 numbers, but low pre-COVID-19 numbers.

That's less the case for the number of other residential commencements, which are hitting local seven-year lows in the second half of 2023.

Not yet commenced values are again slightly contradictory, increasing despite the drop in actual commencements during preceding quarters.

Tasmania

For number of house commencements, the most noticeable number for Tasmania (TAS) is the drop to a new seven-year local low in December 2023 quarter. That runs counter to seasonality, as well.

For other residential commencements, TAS really hit back to pre-COVID-19 numbers in 2022. In 2023, it has further dropped below that.

And yes, again, the steep rise in the value of not yet commenced work.

Northern Territory

Interpreting residential construction stats from the Northern Territory (NT) is always difficult, as its economy is highly affected by local factors. However, we can see that numbers of houses commenced has fallen sharply in the second half of 2023.

Likewise, numbers of other residential dwellings commenced have equalled all-time lows - inasmuch as zero is about as low as you can go.

Value of not yet commenced work spiked for December quarter 2023.

Australian Capital Territory

While the Australian Capital Territory (ACT), like the NT, has something of a partially insulated economy, it still does respond more to national influences. That is certainly the case with number of houses commenced.

That's a very definite low for 2023.

Numbers of other residential is really quite interesting. It's low, but just how low is it?

As it turns out, the annual total for 2023 is lower than the other six years displayed - though not that much higher than 2019.

Value of not yet commenced again shows a new set of highs for 2023.

Analysis

Has the overall economic analysis of the housing industry really been complete? Not really. There is one key element that seems to be consistently missing.

It's fairly evident from these charts that 2023 has seen a reduction in the number of building starts for both houses and non-houses, well the value building work not yet commenced has increased. As a helpful summary, we can review the charts for house builds commenced on an annual basis across the six states.

New South Wales

Victoria

Queensland

South Australia

Western Australia

Tasmania

With the exception of SA, the states show that 2023 comes in below the numbers for five years previously, in 2018. That would indicate that there is a real slowdown underway, and not just a more relative reduction.

The other interesting factor is that, despite the high interest rates and growing price of houses, the market is indicating that there has not been much a shift to non-house dwellings. That's partly a cultural bias, but it also has to do with the construction industry itself: unlike in the US and much of Europe (including the UK), Australian architects and builders are not adept at building higher-end apartments.

But there is something more going on here. In the US, for example, the last couple of years has seen a big surge in the construction of apartment blocks, to such an extent that rents in 2025 are expected not just to stabilise, but to be reduced as well (especially as "move-in" incentives are offered).

Beyond cultural pressures there is another key factor at work here: The US economy is quietly booming. Even with high interest rates, there is a lot of money washing through the economy looking for tax effective investments. The economy grew at a rate of 3.3% in the last quarter of 2023, even as inflation diminished.

The reason for that, more than anything, is the role of "post-industrial" industry such as technology. While technology firms contributed something like 10% of gross domestic product (GDP), the are also though largely responsible for the unexpected high growth in US productivity - which reached 4.7% in the September quarter of 2023.

While we can certainly point to inflation-busting high interest rates, poor city planning, Australians' rampant "NIMBYism" and high levels of migration to city centres as all contributing causes to a confined housing market, the really major, underlying reason is that the Australian economy is not doing well.

The Australian Bureau of Statistics (ABS) has released stats for hardware retail revenue through to February 2024.

In assessing this data, we will rely on periods of 12 months from March to February. Thus p2022 will refer to a period from March 2021 to February 2022.

Overview

Contrasting p2024 with p2023, revenue in Australia overall fell by 0.7% to $25.5 billion, a decrease of $168 million.

In percentage terms, the steepest fall came from the Northern Territory (NT), which was down 5.7% to $263 million, a dip of $16.0 million. In dollar terms, New South Wales (NSW) was the biggest loser, down $239.9 million to $7548.3 million, a drop of 3.1%.

The largest growth in percentage terms came from South Australia (SA), which rose by 2.7% to $1771.1 million, a gain of $46.0 million. Western Australia (WA) was the largest gainer in dollar terms, lifting by $68.3 million to $2803.3 million for p2024.

Victoria (VIC) also performed well, gaining an extra $63.9 million to hit $6618.4 million, an increase of just under 1.0%. Australian Capital Territory (ACT) also grew, gaining $11.0 million, an increase of 2.1% to reach $540.0 million. Queensland (QLD) experienced a loss of 1.8%, or $99.2 million, leaving it with$5298.4 million.

New South Wales

As the chart indicates, revenue for February 2024 was only slightly elevated over previous years. In the usual peak period from August through to December 2023, revenue flattened out as compared to the two prior years.

Victoria

For VIC, p2024 has proven to be surprisingly good period. While the results in both January and February 2024 were in line with recent results, the state managed to set new revenue records during August, September and October 2023.

Queensland

For most of p2024 QLD has mostly "split the difference" between a weaker p2022 and a stronger p2023, though it equalled the prior years for December 2023 and January 2024, and bettered them both for February 2024.

South Australia

SA saw p2024 win out over p2023 for all but two months - December 2023 and January 2024.

Western Australia

Most of p2024 for WA was a close - but slightly improved - copy of p2023. The highlight was a new peak for October 2023, and strong finish in February 2024.

Tasmania

Similar to WA, the TAS numbers for p2024 were close to those for p2023, falling below them for December 2023, and getting above them for February 2024.

Northern Territory

After a very good p2023, p2024 came in somewhat lower for the NT. March to June 2023 were strong, but after that revenue slowly declined through to February 2024.

Analysis

The chart below shows the extent of growth in NSW, VIC and QLD as compared to the rest of Australia.

One influence of the pandemic has been to shift some growth out of the east coast states and towards the rest of the nation - in particular to WA and SA.

Just as a reminder of how much things have changed, here's a chart for hardware revenues by state in p2019 versus those for p2024.

As HNN has commented in the past, tracking renovations (alterations and additions) is always a little tricky. For example, the Australian Bureau of Statistics (ABS) limits all Building Approval data to projects costing more than $10,000, which excludes a large number of actual renovations.

In general, there is always going to be some doubt about absolute numbers, but what we can track relatively accurately are trends. If there are errors in data collection, they tend to be consistent errors, so if the numbers go up or down, they likely reflect the same movements in the underlying markets.

Unfortunately, this group of statistics is not really suited for managing the smaller regions in Australia, notably Tasmania, the Northern Territory and the Australian Capital Territory. To adequately manage those we need access to chain volume statistics, which will be out for the March quarter 2024 in the near future. When we have access to those, we'll do a deeper analysis of those regions.

So what we're attempting to achieve here is not to be definitive, but rather indicative. The statistics we've chosen to use are as follows:

Combining all those stats, we should be able to see some trends in each state.

It's worth delving into these data somewhat comprehensively, because the alts & adds market has become very complex going into calendar 2024. We've seen a slight cooling in the housing market (though not in all areas and all sectors). This is combined with ongoing high interest rates (which, as HNN has suggested in the past, are unlikely to fall through 2024). These contribute to overall increases in the cost of living, driven both by inflation, and opportunistic price increases in Australia's semi-monopoly markets.

Thus there is retardation in the overall market, as Australia's economy staggers under both inflation and the cure for inflation. Yet there is also stimulus in the alts & adds market, as increased house prices and concerns about market stability reduce the willingness of home owners to sell, and increase the attractiveness of "fixing up" a current abode.

HNN also commented earlier that it seemed unlikely to us that the "standard" market analysis would work in 2024. This suggests that when the housing market falls, spending shifts to alts & adds. The scenario that gets omitted in that analysis is what happens when strong exterior influences affect the total market. In that case, you could see falls in both renovations and housing, or increases in both. It's not clear that this is entirely the case for 2024, but it is certainly a year for external influences to play a part in all markets, it would seem.

The monthly data is presented in 12-month periods, which run from March to February. So p2022 refers to a period running from March 2021 through to February 2022, for example. Quarterly data is presented in calendar years for this data series.

New South Wales

Building Approvals

It's interesting to contrast the two sets of stats we have for building approvals: the number of approvals and the total costs of approvals.

The chart clearly shows that p2024 trails p2023.

The value chart shows a different picture, grouping together p2022, p2023 and p2024 apart from the previous four years. That is further born out when we consolidate the monthly data into 12-month periods.

This indicates that while the value spent on alts & adds has remained relatively steady, the number declined sharply for p2024.

Lending

The lending stats from the ABS follow a different pattern.

We can start to unravel this by looking at the numbers for p2023 (the red line), which begins with very high numbers from March 2022 through to August 2022, then drops from September 2022 through to February 2023 to a level that either matches p2022 or is below it. Following that, p2024 underperforms on p2023, but broadly matches p2022.

Both p2022 and p2023 show a high degree of volatility, especially for p2023. It is difficult, on a monthly basis, to really discern any patterns - there is very little seasonality, for example. The only real pattern is the four-month decline from November 2022 through to February 2023 (shown in the red line for p2023).

Some patterns can be seen in the 12-month consolidation for these data. The transitions from p2021 through to p2023 follow an expected pattern - an increase in the number of loans corresponding to an increase in the total value of those loans. That pattern is altered for p2024, where the number of loans decreases significantly, but the value decreases less proportionate to that.

National Accounts

As quarterly results, the survey for household spending on alts & adds does not reflect any data for 2024, but gives a "grounded" indication of what is going on in the market. It clarifies, for instance, just how extreme the growth has been in alts & adds since the beginning of the COVID-19 pandemic.

This also presents a simple illustration of what many have intuitively supposed was happening in the alts & adds market: increased demand in the first quarter of 2023 as compared to 2022, parallel demand to 2022 in the middle quarters, and decreased demand in the final quarter.

Analysis

Numbers of building approvals decreasing while overall spending remains static indicates that a split has developed in the NSW renovation market. We can combine that with the lending numbers, which show a decline, but a much less significant one. For example, a similar number of loans for p2022 show a much lower value than for p2024. This would indicate that the decline in largely in self-financed renovations. The two possible scenarios is that those renovations were of relatively low value, as did not affect the overall number as much, or that as some renovators dropped out of the market, those that did remain have increased their spending.

Victoria

Building Approvals

One aspect of building approvals for Victoria that must be mentioned is the overall decline in alts & adds as reported by the ABS. The chart below illustrates the number of alts & adds reported by the ABS for financial years.

As this shows, in terms of what the ABS considers alts & adds, there has been an ongoing decline since 2018.

Moving on to the monthly numbers as reported by the ABS, what is most notable in comparison with the NSW data is the lack of volatility.

What volatility there is, such as the spike for February 2023 (the red line) is caused by the addition of data for conversions along with pure alts & adds (which is necessary as the value data for approvals is only provided with the two combined). The most recent volatility is for p2021 (the green line), which, running from March 2020 to February 2021, would have been at the start of the pandemic period. While p2022 shows some increased activity, both p2023 and p2024 are more subdued.

The values for alts & adds shows something quite different.

What is interesting here is just how similar the most recent three periods are. There is some additional volatility to p 2022, but there is a strong seasonal pattern running from November through to February in all three periods.

What is happening is more clearly outlined in the chart that totals these 12-month periods.

This shows an immediate shift, starting with p2022, where the value reaches a local high, and maintains that through three periods. This seems to exist almost independent of the actual numbers, which is especially noticeable for p2024, with numbers reaching a new local low.

Lending

It is evident that the number of loans has fallen substantially for p2024.

The most substantial declines are for April 2023 and December 2023.

The story for the value of loans, however, is quite different.

As we saw with NSW, even as numbers fall, values increase. The exception to this would be for April 2023, where a strong fall coincides with the fall in number of loans. But that is contradicted by the February 2024 loan values, which climb steeply, while loan numbers increase more modestly.

Looking at the 12-month totals for the lending stats, we can see a trend somewhat similar to that for NSW.

Again for p2024 there is a reduction in the number of loans, but an increase in the total value for those loans.

National Accounts

As with NSW, the alts & adds reflected in National Accounts show a somewhat more stable pattern.

This shows alts & adds for 2023 tracking slightly above those for 2022 at the start of the year, following below, then tracking considerably higher for the September quarter. The end of 2023 shows a near match on 2022.

Analysis

Similar to NSW, we're likely seeing a split in the market. Fewer loans for a larger amount, a trend that is echoed for building approvals.

Queensland

Building Approvals

The numbers of approvals for alts & adds, leaving aside the spike for December 2022 from conversions, have remained remarkably stable.

The only real spike has been for June 2023.

Surprisingly, the values have also remained stable.

The dominant driver remains seasonality.

The 12-month overview shows some differences to those for NSW and VIC.

While the part of this pattern that is familiar is the value of approvals remaining nearly constant for p2022 through to p2024, what is different is that the number of approvals goes both up and down.

Lending

In contrast to approvals, lending remains quite volatile.

Overall, however, there is an evident reduction in numbers for p2024 as contrasted with p2023.

Not surprisingly, there has been more stability in the value of loans.

The most interesting feature of this chart is the increase between February 2022 and March 2023, which is something like a pandemic "before and after", with values subsequent to March 2023 entering a new region of consistent highs.

The 12-month summary for lending also seems familiar.

The pattern of a reduced number of loans but a constant overall value is repeated.

National Accounts

The estimation of household spending on alts & adds from the National Accounts does show a difference from NSW and VIC.

Spending for 2023 does rise above that for 2022 in the June quarter, but there is a sharp drop for the December quarter.

Analysis

While there are some broad similarities with NSW and VIC, QLD Is also unique. The pattern for spending reflecting in approvals is for a high spend per approval in p2022, followed by a reduced spend in p2023, and a return to a moderately high spend in p2024. The lending data reflects that, though in a diminished way.

South Australia

Building Approvals

After the east coast states, stats for SA seem quite unique.

There is a degree of volatility for p2022, followed by a less volatile p2023, then a somewhat volatile p2024.

In terms of value of approvals, these show a more constrained range of movement, with a strong peak in November 2023.

While some of this chart looks familiar, it is telling a very different story to the east coast states. There is a steady increase in 12-month total values of approvals from p2020 onwards, while the numbers fluctuate. For p2023 there is a reduction in number of approvals, while value continues to grow. However this is followed by a strong increase in numbers for p2024 without a commensurate increase in value.

Lending

The lending numbers are volatile for p2022 and p2024, but more stable for p2023.

There is a similar volatility for the value of loans.

The strongest pattern is an increase for p2024 from the low in September 2023 through to the high in January 2024 - though this is followed by a steep fall in February 2024.

The 12-month view on lending reflects the results from approvals.

In something of a reversal from the east coast states, we see in p2023 an increase in the number of loans, with only a small lift in their total value. This reverses in p2024, with the number of loans decreasing while the value rises.

National Accounts

The pattern here is to see 2023 outperforming 2022, which is itself far above 2021.

Analysis

It would seem that p2023 would have been something of a consolidating period in market, with activity centred on slightly lower-value expenditure on more alt & adds activity.

Western Australia

Building Approvals

Unfortunately, with the low level of approvals reported by the ABS, the chart of stats becomes less clear. What can be discerned is that the level of activity for p2024 is above that for both p2022 and p2023.

In terms of values, we can see that p2024 is clearly boosted above the two preceding years. While seasonality continues to play something of a role, October and November 2023 have been boosted considerably, as has February 2024.

WA shows something of an individual pattern. In p2022 there is a sharp shift in the value of approvals, with numbers reducing while value increases. However, something of that new ratio hold true for the two subsequent periods, with the numbers corresponding more or less with the value.

Lending

Perhaps the most interesting feature of this chart is that while there is some seasonality in p2021, p2023 and p2024, p2022 seems to break away from this, starting in April 2021.

The value of loans seems to follow a similar pattern, with p2023 something of a break-away. So p2024 follows much of p2022, with the exception of a kick upwards for December 2023, January 2024 and February 2024 at the end.

The 12-month values show a real "normality" in lending. The value of loans steadily increases from p2022 onwards, and so does the number of loans issued.

National Accounts

The results for household spending on alts & adds in the National Accounts show a more optimistic picture. 2023 shows considerable gains over both 2021 and 2022.

Analysis

WA escaped much of the early consequences of the COVID-19 pandemic (due largely to sane and smart management, as well as some isolation). But was influenced post COVID-19 by economic changes. It seems likely the state is also going to escape some of the more dire forces at work in the other states, especially as regards poor planning for housing demand.

Overall analysis

It should be clear from considering these stats that we're really not looking at a "regular" period for alts & adds. Universally, there has been an increase on expenditure in this area since the pandemic, and nothing in these numbers suggests that is going to end abruptly.

What we are seeing, however, are different growth patterns. One possibility is that the market is beginning to split in the east coast states somewhat into "have" and "have not" strata. That is, we could see already expensive housing migrating through renovation and extension to be even more expensive, while the stratum below that seeks to remain in the realm of "achievable" purchase.

The Australian Bureau of Statistics (ABS) has released stats for building approvals through to December 2023. For much of the hardware retail industry, seeking to forecast what happens in the first half of calendar 2024, approvals for private detached houses are one of the most important indicators. Much of the building supplies purchased through retailers goes through builders building in this market.

To start with the approval data for private detached houses across Australia, it's interesting to note that while there is a common narrative that approval levels were high throughout the COVID-19 pandemic years, that's not really the case.

As the graph indicates, the major surge began in September 2020, and continued through to November 2021. Some months were elevated during 2022, notably March and August, but by 2023 approval numbers were back in a very normal range.

New South Wales

For NSW, even during the peak year of 2021, the number of approvals remained in range of the most recent previous "boom" year, 2018. That said, the overall elevated levels of approvals did persist through 2022 as well. For 2023 approvals were slightly below the historical average.

Victoria

In VIC the pattern of approvals closely matches that for Australia overall, with a big surge in February 2021 that continued through until November. For the rest, however, approval numbers are within a more normal level, with 2023 at the lower end of the expected range.

Queensland

The pattern repeats with QLD: a big surge in approvals for the final quarter of 2020, then a record-setting surge for February through June 2021, followed by a return to more normal levels for 2022, and a slightly sub-par 2023.

South Australia

SA follows a different pattern from the east coast states. There is the same lift in approvals at the end of 2020, then a surge in approvals beginning in February 2021 that continues through to August. After that, both 2022 and 2023 are positive on historical averages, though 2023 is below 2022.

Western Australia

The boom in WA gets started a little earlier, arguably in September 2020, and it really persists, in a milder form, through to the end of 2021. Approvals for 2022 are above average, and those for 2023 are close to average, but on the positive side.

Tasmania

The effects of the COVID-19 "boom" were somewhat muted for TAS. While a surge did begin in September 2020, and continued through until June 2021 (with a brief resurgence in November 2022), overall there was a smaller surge in demand than other states. For 2023, approval numbers were somewhat volatile, but on the low side through to July, then entered a pattern of general decline.

Northern Territory

Given the small size of the housing market in the NT, the numbers are somewhat volatile. There is a surge beginning in September 2020 that goes through to December, the restarts for February through to April 2021. There is then a second surge from July through to November 2022. For 2023 there is a brief peak in March, then a general reduction in approvals through to the end of the year.

Australian Capital Territory

It is little surprise that the ACT has its own unique patterns for private detached house approvals, given the unique nature of this market. As can be seen in the graph, the COVID-19 surge for 2021 is somewhat U-shaped, peaking in March, declining to August, then reaching a new, higher peak in November and December.

Likewise, 2022 actually outperforms 2021 for June, July and August. Then 2023 remains low through to September, before peaking in November.

Analysis

What we really run into in analysing what is going on in the private house market is the actual structure of this part of the industry. It is a quite low productivity, low capacity sector, that has difficulty attracting investment capital due to a lack of medium-level consolidation - there tends to be individual building operations, and very large builders, with little in-between.

As such, when high demand levels hit, as they did in 2021, the industry response is not growth, but an increasing backlog of work to be done. Given the additional constraints on building supplies through the pandemic years, what has happened in the industry is that it has taken until the end of first half calendar 2023 to work off much of that backlog.

That is perhaps a major reason why there is a forecast of a kind of "collapse" in the detached housing market post March 2024. It seems what we will see in the second calendar quarter of 2024 (April through June) is fairly average demand represented by approval numbers slightly below the average. But given the absence of the backlog, how well builders do will depend on how quickly they are willing to adjust prices down on items such as significant renovations.

At the same time, it's likely that there will be a boost in multi-unit dwellings, especially apartment blocks of nine and more storeys. So builders could switch from constructing private houses to being subcontractors on significantly large builds. As those larger builds bypass both retailers and smaller wholesalers, this could contribute to a decline in the hardware retail market.

That said, there is significant retail "runway" in the renovation area, if retailers are ready to innovate. All-electric kitchens, better insulation for energy conservation, and integrated smarthome services are all growth areas. The difficultly we see with retailers taking advantage of these opportunities is really in the current culture of hardware retail. It's necessary to sell today's products to today's generation of homeowners.

The results for hardware retail sales to November 2023 do not show anything like a sharp slowdown. What they show, for the most part, is relatively flat performance, with a general trend downwards.

While that is better news than many expected, it's worth remembering that, unlike four years ago, the Australian economy has gone through an inflationary period, which would indicate that the slight decline might show a market that is more significantly on the downside from the status quo.

The stats are divided into 12-month periods ending in November. We reference these with a "p" prefix, so p2022 refers to the period from December 2021 to November 2022.

Once again, most of the growth that was present in the market occurred outside the three major east coast states, comparing p2023 with p2022. In percentage terms, South Australia (SA) grew the most at, 4.8%, and, at $80.9 million additional revenue, was close the winner for overall growth in dollar terms, which was Western Australia (WA) with $82.5 million, the result of 3.1% growth. While these are decent numbers, they are significantly down on the p2022 to p2021 comparison, where SA grew by close to 20%, and WA grew by 9.5%.

Queensland (QLD) and New South Wales (NSW) led in terms of losses. QLD was down 2.71%, dropping $147.0 million in revenues. NSW fell by 2.16%, losing the largest amount for the comparison, at $167.1 million.

Both Victoria (VIC) and Australian Capital Territory (ACT) saw revenues increase by around $11 million, with the ACT up 2.1%, and VIC up 0.2%. Tasmania (TAS) and Northern Territory (NT) showed mild declines. TAS was down 0.8% and $4.8 million, while NT was down 1.9% and $5.2 million.

For Australia overall, there was a mild decline of 0.5%, and $138.6 less total revenue. Perhaps the most interesting way to look at that situation is to compare the total revenues collect for August through to November. This shows a broadly very flat result, as show in Chart 2:

The biggest surprise is perhaps that hardware retail grew by over 4% and $100 million for VIC.

New South Wales

As Chart 2 indicates, in 2023 NSW did not experience a surge in sales for either October or November.

Instead, sales remained relatively stable from August to November.

Victoria

VIC shows the same kind of moderation as NSW for November 2023, but differs elsewhere.

While the revenue trails near the bottom of post-COVID-19 results for March through June 2023, from July through to September 2023 it manages to record three record-setting months.

Queensland

It's clear from the graph that p2023 is simply the second-best period QLD has ever had. It consistently trails p2022, but not by much.

The only drift away from this has come in November 2023, so the figures for December 2023 will prove crucial.

South Australia

In almost the inverse to QLD, 2023 has been the best period ever for the SA. While it has closely followed p2022, it has out performed that period in every month.

Western Australia

Like SA, WA had its best ever period in p2023, though it did track p2022 closely - until October and November 2023.

Tasmania

As a note, the ABS did not collect stats for TAS from January 2020 through to October 2021. HNN has estimated the revenues for those months.

It's very clear that TAS for p2023 has very closely followed p2022, though it has also underperformed by a little as well.

Northern Territory

While the NT did well through to June 2023, it has subsequently underperformed p2022, as well as previous periods.

Analysis

Averaged out for Australia, we see the results in the final chart:

While there has not been a lot of growth - in contrast to a year previously, there is certainly a degree of strength in managing to repeat the performance of p2022 - as well as posting an overall record for September.

While there are OK results and nothing to be overly concerned about, low growth in an inflationary landscape is not a good sign.

Related

The Australian Bureau of Statistics (ABS) has released stats for hardware retail turnover through to September 2023.

We can treat the trailing 12-month through to September as periods, which we denote with a "p" prefix. So p2022 refers to the period from October 2021 through to September 2022.

The ABS data shows us two major points: on that trailing 12-month basis, turnover for Australia as a whole has now entered negative growth. This is by a small amount, but given underlying inflation, it is likely indicative of a larger market contraction.

The second point, however, is that across Australia results for both August and September 2023 have been broadly positive. Up, as we all know, is good, in any circumstance.

In terms of how much direct inflation there is in the hardware retail market, that remains difficult to determine. In our recent article on the ABS stats for the Producer Price Index (in this e-newsletter) as it relates to construction, we indicate that this is broadly flat. However, if you consider the categories listed, many of those that more directly relate to hardware retail have trended down. It is somewhat likely as a consequence that inflation for hardware retail is below the 5.4% consumer price index (CPI) increase for p2023 - but will still be significant.

The overall numbers

Australia overall saw sales of $25.46 billion for p2023, down $21 million from p2022, a decline of -0.08%. That contrasts with an increase of 7.54% for p2022 over p2021.

In both percentage and dollar terms, Queensland (QLD) saw the steepest fall for p2023. Revenue was down $85 million, representing a decline of -1.58%. Both New South Wales (NSW) and Victoria (VIC) were close to that, with declines of $81 million/-1.05% and $72 million/1.08% respectively. Tasmania (TAS) also recorded a fall for p2023 over p2022 of 0.93% and $6 million.

In both percentage and dollar terms, South Australia (SA) had the steepest increase, gaining 6.28% and $103.9 million. Western Australia (WA) was just slightly under that with $103.4 million, representing an increase of 3.88%. Northern Territory (NT) grew by 3.05%/$8 million, and Australian Capital Territory (ACT) went up by 1.35%/$7million.

The chart below illustrates the specific revenue comparisons between the states:

The chart below shows the shift in growth from the three major east coast states to the rest of Australia, in dollar and percentage terms.

While the east coast dominates in terms of market size, the rest of Australia has been outgrowing it in percentage terms.

New South Wales

In the contrast between p2022 and p2023, the decline in revenue over April, May and June have dragged down performance in the most recent period. While August 2023 came in marginally below August 2022, September 2023 has seen revenue nudge past September 2021 to provide an all-time high for the month.

The question that remains is whether revenues over the coming quarter will run high, following the December quarter over the two previous years, or if it will fall back to 2020 levels. Based on a range of factors, HNN expects the results for the three months of the quarter to be around the $1.9 billion to $2.0 billion mark, averaging just above December quarter 2020.

To add some overall context to this result, it's worth noting that from p2019 to p2023 retail turnover in NSW increased by 33.1%.

Victoria

Of all the states, VIC has actually benefitted the least from the COVID bump to hardware retail. That's largely down to its subdued performance in p2021, when sales increased by only 0.1%, a period when both NSW and QLD boosted sales by over eight percent. The gain from p2019 to 2023 for VIC is the lowest for all states and territories, at just 17.1%.

Given that, it's a little surprising that in a time where p2023 sales trailed those for p2022 consistently, the state outperformed p2023 throughout the September 2023 quarter. That was especially true for September itself, with sales up 8.9% over September 2022. That's not against a weak comparative either, as sales in both August and September 2022 were the highest to date, a feat obviously repeated in 2023.

While this is encouraging, HNN still expects total retail turnover for the current December quarter to come in just below that of NSW, at $1.8 billion to $1.9 billion.

Queensland

QLD began p2023 by setting record highs in sales for October and November 2022, and just nudged a new record in February 2023. However, from June through to September 2023 the state has underperformed the previous period.

Again, to provide some perspective, sales for p2023 were up over 30% on those for p2019, increasing by $1.3 billion.

South Australia

Every single month of p2023 has seen SA set a new record for hardware retail sales, with September's increase of 9.2% over September 2022 only the fourth highest percentage gain for the period.

It's difficult to predict what December quarter of 2023 will bring, but it is likely to be over $500 million in total revenue. SA has been the state to most benefit in percentage terms from the COVID bump, with hardware sales up over 50% for p2023 against p2019.

Western Australia

Like SA, p2023 was a good year for WA hardware retail, with only April 2023 dipping below results for p2022, and every other month setting a new record for the state.

The overall COVID bump from p2019 to p2023 has been 39.5%.

Australian Capital Territory

Through until April 2023 performance for p2023 closely followed that of p2022, but since May 2023 the territory has outperformed the previous period. That culminated in a 10.4% lift for September 2023 over September 2022.

ACT saw a COVID bump of 45.7% from p2019 to p2023.

Tasmania

As we've started to fully cycle out of the data blackout that happened for the state during the COVID years, we can present at least the two post-COVID years.

As the chart indicates, p2023 followed p2022 very closely.

Northern Territory

NT also has enough data available to now present the two most recent periods.

In part due to its size, NT tends to be volatile in its results, but these do indicate that p2023 outperformed p2022 until July 2023, and has underperformed p2022 for all of the September quarter. However, that is in part due to an exception p2022.

Analysis

The primary fact to understand about the current Australian economy is that it is the intent of the Reserve Bank of Australia (RBA) to create conditions where Australians will spend less, especially on housing.

The overriding influence on the economy is a shortage of supply, which means that even moderately high demand can lead to inflation. As mentioned in our analysis of the ABS Producer Price Index numbers for construction, the ABS sees demand in construction for the September 2023 quarter as being split. While supplies used up until first fix have seen diminishing demand, and hence price reductions, second fix supplies continue to see high demand, and hence price increases. This would indicate that the RBA has started to achieve its goals.

Where HNN sees real concern for hardware retailers is in how the more DIY market plays out over December 2023 and March 2024 quarters. As we mentioned in our analysis of the DIY market, we've grown used to both analysts and corporate CEOs relying on a model that sees DIY pick up when house sales slow. There has always been some truth to that, but it has become an increasingly simplistic analysis as other factors come into play. It might have been a leading market modality back in 2018, but in 2023 and 2024 it is just one factor among equals.

One of those factors is that HNN is seeing increasing anecdotal evidence that DIY has become less popular. It seems to be moving to a more narrow focus. We do think one area that could see growth is in repair as opposed to improvement, with an increased willingness among homeowners to take on annual, seasonal tasks to ensure their homes stay in good shape.

All that said, it is true that Australia's hardware retail industry has managed to stay surprisingly robust and resilient through some quite turbulent economic times, as the chart indicates.

Even if revenues pull back to the levels of p2021, the industry will have retained much of the growth experienced during COVID. While that won't be good news for corporate hardware retailers, for independents there have been real gains in both market size and share. As we also expect to see the number of business exits from hardware retail increase through calendar 2024 (as owners seek to exit on a high), we see conditions continuing to improve for those independents.

The Australian Bureau of Statistics (ABS) has released its stats for the Producer Price Index (PPI) through to the September quarter of 2023. The ABS has recorded a zero percentage gain, after four years (16 quarters) of continuous increases going back to December quarter 2019.

Overall, the prices of "inputs" - such as construction materials - into house construction have flattened. However, this is something of a split situation, according to the ABS. With demand for new housing easing during the most recent quarter, prices have declines on materials used during the initial phase of construction, but those needed during second fix - such as paint - continue to trend high.

On the other side, output from house construction, labour costs continue to rise, and are the main reason why house construction prices rose by 1.0% for the quarter. For the four quarters to September 2023, prices rose by a cumulative 3.9%.

Category performance

We can roughly classify the construction material categories into four groups: where there has been a substantial price index fall to a level going back more than 12 months: where there is some price decline in the most recent 12 months; and where there is a near-flat or only very small increase in price; and where there is a substantial increase.

Overall, as the ABS states, there has been a near flat performance for September quarter 2023, as shown below:

We've chosen to break the data into periods from December quarter to September quarter not because it is seasonal (as with retail sales and building approvals), but because the 12-month-on-12-month comparisons make it easier to understand what's going on.

Substantial price falls

To start with the good news first, there have been substantial price falls in six categories:

ABS PPI for construction: Ceramic Tiles

Other Electrical Equipment

Reinforcing Steel

Steel Beams and Sections

Steel Products

Structural Timber

Mild price falls

Not quite as great, but still very encouraging, there are a further 10 categories which have undergone slight price falls and indicate in most cases a stabilising market. These categories are for:

Aluminium Windows & Doors

Carpet & Other Floor Coverings

Ceramic Sanitaryware

Electrical Cable & Conduit

Electrical Equipment

Fibrous Cement Products

Plywood & Board

Switches & Distribution Boards

Termite Barriers

Timber Board & Joinery

Stable prices

In this group are categories that were either flat, or had only mild deviations from flat, representing price stability. There are nine categories included:

Copper Pipes & Fittings

Cupboards & Built-in Furniture

Metal Garage Doors

Mirrors & Other Glass

Other Metal Products

Plumbing Products

Shower Screens

Timber Windows

Increasing prices

Then there are the 19 categories that did actually increase.

Forecasting in the post-COVID world remains difficult. Paradoxically, that's partly because the influence of COVID-19 itself is rapidly waning. What we've been left with is a confusing picture where the aftereffects of COVID intermingle with changed global dynamics for commerce.

For example, it has become evident that the supply chains we knew pre-COVID are, for the most part, not coming back. 2023 was supposed to be the year we saw that return progress, but instead we've seen a range of new circumstances – including global unrest, notably in Russia/Ukraine and Israel/Gaza, but also in the economies of China and several south-east Asian countries. All that has been topped up with ongoing climate-driven disasters and stress, including the real threats of fire and flood in Australia.

What has defined hardware retail throughout calendar 2023 (so far) has thus been what economists refer to as the supply-side, rather than signals originating in the demand-side.

In the past, when supply chains were super-charged, the struggle was getting people to buy what could be supplied. Today, there are many willing customers, and the restraints are all about providing them with the goods. This does create price rises (as restraints on supply echo some of the effects of increased demand), but it also creates switching behaviours, not only between products, but between types of demand as well.

The housing market is one area where we can clearly see these influences play out. Chart 1 shows data from the Australian Bureau of Statistics (ABS) Total Value of Dwellings report for Brisbane, Sydney and Melbourne. It maps median prices to number of transactions for established houses.

As marked on the chart, the tipping point in terms of a decline in the number of transactions is March quarter 2022.

Chart 2 shows the lending rates in Australia as provided by the Reserve Bank of Australia (RBA).

Lending rates began to rise sharply in May 2022, up 21 basis points, followed by a rise of 45 basis points in June 2022, and ongoing increases thereafter.

What stands out in these charts is that they show relative purchase price stability for houses, despite a very strong – indeed, historically unique – increase in the actual cost of home ownership through interest rates rises.

Economists expected a sustained decline in prices. Instead what happened was that the number of transactions declined, but prices did not.

As the housing website Domain commented in an article from 3 November 2023:

The lift in auction listings is driven by prices close to new records and improved property market conditions, motivating sellers to list. However, the recent performance of [declining] clearance rates seem to indicate a more balanced market.

The prices charted above are for established houses, rather than new builds. Part of what drives the evident market confidence, where house sellers are less inclined to reduce prices to secure sales, is the awareness that new house construction (the ultimate supply-side of the housing market) continues to struggle. Supply constraints continue, but more importantly the industry has demonstrated it lacks the capacity to grow in terms of scale and/or productivity.

The renovation situation

It has become something of an "old saw" of hardware retail that when the housing market goes into decline, sales for renovations – "alterations and additions" (alt-adds) in the ABS lexicon – pick up. Of course, no market is ever that perfect, but it's made a nice line for the CEOs of both Wesfarmers' Bunnings and Metcash's Independent Hardware Group to trot out for investment analysts – with some justification.

Looking at the market situation described above, it is arguable that FY2022/23 should have produced stimulus in alt-adds. The drop in transactions coupled with the persistently high house prices and steadily increasing interest rates should have seen more families opt to improve, not move.

The difficulty is that actually tracking alt-adds through stats is not an easy task. There is no single, fully reliable source of data on alt-adds available from the ABS (or anywhere) – but we can, by combining several, arrive at some kind of reasonable overview.

One of the most useful sources is from the ABS national accounts data. This is where the government gets its numbers for gross domestic product (GDP), and a range of other fundamental measures as well. One part of this dataset is household consumption, and this includes data on alts-adds, which is gathered via a surveys.

It's best to see the national accounts data in contrast with one of the most popular sources of alt-adds data, which is building approvals. The main advantage of the approvals data is that it is very accurate, as it relies on approvals that have been registered with state and territory governments. However, these approvals only capture alt-adds that take place above a set dollar value, which means that the large number of smaller alt-adds are missed.

The national accounts data does capture alt-adds of all sizes – but is captured via survey data, that is then extrapolated, making it less accurate. That said, however, when dealing with an organisation as capable, professional and ethical as the ABS, while the numbers captured by the survey may not result in absolutely accurate data, they will be reliable in relative terms – in other words, they will accurately capture fluctuations.

Next there is the lending data, which provide a view of the loans taken out by homeowners to finance alt-adds. Again, this captures only a proportion of all alt-adds, but understanding the propensity of homeowners to take out loans is useful.

Finally we come to one of the more difficult statistics from the ABS, for building work done. The first two datasets to pay attention to are for work commenced and work completed. These both relate to the total cost for a project. When work commences, that total cost is recorded, and when work completes the total cost is again recorded. HNN adds its own simple, derived stat to this, which is just work commenced minus work completed, which gives a general sense of "loading".

The third dataset is for actual work done during a quarter. This is very useful in judging how well the construction industry is faring at any particular moment, but it does also rely on survey data estimates, so, like the national accounts data, it might not always be definitively accurate, but it does reliably provide a sense of fluctuations.

Taking all that data together, we can derive, state-by-state, a sense of what is happening with alt-adds. And that will, hopefully, give us some insight into the current state of the overall industry, and hence what we can expect in hardware retail.

In this series, we will be looking at the five major states. We are developing a series specifically for Tasmania, the Australian Capital Territory and the Northern Territory. In assembling these stats we realised that, given their smaller size, and highly unique nature, we needed to provide additional statistics to really make sense of these smaller, but very important markets.

New South Wales

New South Wales (NSW) continues to be the state with one of the most robust markets for houses in Australia. However, we are likely to see that shift somewhat over the course of the current financial year.

National Accounts

To begin with the national accounts for current prices in alt-adds:

This shows a familiar story: there is a stone increase in expenditure in December quarter 2020, and then this continues progressively through to March quarter 2023, with June quarter 2023 slightly below June quarter 2022.

Building Approvals

Next, it's helpful to look at the building approvals for alt-adds that do not result in a new dwelling being created:

These are for the period from October to September, which we refer to with a "p" prefix, so p2021 would be the period from October 2020 to September 2021.

This echoes the national accounts pattern, with increased levels of approvals from September 2020. The results for p2023 do show more volatility – generally towards the upside – than is p2021 and p2022, but the three periods are mostly in range.

We're including the generally smaller category for alt-adds that create dwellings because we think this is something to watch over the coming years.

The pattern here is a general low-level of activity, along with one or two anomalous spikes, usually relating to very large renovation projects on major buildings.

Lending

The stats for lending directed at alt-adds projects show a slightly different pattern than that of approvals.

The value of loans begins to increase in February through April of 2021, then increases dramatically in May and June 2021. From November 2021 through to August 2022 new highs are reached in value, but, except for October, all of p2023 underperforms p2022, albeit only marginally in three months.

Looking at the number of loans, there is also interesting activity:

The over-performance of p2022 is more marked. Also, while the value of loans for May through September almost converged for p2022 and p2023, in numbers p2023 had significantly fewer loans, indicating the loans that were taken out had a higher value in p2023 than p2022.

Building Work Done

With the building work done stats, the commenced data is some of the most important as it represents the uptake of projects. To outline these clearly, we provide chain values along with regular values.

Chain values are a statistical measure, where the dollar amount does not directly relate to the cost of the projects, but is adjusted to provide a measure of the level of activity. They are adjusted to filter out most of the effects of movements in inflation and supply prices.

This chart does show some interesting activity. There was an acceleration in activity starting in December quarter 2020, and continuing through to March quarter 2022, with a peak in June quarter 2021. However, from June quarter 2022 through to June quarter 2023 the trend has returned to that of the pre-pandemic years.

This is something of a contrast for the non-chain values for building work commenced.

Here we can see that FY2022/23 remains somewhat elevated above the pre-pandemic years, and much more in alignment with FY2021/22 in particular.

Building work completed is also interesting.

Here we see two almost mirror symmetrical lines for FY2021/22 and FY2022/23. FY2021/22 somewhat underperformed for its December and March quarters, while FY2022/23 over-performed for those same quarters.

We can see the results of that in the chart for Work-Loading.

The loading for FY2021/22 reaches a peak in the December quarter, and there is a low for this eight-year series in the March quarter of FY2022/23.

Driving these numbers is the actual value of work done during each quarter.

Starting with March quarter 2021, there is a substantial increase in the value of work done, right through to the end of FY2022/23.

Analysis

If there is a single clear sign that NSW is into its post-pandemic phase in construction, it's the high volume of completions for alt-adds, a consequence of the high value for quarterly work done.

Coupled with that transition is likely a transition slightly away from alt-adds that are related to house sales – both the pre-sale and the post-sale bump – and a shift to a market more driven by "improve, not move".

What needs to be figured into this, of course, are the continued increases in interest rates. While there has been speculation from the more "populist" writers on economics at some news organisations that these increases are "meaningless" – as they are aimed at reducing demand, when inflation is largely driven by supply at the moment – it is evident that they are targeted at preventing the current nascent house price bubble from getting worse.

Also, while it is true that higher interest rates have a minimal impact on spending on "essentials" such as food, they do impact not only non-essential spending, but also encourage behavioural shifts. For example, petrol might be an essential purchase to some, but petrol usage, for many, is a choice. The lower rates of public transport post-pandemic indicate there is room for lower rates of consumption.

As it seems highly likely rates will reach around the 4.9% level by the end of the current financial year, they will begin to affect spending on alt-adds as well as houses. That effect will be increased if house buyers are ultimately discouraged from their purchases, and/or switch to alternative markets (non-urban and multi-dwelling). In a market where house prices enter some decline, spending on alt-adds will likely fall.

Victoria

Overall, Victoria (VIC) stands in somewhat stark contrast to NSW. There is a range of circumstances that saw COVID-19 have a more severe impact on the state, and that impact has carried over to some extent to its post-COVID-19 economy as well.

National Accounts

The first half of FY2022/23 carried on some of the exuberance of the final quarter of FY2021/22, but this ended in the second half of FY2022/23, with alt-adds as measured in national accounts essentially tracking the previous year.

That said, the rate of expenditure remains far above the pre-COVID and early-COVID rates.

Building Approvals

Building approvals not creating dwellings shows a slightly mixed aspect. While most of p2023 closely tracks p2022, there is a breakout at the end of the period for September 2023, posting a strong decline over both p2022 and p2021.

For building approvals creating dwellings, there is some noticeable activity for p2023, but this is less than that for p2021 and p2022, even without the anomalous boost in May 2020.

Lending

For the most part the value of lending for alt-adds in p2023 trails that of p2022 – the most notable exception being the final month of the period, September 2023.

As with NSW, the number of loans in the latter half of p2023 declines more sharply than the value, indicating a shift to fewer loans of higher value.

Unlike NSW, however, the decline in the number of loans is quite sharp, falling far below the level for p2021 in the final six months.

Building Work Done

Perhaps the most significant number for VIC is the result for building work commenced measured as chain values, which shows a very low result for June quarter 2023. Is is the lowest such number for the past eight financial years.

The result for regular work commenced values at the end of FY2022/23 is not quite so dire, but it does reflect something of a slowdown, coming in below FY2020/21 and FY2021/22.

As with NSW, the work completed values show a sharp upward arch through FY2022/23.

That arch provides a work loading value that stayed in the negative region for the last three quarters of FY2022/23.

A major contributor to the decrease of work loading is the high value of work done in the quarter, especially during the first two quarters of FY2022/23.

Analysis

It is fairly clear that, in contrast to NSW, VIC seems to be heading into a more uncertain time when it comes to alt-adds. That said, the overall levels appear to be higher than those before COVID-19.

It's notable that VIC has seen a lower resurgence in house prices over the past year, though this does seem to be accelerating. To some extent that could mean the state will be less affected than NSW if interest rates do continue to rise through the financial year.

However, there are distinctly fewer indications that the "improve, not move" effect is much in evidence.

Queensland

It is often tempting to approach Queensland (QLD) as something of a hybrid of NSW and VIC, but it's clear from these numbers this is really not the case.

National Accounts

In terms of national accounts, spending on alt-adds has been for the most part slightly elevated in FY2022/23 over FY2021/22. That's important, because FY2021/22 was considerably higher than FY2020/21.

Building Approvals

QLD is quite unique in terms of building approvals, with p2021 being the peak period, and p2022 underperforming that period for 10 of 12 months. P2023 manages to outperform p2022 for all but two months, and even outperforms p2021 during May and June 2023.

QLD is also quite different from NSW and VIC when it comes to alt-add approvals that seek to create new dwelling. There is substantial activity in this sector through p2021, p2022 and p2023. P2023 was especially active from February 2023 through to September 2023.

Lending

While the value of loans for alt-adds in QLD has declined for p2023 over p2022, overall this still remains at a high level, continuing to outperform p2021.

Unlike NSW and VIC, there does not seem to be a shift to fewer higher value loans, with the number of loans closely tracking the value.

Building Work Done

As with the other states, the chain value for work commenced is somewhat interesting. For QLD this has retreated in FY2022/23 below the level for the previous two financial years, and close to the pre-COVID values.

In regular value terms, there is a close convergence between FY2021/22 and FY2022/23, and only slight variance from FY2020/21.

Work completed for alt-adds in QLD shows a steep rise in the second half of FY2022/23.

That in turn has seen the work loading enter negative territory, after spending all of FY2020/21 and FY2021/22 in positive territory.

That has been a result of the combination of a steady rate of work commenced, and the higher level of work done in the quarter.

Analysis

One difficulty in analysing QLD is its diverse geographical and demographic makeup. Where VIC is very much all about Melbourne, and NSW remains dominated by Sydney (though with growing regional centres), QLD has Brisbane, and then a large coastal region that mingles high-value and low-value areas.

One aspect of the state's market might be ongoing growth in alt-adds that create dwellings, as it moves to increase density in some of its regional areas. That, along with a general move to improve existing dwellings, could continue to drive activity, even if rising interest rates cause house prices to stall.

South Australia

While we wouldn't describe the alt-adds situation in South Australia (SA) as "rosy", it certainly seems overall to be positive.

National Accounts

While the extent of growth has tapered slightly for June quarter 2023, the national accounts figures overall show steady and constant growth in alt-adds expenditure since March quarter 2021.

Building Approvals

Approvals alt-adds not creating dwellings for p2023 tended to follow the previous two years closely, but with reduced volatility, mostly on the downside.

Interestingly, as with QLD, SA has shown higher levels of alt-adds creating dwellings, especially in p2023.

Lending

Lending for alt-adds showed steady upward progression through p2021, and then became more volatile in p2022. It has been a little less volatile in p2023, tracking overall between the two previous periods.

While there was a shift to higher average value loans at the end of p2022, that seems less the case for p2023.

Building Work Done

As with the other states, the chain values for building work commenced do signal a decline in real value for FY2022/23, especially in the final quarter.

In simple value terms, there is also something of a decline for June quarter 2023, back to values for June quarter 2021. That said, the values remain well above those pre-COVID.

Value of building work completed for SA remained at pre-pandemic levels through to September quarter 2021, and returned to those levels for March quarter 2022, before lifting again in the next quarter. However the levels have remained high throughout FY2022/23.

That behaviour has seen the work loading fluctuate as well, though the definitive shift is far into negative territory for June quarter 2023.

The work done per quarter values show that the alt-adds industry has been progressing to deliver an ever-increasing level of value.

Analysis

The sharpest brake on alt-adds spending for FY2023/24 is likely to be a slowing economy, as the post-pandemic stimulus wanes, and state-wide growth returns to levels closer to 1.0%. There are some early signs of that in the alt-adds stats, but it likely that growth will continue through to the end of March quarter 2024.

That shift to slower growth could very well see a further shift in alt-adds, as spending moderates, but remains supported by the past years of growth.

Western Australia

One of the distinguishing characteristics of Western Australia (WA) is that it has experienced housing booms in the past, largely driven by mining development.

National Accounts

The national accounts figures for alt-adds shows that demand in FY2022/23 was generally above that for FY2021/22.

Building Approvals

Unlike in other states, alt-adds approvals for non dwelling creation have remained somewhat closer to past levels. There is also a great deal of volatility, especially for p2023.

For p2023 the stats reflect five eight-year highs, mixed in with four three-year lows. As that indicates, the trend is more positive than negative, especially since May 2023, but it remains unclear.

In approvals for alt-adds creating dwellings, WA – like SA and QLD – shows a surprising amount of activity, especially post June 2023.

Lending

Lending represents a clearer picture, with the value of loans for alt-adds reaching six-year highs during p2022 and p2023. That is more evident in the second half of p2023.

With the number of loans for p2023 going below those for p2022, even as value increases, it is clear WA also experienced a period of fewer loans be granted, but for higher amounts. The peak period for reduced value loans would have been March 2022.

Building Work Done

There is no other state which has quite the startling results for building work commenced chain values as WA.

What is indicated here is that the chain value – the basic throughput – for commencements fell to a very low level during FY2022/23. It is substantially lower than in the two preceding financial years.

The stats for standard values do not show quite that break, but they do show a substantial decline from FY2021/22 to FY2022/23.

Work completed for alt-adds presents, however, somewhat the reverse picture, with FY2022/23 substantially outperforming the two prior financial years.

That has contributed to a lower work loading, though this does remain historically high.

Work done per quarter for FY2022/23 does outperform the two previous years.

Analysis

The situation for alt-adds in WA remains somewhat unclear. The very low value for chain values of building work commenced could indicate that this sector is under more stress than other stats indicate. Approvals for alt-adds seem good, but that depends if the optimism expressed post May 2023 is really justified.

Of course what makes WA so unique is that its overall economy is directly dominated by the export of commodities, which fluctuates strongly. This is likely to be as much a determining feature for calendar 2024 as interest rate rises.

Overall analysis

The dominant sensibility running through most of these stats is that the alt-adds market is undergoing some kind of a change. The post-pandemic currents that have been driving it through FY2021/22 and FY2022/23 are fading out. Rising interest rates are likely to see the property market start to fade, and it is simply unclear whether that will translate into greater activity in alt-adds.

HNN's current estimation is that we are likely to see some expansion of the alt-adds market as the housing market fades in calendar 2024. However, we expect that market growth to develop in certain very narrow areas. One such area we have identified (through the use of additional sources) is for decks.

One reason for this is that we've identified some shifts that indicate a move towards in-home entertaining, especially outdoors. We think this shift will be boosted by features that make decks usable for something close to nine months of the year.

We also see a move towards the installation of simplified security systems. These would fill the space between the doorbell-with-a-camera and walls bristling with CCTVs. The new systems will be small and discreet.

While there are major economic shifts likely to occur throughout calendar 2024, the market will also be very responsive to what it sees as good value propositions which help homeowners to improve the quality of their experience of their homes. By the end of 2024, we think this trend will help to usher in the first real wave of integrated smarthome appliances, driven in part by better more integrative communication protocols.

In short, it's understandable that over the past three years the hardware retail industry has seen real growth, but it has also lost something of its sense of direction. The externalities, including COVID-19 – as well as the societal and governmental reactions to it – have been overwhelming. But we are moving now into a period where shifts will be less deterministic, and where the market will change based as much on internal feedback.

Hardware retail sales slowed considerably for the 12 months ending July 2023, according to figures from the Australian Bureau of Statistics (ABS). While growth did not go negative for the nation as a whole, given ongoing inflation, it's likely the general market has retreated over the past year.

For July 2023 itself, however, there was a degree of mild positivity for most states, with revenues for the most part matching to revenues for July 2022, or even lifting above those. (There are anecdotal reports of a more generalised slump for August 2023.)

Looking at the trailing 12 months, the two states that did well were South Australia (SA) and Western Australia (WA). SA produced 7.95% growth, for a total increase of $128.9 million, while WA grew by 5.0% and an increase of $131.2 million. Close behind in percentage terms was the Australian Capital Territory (ACT), with 5.0% growth, and an increase of $25.3 million.

Queensland (QLD) was almost flat with a 0.01% increase. Victoria (VIC) continued to see declining revenues, down by -0.26%. New South Wales (NSW) is also showing a decline for the 12 months, down by 1.3%, a reduction of $86.3 million.

As a whole, Australia saw a 0.8% uplift, and a net gain of $207.9 million.

New South Wales

As Chart 2 illustrates, NSW was one of several states that saw July 2023 come close to matching July 2022.

Taking a wide perspective, NSW had its second best results for July in 2023, just a shade off the results for July 2022. Again, it's difficult to statistically account for inflation, but even with that discount, the month performed relatively well.

Victoria

Surprisingly, given that 2023 has seen a general slowdown in hardware revenues for VIC, the July 2023 result was the second-best historically, beaten only by the huge result for July 2020, as seen in Chart 3.

This does come at the end of a year with a definite slide in comparative revenues since January 2023. The real test of the VIC market is what happens in November and December 2023.

Queensland

Making comparisons with the somewhat "zany" three years since COVID-19 is not always useful. The pattern we may be seeing in QLD from April 2023 onwards is a return to the pre-COVID-19 patterns, albeit at a higher level, as shown in Chart 4.

Again, the result for July 2023 is the second-highest ever for the state, and it follows on from a steady increase in revenues over the prior three months.

South Australia

SA has had its best 12-month period ever for hardware retail revenues, though the result for July 2023 just edges ahead of July 2022. Chart 5 shows this outperformance, especially from August 2022 through to January 2023.

Western Australia

Like SA, WA is having its best 12 months ever for hardware retail revenue - though by a small margin. In fact, 11 out of the twelve months have set new records for the state as shown in Chart 6.

The state is very much a tell of two halves when it comes to hardware revenue, so the real test will come over the next six months.

Tasmania and Northern Territory

The lack of data through the COVID-19 years still makes individual comparisons for Northern Territory (NT) and Tasmania (TAS) difficult. We can derive an estimate of the total for the state and territory, but it's not really of much use statistically. So we present this chart for completeness sake.

Analysis

Generally speaking, the results for July 2023 are encouraging, and show a resilient market that is softening, but also holding up under pressure from high interest rates and inflationary pressures.

One element that might be helping to boost it a little is that other areas of expenditure - such as international travel - remain expensive. That's not just a matter of airline ticket prices, but also the AUD (somewhat paradoxically) remains devalued against currencies such as the USD and the Euro. It's cheaper to renovate the bathroom than to visit Italy or Los Angeles.

Economic forecasting has narrowed somewhat during August 2023 to focus on whether the Australian economy is seeing an abrupt slowdown in the first quarter of FY2024. With broader retail businesses reporting a slowdown in sales for the first six weeks of FY2024, and some hardware retailers seeing a similar trend, there is some confirmation that there is more of a drift downwards than upwards. However, most mainstream economic indicators show something of a more mixed "will we or won't we" trend.

Building approvals are very much in that uncertain grouping. Looking at the Australian Bureau of Statistics (ABS) stats, you can certainly make the case for a slowdown, but the real case is perhaps more about volatility than decline when viewed on a state and territory basis.

We're looking here at the ABS series that tracks building approvals for the greater capital city regions - including the Australian Capital Territory (ACT) - for all house and non-house building approvals through to June 2023. The 12-month periods thus correspond to the standard Australian financial year of July through to June.

Greater Sydney

The first thing that is clear about the Sydney numbers is that there is increased volatility for FY2024. January 2023 shows the lowest point for the four years - FY2020 through to FY2023 - under consideration. And May 2023 shows the highest point for that time period.

Five of the 12 months in FY2023 represent highs or lows for the time period. While FY2023 represents a decline on FY2022, the largest decline is from FY2021 to FY2022.

Likewise, approvals for June 2023 show a decline over May 2023, but remain above the level for June 2020.

Greater Melbourne

The stats for Melbourne in FY2023 show a distinct division into halves for calendar 2022 and calendar 2023, divided by the very common sharp slump in January 2023.

For the first half of the FY approvals follow the average of the preceding three years, followed by a slightly lower number for January, and then four months from February through to May of below average approvals. Then there is a recovery back to near-average numbers for June 2023.

However, Melbourne does show more certain signs of decline for FY2023, with approvals significantly lower than for the three preceding years.

Greater Brisbane

As often seems to be the case with Brisbane, the region falls somewhere between Sydney and Melbourne statistically. Total approvals for FY2023 are lower than for FY2021 and FY2022, but higher than FY2020.

About the best that can be said is that the region remains volatile, but with the balance moved to the downside.

Greater Adelaide

Somewhat similar to Melbourne, Adelaide has seen a slightly stronger first half to FY2023, concluding in a somewhat lower slump in January 2023, and then a more subdued second half. There is a four-year high in approvals for November 2022, and then a four-year low for March and April 2023.

In fact, the Adelaide numbers for FY2023 from November 2022 onwards track fairly closely those for mostly pre-COVID FY2020.

Greater Perth

In a more extreme version of Adelaide, Perth shows numbers for FY2023 that are similar but below those for FY2020, but this comes in the shadow of a very strong increase in approval numbers for FY2021.

Australian Capital Territory

FY2023 for the Australian Capital Territory (ACT) shows actually less volatility than the preceding three years, and this comes - mostly - at the expense of the highs rather than the lows.

May and June 2023 are especially weak, showing low points for the four years.

Hobart

Conversely to the ACT, Hobart shows higher volatility for FY2023 than for the preceding three years. Four year lows were set for seven months during FY2023, including a significant slump in June 2023.

Yet the larger overall slump for Hobart happened in FY2022, coming off the highs for FY2021.

Darwin

Given the smaller size of the Darwin market, it's volatility is has been relatively subdued. FY2023 has not been its best year, but it actually outperformed FY2022, and came close to FY2020.

Analysis

Chart 9 shows the total building approvals by financial year for the greater capital areas described above.

It's always worth mentioning that there is something of a distortion in terms of comparing regional/urban areas for NSW, as it is the only state that has a number of significant urban areas outside of its capital city.

What the chart does show is that FY2023 has been a slower year for approvals than the previous three years. That slump seems significant for Melbourne and Perth, but far less so for Sydney and Adelaide, with Brisbane somewhere in-between.

Of course what we are really seeing in FY2023 is the tension between demand on one side for more dwellings, and increasing costs due to rising interest rates on the other. The real question is probably not whether the Australian economy will begin to decline in FY2024, but when and how interest rates might go down, and thus give more dwelling purchasers a path to market.

The Australian Bureau of Statistics (ABS) has released hardware retail sales for June 2023. This means that in comparing the trailing 12-month numbers, we're looking at the financial year (FY) from July to June.

In general retail, the June 2023 numbers are being seen as broadly significant in terms of predicting the first quarter of FY2024. It's unclear if that is really the case for hardware retail, though the performance during that quarter itself will likely be very significant as an indicator of the market for the following 18 months.

New South Wales

The graph shows that sales for New South Wales (NSW) in FY2023 closely shadowed those for FY2022 from January to March, then dropped to a lower level from April to June.

That said, the June numbers remain relatively buoyant, beating both June 2020 and June 2021.

Victoria

In many ways the core question about the June numbers for Victoria (VIC) is what is going to happen in the following July? July has taken on the role of being the lowest revenue month, where prior to FY2020 it shared that role with June.

That's shown in the developing convergence around $510 million for the month over the past three years, while July shows a relatively wide divergence.

Queensland

FY2023 saw Queensland (QLD) setting all-time records for hardware retail sales for July through November, following on from record sales for FY2022 in December, March, April and June. In FY2023, sales tracked FY2022 from December to February, but have been generally lower since then.

It's difficult to see the sales pattern altering much for QLD, given that its economic drivers are broadly different than those for NSW and VIC.

South Australia

In technical statistical terms, FY2023 has been something of a cracker for South Australia (SA), with every month setting a new record in sales.

The first seven months were particularly strong, but since February sales have tracked closer to FY2022. While SA does tend to be more volatile than NSW, VIC and QLD, it seems unlikely the state will see a sharp decline.

Western Australia

Western Australia (WA) didn't quite match the record of SA, only setting new records for 11 months in FY2023 - April dipped slightly lower than results for FY2022.

The economic factors that affect WA are so unique that it's difficult to see it in comparison to the rest of Australia. Broadly, given the effect of changes external to the state, it seems likely that revenues will continue high, but under those for FY2023.

Australian Capital Territory

The Australian Capital Territory (ACT) managed to exceed or close to equal new records for six months in FY2023.

Since October 2022, the territory has closely followed the trend set by FY2022, but diverged higher in May and June. Predicting this region is very difficult, but again there is cause for optimism looking ahead to FY2024.

Combined Northern Territory and Tasmania

As we lack much of the historical data for these two regions, we have backed into some numbers by subtracting the total revenues of all other regions from the total for Australia (this is a slight over-estimation, but by very little).

It's difficult to imagine two more different regions, so statistically this is pretty much nonsense. But the chart does indicate that for FY2022 and FY2023 the two regions seem to be doing well.

HNN will begin to reinstate stats for these two regions individually for FY2024.

Australia

The nation managed to set hardware revenue records for the first seven months of FY2023, and closely followed FY2022 for the remaining five months.

Of course, as with the results above, inflation plays a key role in these new records, but they are at the very least modestly good.

However, we can see more of a trend if we look at the percentage growth across financial years for the past five years, as shown in Chart 9:

It is clear that revenue growth in NSW, VIC and QLD has been slowing down over the most recent financial year. In fact, figuring in inflation both NSW and QLD are probably negative in real terms, and VIC, of course, is negative for both FY2022 and FY2023. That is balanced by very strong growth in other states and territories.

Analysis

The post-COVID-19 economy remains something of a mystery today, largely because it seems to shift significantly over each half. There is an admixture of some remaining traces of COVID-19 hesitancy, combined with compensatory/recovery changes, plus genuine medium-terms shifts in consumption.

One revealing chart to look at is for returning travellers to Australia who travelled to see friends and family, or to go on holiday:

Just glancing at this chart, it is evident that while visiting friends and family has recovered almost to pre-pandemic levels, holiday travel is below the historical norm.

In fact, departures in these two categories for FY2019 totalled 9,330,510; for FY2023 this was just 7,141,640, a 30.7% drop.

How are we to interpret that? One possible cause is that airfares remain historically expensive at the moment, exacerbated by the falling AUD - which is falling, slightly paradoxically, because forecasts indicate the Reserve Bank of Australia (RBA) will taper future increases in interest rates.

It's most likely, of course, that past increases in interest rates mean that families which are somewhat financially committed to mortgage payments on increasingly expensive real estate now cannot afford holidays. But is this a positive sign for hardware retailers, as it means what spare funds they do have, they will be more inclined to spend on the asset that is consuming most of their investment capital, housing?

Short term and likely medium term maybe this does benefit the hardware retail sector. The problem is that it points to a growing imbalance in the economy. It is never wise in investment terms to concentrate on a single asset category.

Should house prices decline for some reason, Australia could suffer some fairly severe consequences. We're less than 15 years on from the last time that happened.

The Australian Bureau of Statistics (ABS) has released its stats for hardware retail sales through to May 2023. HNN will use the trailing 12 months to May in analysing these stats, timespans which we refer to as "periods". This means that, for example, p2019 refers to the timespan from June 2018 to May 2019.

The trends HNN noted in reviewing the stats for April 2023 seem to be continuing, likely signalling the start of a slowdown in the growth of hardware retail revenues.

Most notable is the shift in growth from the east coast states - New South Wales (NSW), Victoria (VIC), and Queensland (QLD) - to the other less populous states and territories. Comparing p2023 with p2022, South Australia (SA) is now the leader in both percentage growth, and numerical growth, with 12.6% and $195.4 million. Next, NSW recorded growth of 2.1% for the period, with an increase in revenue of $160 million. It is followed by Western Australia (WA), with 5.8% growth, from an increase in revenue of $150.0 million.

In percentage terms, it is followed by Australian Capital Territory (ACT) with 5.4% ($27.0 million), and then QLD at 2.6% ($136 million). VIC remains negative, with growth of -1.4%, and a loss of $89.4 million. While Northern Territory (NT) and Australian Capital Territory (ACT) do not have individual historical stats available, combining the two (which makes little statistical sense, but is a very rough guide) showed growth of 5.0%, on an increase in revenue of $42.4 million.

Growth for Australia overall was 2.5% with an increase in revenue of $620.3 million.

New South Wales

Chart 1 shows that the current period continues to track below the previous period.

Victoria

VIC has been tracking below p2022 in p2023 since November 2022. It seems to be following the pattern for p2021.

Queensland

Chart 3, for QLD, is slightly more optimistic, with the result for May 2023 managing to get above May 2022. However, this is after tracking largely below p2022 in p2023 since December 2022.

South Australia

SA has managed to track above p2022 throughout p2023, as Chart 4 shows. However, its lead over the previous period has diminished.

Western Australia

Like SA, WA has managed to track relatively high, though the margin between p2022 and p2023 continues to shrink, as shown in Chart 5.

Australian Capital Territory

Since December 2022, ACT has seen its p2023 almost in lockstep with p2022 - and with May 2023 it has broken out above p2022 for the first time.

Analysis

As the chart for Australia as a whole shows, if there is a downturn taking place, it is - so far - relatively mild. As with many of the states and territories, p2022 and p2023 seem very close since December 2022, but there has been a little decrease since March 2023.

Some of the research HNN has done which will be featured in HI News shows that many of the assumptions being made about the origin of the housing shortage may not necessarily show the entire picture. For example, there has been a noticeable increase in sole-resident dwellings through the pandemic years, a situation which will likely correct itself over time. Likewise the shift to less-efficient (in cost terms) detached housing will probably swing back to more multi-dwelling residences as time passes and the COVID-19 scars heal.

What will be interesting to see is whether the overall elevated level of spending on hardware continues, or we begin to see an "averaging" back down over the rest of the current decade.

Related

ABS hardware retail stats from the same period, 12 months ago.

The Australian Bureau of Statistics (ABS) has released stats for residential building approvals through to April 2023. In reviewing this series, HNN is taking a look at the growth patterns in the number of residential building approvals in metro-capital cities, versus the rest of the key five states, as well as the overall split between houses and non-houses.

HNN uses the trailing 12 months to April in analysing these stats, which are referred to as "periods". This means that, for example, p2019 refers to the timespan from May 2018 to April 2019.

New South Wales

One of the surprising facts about building approvals in New South Wales (NSW) is that in the five-year period from p2019 through to p2023, the highest number of approvals, was pre-pandemic, in p2019. That's largely because the pandemic brought about a strong decrease in the number of non-house (mostly multi-unit) dwellings, and those approvals have yet to recover post-pandemic.

Houses

Starting with the number of approvals for houses in the Greater Sydney area, it's interesting to note that the record for most approvals over this five-year period belongs to p2019 for five of the 12 months: July, September through November, and January.

May 2021 just beats May 2018. P2021 picks up the next most highs, in December and February through April.

If we look at the numbers for the most recent 12 months (represented by the black line), from May 2022 through to February 2023, the number of approvals is not that far off from the pre-pandemic p2020, hitting lows in May and July, but recovering in both June and August. It is only in March and April 2023 that new lows (for the five-year period) are established.

Looking at houses in all of NSW (including Sydney), the picture is slightly improved, but the overall pattern remains.

Non-houses

In contrast with houses, non-houses show a much more volatile outcome. That is partly a feature of non-house stats, as multi-dwelling buildings have more of an individual effect on the numbers, and the overall numbers are lower than those for houses. That said, the volatility for Sydney is quite high.

Over the most recent 12-months (p2023) non-houses manage to set two peak values, for August 2022, and for December 2022, as well as a strong surge for September 2022. That is followed, however, by a very steep drop in January, then a slow climb back up over the next three months, so that the April 2023 number is close to that for April 2020.

As with houses, when non-capital non-house approvals are included, the picture improves a little, but the Sydney pattern still dominates.

Overview

The graph for the overall result for NSW shows the pattern of p2023 doing relatively well through to December 2022, then falling steeply for the final four months.

That is something of a contrast, though, to the numbers for approvals outside of the Greater Sydney area.

Not only do approvals track closely to the broader historical record, while there is a steep decline in January 2023, both February and March 2023 show the kind of sharp recovery typical of pre-pandemic periods. However, with April 2023, there is an uncharacteristic steep decline again.

Finally, we come to the overall stats for NSW, consolidated into the trailing 12 months to April periods.

As the top graph in this chart clearly indicates, building approvals through the pandemic were slightly below those pre-pandemic. Much of that is due to the decline in non-house approvals. That is shown in the lower graph, which shows the period-on-period percentage change in approvals. While houses show a very high peak of growth, there is some growth for non-houses, but much more subdued, and in the pandemic exit, non-house approvals decline more sharply.

Victoria

For Victoria (VIC), the pattern shows that April 2023 represents a departure from past building approval performance.

Houses

While p2023 has not been an especially robust year for house approvals in Melbourne, it has held close to pre-pandemic norms, up until April, as shown in the graph.

Unlike Sydney, after the slump in January 2023, house approvals recovered strongly for both February and March, but then fell sharply for April.

Looking at VIC overall, unlike NSW, the additional of regional approvals actually makes the numbers look slightly worse.

It is evident that the regional boost present in past pandemic periods did not show up as much for p2023.

Non-houses

With the exception of July 2022, the non-house category had a relatively good year through to January 2023, then retreated significantly through to April 2023.

Not only did February and March underperform, but April managed to fall still further.

Given the concentration of non-house construction in Melbourne, it's not surprising that the graph for VIC overall is virtually its duplicate.

Overall

The overall picture for residential building approvals in VIC shows that 2023 has seen significant historical underperformance.

While the sharp fall to April is not unprecedented, as shown by the results for April 2019, in 2023 this has come on the back of underperformance in both February and March.

One source of this is that regional approvals also fell more sharply during this period, as shown in the graph for approvals outside of Melbourne.

Again, most of p2023 traces the approvals from the pre-pandemic years, but then falls below that level from February to April 2023, with a particularly steep fall in April.

The chart for the YTD figures shows these trends as well. In the upper graph it can be seen that, unlike for NSW, VIC experienced a real increase in approvals through the pandemic. It's worth noting that the major boost from p2021 to p2022 came from an increase in non-house approvals.

That's illustrated in the lower graph, which shows house approvals actually declining for p2022, while those for non-houses increase steeply.

Queensland

Queensland (QLD) represents an interesting region in terms of the balance between approvals for Brisbane and the rest of the state, as the Brisbane market is far from being dominant.

Houses

Perhaps the most interesting aspect of building approvals for houses in QLD is how similar the graph for Brisbane and the state overall are - despite only making up just over half of the total market.

While there are some differences, the basic story is the same: p2023 has largely followed historical norms all the way to March, but then there is a significant fall in April. It's too soon to know if that represents a trend, but with the Brisbane area hitting a low close to that for January, it is certainly significant. Of course, the fall in April is not as acute for the state as a whole, but it still shows up.

Non-houses

The numbers for non-houses in Brisbane indicate that while the first half of p2023 was quite subdued, with approvals bumping along near the bottom of the historical range, the second half, starting with November 2022, was very strong - up until April 2023.

Looking at the picture for the state as a whole, the strong Brisbane surge does get diluted a little but remains very healthy.

That said it is also true that the decline in April 2023 is higher in percentage terms, indicating that outside Brisbane there may be a stronger slowdown.

Overall

The overall picture for approvals in QLD shows a high degree of volatility for p2023.

In October 2022 approvals hit a five-year low, followed by a five-year high in November 2022, and another high for January 2023. As expected, there is a steep dive through to April 2023, with the three prior months showing consistent growth.

Looking at approvals outside of Brisbane shows that this market was not only very strong historically, especially for March 2021 and 2022, but it was also strong over the first five months of p2023.

However, there is a notable, ongoing decline from February 2023 to April 2023, with April marking a five-year low.

The YTD chart shows interesting longer term patterns.

As the top graph indicates, the contribution from areas outside the capital city is outsize as compared to other states. There is a peak in approvals for p2021, followed by declines in p2022 and p2023.

The lower graph shows that since p2021 non-house approvals have grown strongly, not only for Brisbane, but for Queensland as a whole, indicating strong regional growth.

South Australia

South Australia (SA) is the one state that seems to have had more of a "normal" p2023 than anywhere else.

Houses

The graph for Adelaide houses shows p2023 closely following the pattern of p2022, though it did not achieve the exuberance of p2022 at the start of the period.

Adelaide and SA experienced an exuberant period for approvals from December 2020 through to September 2021, but outside of that its approvals levels have tracked above pre-pandemic levels, but not to extremes.

While there has been something of a fall for approvals in April 2023, this has just been back down to those historical levels.

Non-houses

The first thing to notice about non-houses in SA is that the numbers for Adelaide and SA as a whole are a pretty close match - not much regional building of multi-unit dwellings.

Dealing with low overall numbers for approvals in this category means that there is a fair degree of volatility. It's notable, though that April 2023 actually produces an uptick in approvals.

Overall

While SA does display signs of the chill factor for 2023, its approvals are nonetheless quite robust.

In p2023 there are two five-year peaks, for August 2022 and November 2022. While approvals are more subdued after January 2023, they are close to pre-pandemic levels.

The graph for approvals outside of Adelaide shows that this area has remained more lively post-pandemic than it was pre-pandemic.

The YTD chart shows how heavily SA relies on house approvals, and reflects the growing market outside of Adelaide.

In terms of percentage changes shown in the lower graph, perhaps the biggest surprise in the growth in non-houses for p2022, though this was followed by a decline in p2023.

Western Australia

In general, building approvals in Western Australia (WA) are largely dominated by its capital city, Perth.

Houses

The graphs for houses in Perth and those for WA overall are virtually dentical.

The period of exuberance in WA seems to have started in September 2020, and carried through to May of 2022. The remained of p2023 after than may has seen levels of approvals return to closely match those for the pre-pandemic years.

Non-houses

Again, the graphs for non-houses are virtually identical for Perth and the state as a whole.

These graphs show a high level of relative volatility during the pandemic years. P2023 started out with two relatively high results for May and June 2022, followed by a decline to a five-year low for July 2022, and then very low levels for November 2022 through to February 2023. Approvals for both March and April 2023 show some improvement, but remain relatively subdued.

Looking at the graph for approvals outside of Perth, these indicate they are largely following the pre-pandemic trends, rather than the exuberance shown from October 2020 through to July 2021.

The YTD chart shows just how reliant approvals are on houses in Perth. While there is a notable increase in approvals for dwellings outside Perth for p2021, these decline somewhat in following periods.

The lower graph shows the steep increase in approvals for 2021, followed by a consolidated decline in p2022. Interestingly, for p2023, non-house approvals continue to outgrow house approvals.

One of the "mysteries" of the post-pandemic period is that prices on building goods have not deflated as much as expected. If we accept that the latest date for the end of the major COVID-19 pandemic period in Australia was September 2022, then the nation has been post-COVID-19 for around nine months now. The data presented below is a "snapshot" of the market situation six months into that recovery. Yet that data and our current experience indicates little evidence of a "resilient" supply-chain that has burst into action and flooded the markets with less-expensive building materials.

Far from it. As the main chart above indicates, the general upward trend in prices has continued into March quarter 2023. That data is taken from the Australian Bureau of Statistics (ABS) Producer Price Index, which tracks the input prices of various building materials (as well as a broad range of other goods) in the form of index values.

Australia continues to face increasing prices for builders, and consequently increased prices for home buyers. The following chart from the ABS illustrates those overall effects.

While this data provides some good general information about broad categories, in the data below we drill down to more specific categories, with price impact measured as index values.

Index values can be a little tricky to work with, as they use mathematical formulae to overcome the core statistical problem of how to compare "this" with "that" - in this case, how to track price changes across different time periods with very different contexts. For those interested in investigating this issue further, the ABS has provided a quick history of how the index has been handled at this link:

For the more mathematically curious, the ABS has produced a fascinating tour of how indexes are developed and derived, which can be accessed at this link:

Perhaps the most important detail is that the indexes were reset to 100 for FY2011/12. That means that in very broad terms the "score" relates directly to the market of 12 years ago. However, what indexes really present is a means of direct relative comparison. So the absolute number is less important than the increases and decreases in the index number between time periods.

Price indexes

We could have presented this data in a number of ways, such as table of recent values. However, we do know that not only retailers, but also builders are likely to make better use of both a broad overview and more detailed information about specific products and categories.

Thus we choose instead to chart the data, in a series of simple, glanceable graphs, which nonetheless contain a depth of information. There are 31 of these graphs in total. We've divided them not by category of core product, but into three categories by their performance in March quarter 2023: Trending up, trending flat, and trending down. Trending flat is a slightly broad category, as we've included goods which have had slight index changes as well.

We've broken the graphs up into four-quarter periods, from June quarter to March quarter. Usually this is done to accommodate seasonality, making quarter-on-corresponding-quarter a simpler comparison to make visually. In this case we've used this technique because it makes it easier to see the influence of the pandemic.

Analysis

While we could generally present our analysis at the end of the graph series, given how many graphs there are, we thought it best to present it here, at the top of the graph series, making it easier to find and refer to later.

In very broad terms, there are only seven categories which have shown any sign of price index decline. Arguably of those seven, only one category, steel beams and sections, has shown relatively strong decline for both December quarter 2022 and March quarter 2023.

In the more problematic category, with continuing strong increases in the index are: cement products, cement, concrete tiles, fibrous cement, paint and other coatings, plaster products, readymix concrete, and sand. ABC News has quoted Housing Industry Association economist Tim Reardon as stating that:

That's as a consequence of the increase in energy prices globally flowing through to the domestic market. It's also a consequence of a very large level of investment in Australia and globally in infrastructure projects, [like] roads and bridges [that] are all heavy users of cement.

According to the industry's peak body, the Cement Industry Federation:

A cement manufacturing plant requires significant amounts of energy, mainly in the form of heat, to produce clinker. Significant amounts of electricity are then required during the milling (grinding) of clinker and other constituents to produce cement - the main binder in concrete.

The decarbonisation of the cement industry is also a cause for increased costs, with local manufacturers concerned that those additional costs will increase the competitiveness of imported cement products - effectively exporting pollution without resolving the issue in global terms.

Paint and coating prices continue at a high level mainly due to extraordinary increases in the costs of solvents, which are dependent on inputs from the petroleum industry, with crude oil prices remaining at historically high levels.

While these are very deep subjects and deserve a more thorough analysis, HNN is mentioning them here to point out that depressed manufacturing capacity and supply-chain transportation disruptions are not the only cause of high prices for building materials. In many cases, it's more accurate to say that those disruptions acted as exponential accelerators on underlying pricing pressures.

There is a range of other factors at work here as well. For example, some markets have become less competitive because the pandemic years eliminated or severely damaged a range of smaller companies in a market. Added to that is greater uncertainty across markets, which makes investment capital both more difficult to obtain, and more expensive once it is obtained.

The end result of these various factors is that estimates regarding price deflation for construction materials have been overly optimistic. From HNN's perspective, it will be surprising if there are effective cost reductions through the current calendar year. It's more likely that those reductions will become apparent somewhere around the final quarter of FY2023/24 - that is to say in a year's time.

Trending down

Trending flat

Trending up

The Australian Bureau of Statistics (ABS) has released hardware retail sales stats up to April 2023. HNN will use the trailing 12 months to April in analysing these stats, timespans which we refer to as "periods". This means that, for example, p2019 refers to the timespan from May 2018 to April 2019.

The main image for this article, Chart 1 shown above, indicates continued growth through p2023. Overall for p2023, Australia saw revenue increase by $825 million to $25.50 billion, a lift of 3.34%. The distribution of that increase, however, continued the trend of leaning on states outside of the three major east coast states which provided much of the growth during the pandemic years.

The top growth state was South Australia (SA), with an increase of 14.8%. In dollar terms, its hardware retail revenue increased by $224 million, only slightly behind the growth leader in dollar terms, New South Wales (NSW), which grew by $269 million, representing a 3.6% increase.

Western Australia (WA) grew by 6.4%, an increase of $165 million, while Australian Capital Territory (ACT) grew by 5.27%, gaining $27 million. Trailing the pack were Queensland (QLD), with growth of just 2.9% or $152 million, and Victoria (VIC), which saw negative growth of just under 1%, a loss of $61 million.

Since p2022, there has been a decided shift in overall growth patterns, with the east coast states (NSW, VIC and QLD) collectively lagging the Rest of Australia (RoA) in percentage growth terms. For p2023, this has been further extended, with RoA now outperforming the east coast in gross dollar terms as well, as is illustrated by the two graphs in Chart 2:

New South Wales

The state's performance for most of p2023 has been stellar, as is indicated in Chart 3:

There has been only three months when p2023 did not outperform p2022 - and given that all of p2022 provided record-setting revenue levels, that means setting nine new records during those 12 months.

That said, however, the decline by -5.2% for April 2023 does seem significant, and not part of the pattern for the previous 11 months. The revenue for that month nudges just above the result for April 2021, and is below the early-pandemic result for April 2020.

Victoria

As with NSW, there's the potential to attach additional significance to VIC's result for April 2023. Its ongoing pattern of retreat from past highs is shown in Chart 4:

While p2023 has not been as good for VIC as it was for NSW, nonetheless three record highs were set, in August, September and October 2022. Revenues failed to match the highs of the pandemic years for November 2022, and since the start of calendar 2023, the state has underperformed results for the previous period.

That said, the dip from March to April is built into the seasonality for the state. However, what makes the April 2023 result potentially significant is that it has underperformed every result going back to just after the start of the pandemic, in April 2020. Though even at that, of course, it is still significantly above pre-pandemic results. The highest result for April previously was $455 million in 2019. The April 2023 result was $509 million, which is 11.9% above the 2019 number.

Queensland

Unlike VIC and NSW, the April 2023 result for QLD may be -4.7% lower than the April 2022, but it is above April 2021, and exactly the same as April 2020 - and it is a whopping 28% above April 2019. The pattern is shown in Chart 5:

That follows on from a p2023 which has set record revenue levels for seven months, mostly from June to November 2022.

South Australia

April 2023 set a record for SA, in a period where all but one month (May 2022) resulted in record hardware retail revenue, as seen in Chart 6:

Western Australia

Similar to SA, WA has set record revenue levels for 10 of the 12 months in p2023, the exceptions being May 2022, and the most current result for April 2023, as indicated by Chart 7:

While this does represent a break in the pattern for the period, it's not possible to see it as predictive for the rest of calendar 2023.

Australian Capital Territory

The general record for the ACT sees the territory apparently following the trend in p2023 of echoing results from either p2022 or p2021, depending on which is higher, as seen in Chart 8:

It seems likely there is some kind of upper-limit limiting factor at work here, which could simply be supply logistics, working to constrain growth to around the maximum in previous period.

Analysis

An underlying factor that is difficult to judge is the exact impact of inflation on these revenue numbers. Hardware had its own unique inflationary aspects due to constraints on supply. Also, just as margins tend to suffer when costs initially increase, so there is also often a "honeymoon" period directly after costs decrease where retailers can recover a portion of those previously lost profits. So while growing revenue is obviously a good thing, it is likely not as universally positive as it would have been in 2018 or 2019.

It Is the nature of statistical evaluation to always be alert to potential breaks to past patterns. It's helpful, though to return to the overall picture to affirm that things are, in general, going well. That is clearly indicated by the overall comparison for Australia, as shown in Chart 9:

It is hard to be pessimistic about a period which as set national records for hardware retail revenue for eight out of 12 months. Still, though, the results from NSW do require close attention.

To return to the issue mentioned in the introduction and overview, there is a distinct difference between the east coast and Rest of Australia. One aspect of this might be that the effect of the COVID-19 pandemic was most sharply felt on the east coast, driving up hardware revenues sharply, and that the rest of the nation is catching up to those higher levels of expenditure.

Another factor might be that house prices have been historically higher in the east coast, and that the recent increases in interest rates have more severely affect households in that region, slowing growth in retail expenditure.

What has been difficult to really tie down, of course, and the true externalities to hardware retail that may still strongly affect the market. Most of these relate to aftereffects of the COVID-19 pandemic. As HNN has suggested in the past, the recovery from the pandemic might seem to be "V" shaped, but in reality it is more "K" shaped, with some portions of the economy making a rapid reversion to pre-pandemic performance, while others lag considerably.

Overseas travel is, unexpectedly, one of those areas. While travel has resumed a higher level, airline prices have remained high, due to the intersection of increased demand and somewhat limited supply. That may mean that frequency of travel has increased, but actual expenditure has been constrained - families are choosing less expensive destinations.

It is becoming increasingly evident, however, that "limited supply" is due less to actual physical and organisation restraints, more down to airlines preferring high prices on restrained supply than lower prices on broader supply - they are strategising for more profit per seat, in other words, rather than more seats at less profit.

This means that households may still desire travel, but face a very different equation in terms of its value as compared to, say, renovating the kitchen. It is highly likely that those kinds of externalities will continue to exert effects through to the end of the next financial year.

Underlying the commercial strategies is the need to deal with increased levels of global risk, a necessity headlined by Russia's peculiar need to invade Ukraine. Accepting higher profit on restrained supply is not a good growth strategy, in general, but it does de-risk the situation, as funds are not being committed to expected growth that may not eventuate.

One of the factors that does enable that strategy is a decline in competition, and it has certainly been the case that both some smaller competitive companies were knocked out during the pandemic, and other larger companies saw their ability to exert market influence broadly depleted.

The real fear for longer-term forecasters in hardware retail is that at some stage these market inhibitions are going to reverse, and it's not clear what effect that will have on the market. The current market conditions could end up being ephemeral, and we could all eventually look back on this period as being the halcyon days that eventually just fluttered away.

One way to strategise against that possibility is to thoroughly re-capitalise businesses, and seek out new ways to better service future markets. However, especially for smaller businesses, that is frequently a difficult path to follow. It is simply hard when things are finally going well after a decade of slow and slowing growth to envision a future where current business practices will not be a good fit for the new markets. It's difficult, but it is also very necessary.

The Australian Bureau of Statistics (ABS) has released stats for hardware retail turnover through to March 2023. HNN uses the trailing 12 months to March in analysing these stats, which are referred to as "periods". This means that, for example, p2019 refers to the timespan from April 2018 to March 2019.

As the main image for this article (Chart 1) indicates, overall sales for p2023 continued to trend upwards, marking what would seem to be another step change in overall revenues. For Australia, revenues increased by $1.06 billion to 25.571 billion, an increase of 4.3%.

In percentage terms, South Australia (SA) had the largest increase, of 16.6%, lifting by $241 million to $1730 million, followed by Western Australia (WA), up $198 million to $2741 million, an increase of 7.8%. Ranked in dollar terms, New South Wales (NSW) increased revenue by $332 million to $7787 million, up 4.5%. Queensland (QLD) gained $221 million, increasing by 4.3%. Australian Capital Territory (ACT) was up 6.0% or $30 million.

Only Victoria (VIC) showed negative growth, down by 0.24%, with a loss of $16 million in revenue.

New South Wales

Chart 2 shows a familiar pattern for hardware retail revenues in NSW.

A shorthand way to view the change in revenue structure, at least for NSW, is that the pre-2020 highs have become the post-2020 lows.

The most significant element of this graph is the strong kick up for March 2023. That echoes the kick for the three previous periods - p2020, p2021 and p2022 - but it is far more significant, as it comes after the Reserve Bank of Australia (RBA) has lifted interest rates with the goal of reducing this kind of activity.

The increase for March over the previous February percentages for NSW are:

Victoria

Chart 3 shows the kind of results the RBA would be happier with.

Where for p2023 NSW had only two months that were below p2022, VIC has six months below, with five in the second half of the period. The March 2023 result shows a modest upwards kick, shadowing the result for March 2021, despite the February 2023 revenues being stronger than the February 2021 revenues.

Queensland

Chart 4 for QLD bears more resemblance to NSW than VIC.

In fact, QLD has seen p2023 substantially outperform p2022, with only three months in p2023 underperforming p2022, while setting record highs in seven months. Again, there is the sharp upwards kick in March 2023, though it was not as high as for March 2022.

South Australia

Chart 5 for SA shows the state setting records for 11 months in p2023.

That said, performance in calendar 2023 has become somewhat muted with both February and March 2023 close to 2022 values.

Western Australia

As with SA, WA set new records in 11 months of p2023, as shown by Chart 6.

While these results are good, unlike other states the overall COVID-19 driven increase has not been as extreme as for other states, as WA achieved previous high records in p2017.

Australian Capital Territory

The ACT tends to be a little volatile in stats, due to its smaller size and unusual composition. Even with that, as Chart 7 shows, the territory more or less had a "best hits" p2023.

At the start of p2023, through to October 2022, p2023 follows the trend for p2021, then switches over to following p2022 for the rest of the year. The result is an overall record for revenue in this period.

Analysis

As Chart 8, for Australia overall shows, p2023 outperformed p2022 for 10 months, with the two underperforming months very close to p2022 in February and March.

It is almost a little shocking to see how mammoth the gap is between the post-COVID-19 periods and the pre-COVID-19 periods. Chart 9 shows the percentage gain over the three most recent periods.

As HNN covers elsewhere, it seems likely that one reason the RBA did increase interest rates in May 2023 was that sharp kick upwards for March 2023 figures - which repeats across most areas of housing, such as finance.

One thing to be aware of, in terms of business forecasting, is that the markets are at the moment experiencing more of the upside of changes brought about by COVID-19, with the downsides likely to begin showing up more midway through next financial year.

For example, houses have been valued upwards through trends such as work from home and the four-day workweek. Yet those trends will eventually have a profound negative effect on office spaces and urban areas.

The current attitude in most major capital cities is that it is better to retain relatively high office rental rates and accept higher vacancy levels. It's likely that by the end of FY2023/24 there will be a decline in office rents, which will flow through to a devaluation of those properties. It is, of course, possible to repurpose offices to residential uses, but this entails large investments. For example, modern office buildings typically do not offer the requisite access to external windows, which means constructing substantial light wells.

That said, arrangements such as work from home are, basically, far more efficient than transporting masses of workers to and from centrally located offices five days a week. Those efficiencies, however, will only appear over a much longer timescale, and potentially only begin to affect state economic planning at the end of the current decade.

For the majority of independent hardware retailers, renovations form a major channel of revenue. That could be from builders buying materials for major work such as outdoor decks, or home DIYers spending the odd $500 to $1000 to make cosmetic changes to their homes, or do some substantial renovations.

Renovations always require a degree of estimation. While we have very accurate statistics from the ABS for building approvals for renovations, these don't capture all the work that is done, as only a proportion of renovations require such approval.

Two wider ranging sources of information are also provided by the ABS. In the stats for National Accounts, there is an estimate of household expenditure, derived from household interviews. This includes statistics for "alterations and additions", as the ABS styles the category. Additionally, there are stats for new loans obtained by owner-occupiers of dwellings, which also includes a category for alterations and additions.

It's an interesting exercise to compare all three sources of information. Household expenditure is a quarterly category, which means we only have data reaching to December 2022. Lending, however, is data gathered monthly, which means we have data to March 2023, and building approvals - which is the most extensive data set - is also monthly. For building approvals we've also chosen to use the "normal" stats, which exclude renovations which result in the creation of dwellings.

We've arranged the data for lending and building approvals in trailing 12 months to March format. We refer to these ranges as periods, so the data for the period April 2020 through to March 2021 is referenced as p2021.

We've elected to deal only with the five major states, and have excluded Tasmania, Northern Territory and the Australian Capital Territory. The reason for this is that data from those smaller regions tends to be quite volatile, and can be influenced by a single project, making longer-term patterns difficult to find.

New South Wales

New South Wales (NSW) was one of the states most affected by COVID-19, and this shows clearly in its stats for renovations. Chart 1 shows the household expenditure estimates.

The upper graph, for actual values, indicates that the pandemic boost to renovations only began in the December quarter of 2020, but continued on then quite strongly through to December quarter 2022, reaching a record high in December quarter 2021. The lower graph which shows the percentage growth reflects this, with the highest growth levels in the March, June and September quarters of 2021.

Chart 2, which shows the value of loans by owner-occupiers for renovations tells a similar, though more nuanced story, with a bit of a surprise ending.

While the upper graph of actual values shows that p2022 is the breakaway dataset, p2023 comes close to equalling this. That said, there is a clear decline in loan values after the first interest rate rises by the Reserve Bank of Australia (RBA) in May 2022, though overall these values remain significantly higher than in the two pre-pandemic periods.

The big surprise is that at the end of p2023, where the loan values for February and March 2023 shift abruptly higher after the low in January 2023 - despite this being a period of high interest rates. The lower graph reflects these trends, showing the exceptional levels of growth in p2022. P2023 does go negative in November 2023, but it also recovers to close to zero growth in December, January and February, before dipping again in March.

Building approvals for alterations and additions (the ABS reference for renovations) confirm the loan data, as seen in Chart 3.

Building approvals for renovations not only climbed steeply after January 2023, they hit record highs for February and March 2023.

Conclusions

Probably what we're really seeing here is the collision between two patterns - the leftover influences of the pandemic and the newer influences of the increase in interest rates. The cultural and other influences of the pandemic have reset the overall investment in renovations to a higher level. The advent of higher interest rates has an influence as well, with families that might have considered moving to a new house, instead investing in renovations.

Victoria

While Victoria (VIC) was in many ways harder hit by COVID-19, with more and longer quarantine shutdowns, the effect of the pandemic on renovations was largely more muted.

Chart 4 shows the household expenditure estimates.

As the top graph for values shows, while the pandemic did generate a boost, the biggest effect was limited to the March and June quarters of 2022, breaking the usual season slump. Outside of that, the value assigned to the two immediately pre-pandemic periods were relatively close to those of the pandemic periods.

That's reflected in the lower graph, with a very strong dive in growth after the lift in interest rates in May 2022.

Chart 5 shows the value of loans by owner-occupiers for renovations.

At the top graph indicates, while the household spending estimates are nothing that remarkable, the loan values do show a clear difference between pandemic and pre-pandemic periods. Again, there is a noticeable downward trend post May 2022, but a surge that occurs in February and March 2023.

That is reflected in the lower graph, which shows just how outstanding p2022 was in terms of increased spending on renovations.

Chart 6 shows the building approvals for renovations in the state:

The most interesting feature of this graph is the result for March 2023. This is, in contrast to the data on the other charts, broadly flat from the February 2023 values. Historically, that's not unusual, as there is roughly the same result for both p2018 and p2019. Granted, this is also a high level historically - it is still above the March 2020 number, which marked the whole start of the pandemic change - but its contrast with both p2021 and p2022 is significant.

Conclusions

The strong increase in loan amounts despite only a modest boost in household expenditure on renovations indicates many families in VIC were taking advantage of low interest rates. That makes the resurgence of loans in calendar 2023 even more remarkable, and could indicate that there are very strong forces at work in VIC driving renovations.

While that is partially confirmed by the building approval numbers, that flat result for March 2023 could be the first harbinger of families rethinking their investments.

Queensland

Queensland (QLD) is somewhat closer to the NSW model than the VIC model when it comes to household spending on renovations. Chart 7 shows the familiar pattern of strong spending for p2022, but the drop-off in spending to p2023 is stronger than for NSW and VIC.

It is also interesting to note that while both NSW and VIC saw a degree of unseasonality in the spending patterns, those patterns remain strong for QLD, with spending gradually increasing through the year.

As the lower graph indicates, while 2021 was a strong year, 2022 saw spending levels drop back close to pre-pandemic averages.

In terms of lending for renovations, QLD is quite individual, as shown in Chart 8. Loan levels were elevated above those of p2022 in p2023 until December 2022.

While the lower graph clearly shows that p2022 was responsible for most of the growth, p2023 remained in strong positive growth until November 2022. And, again, there is the kick upwards in spending on loans, though for QLD this is confined to March 2023.

When it comes to building approvals, there is something of an echo of the VIC result, with the growth in value of renovation approvals flattening out between February and March 2023 as shown in Chart 9.

There's historical support for this as a pattern, shown for p2018, p2019 and p2020. Even so, given the exuberance of both p2021 and p2022, this could mark a change.

Conclusions

The big question is, why weren't loans for renovations more affected by increased interest rates earlier in p2023? This could be because cultural changes, such as work from home (WFH) have had a stronger impact on QLD. It's also possible that there are hidden boosts to the QLD economy, resulting from the return of both domestic and international tourism that buoyed the spending.

South Australia

In terms of household spending on renovations, much of the effect of the pandemic seems to have been on altering seasonality in South Australia (SA) , as shown in Chart 10.

There is a curious meeting point shown in the top graph in the December quarter, where not only do the pandemic years intersect, but also 2018 as well. Both 2021 and 2022 show high levels of spending through the other three quarters. As the lower graph illustrates, that growth was, once again, largely the result of a bumper 2021 setting high levels for 2022 as well.

As Chart 11 shows, lending followed a slightly different path.

Noticeably, loan values remain high for December, as shown in the upper graph. There is a steep decline in January in p2022 and p2023, followed by an immediate rebound. Loan values do decline post May 2022, but they recover early, in October 2022.

The lower growth graph for lending is atypical for this series, with sharp peaks and low valleys throughout p2022.

Looking at building approvals, four months in p2023 set all-time highs, including for the "down" month of January, as seen in Chart 12.

While approvals did not reach the hyper level they did for March 2022, March 2023 came in a very decent second on the historical scale.

;Conclusions

As with QLD, SA is likely experiencing a range of very individual patterns that are affecting its renovation market. One factor that may be at work is that, as house prices in SA did not rise as significantly as those in NSW, VIC and QLD, there remains much more room for growth in this market, encouraging further investment in dwellings.

Western Australia

As the state least affected by the COVID-19 pandemic, Western Australia (WA) shows some traits similar to the other states, but also atypical behaviour, as seen in Chart 13.

Household spending shown in the upper graph is, surprisingly, somewhat below that for pre-pandemic years for much of the time. As elsewhere, 2021 manages to show strong growth, but only manages to hit 20% in the June quarter of 2021, remaining below 10% for the rest of that year. Even more unusual, spending for 2022 falls strikingly low, equalled only by spending during the first three quarters of 2020.

Yet, despite that, spending on loans does manage to soar, as seen in Chart 14.

It's perhaps best to start with the lower graph, which shows an over 200% boost in loan values for June 2021. That's partly a reflection of a smaller market, but it remains astounding. As the top graph shows, for both p2022 and p2021 there have been very high loan values relative to the past. And, again, there is the kick upwards in March 2023, despite high interest rates.

Building approvals for renovations in WA, it turns out, deliver something of a wild ride, as seen in Chart 15.

It's interesting that there are two points of convergence, in both October and January. Outside of those two months, both p2022 and p2023 trended very high, though p2023 was somewhat more muted in both February and March.

Conclusion

Here again we're seeing something of a disconnect between loans taken out for renovations, and the numbers indicated by both the national accounts and building approvals.

Analysis

One thing we could suggest is that there is somewhat less mystery around why the RBA chose to increase interest rates in May 2023. If the RBA Board were looking at similar figures to these, and seeing the boost in loans, despite high interest, that would have caused some grave concerns. One difficulty with entrenched inflation is that, as it discounts the value of the currency, it also discounts the value of interest on loans. It's likely this kind of sharp kick up in March 2023 was interpreted by the central bankers as being a possible sign of that trend. Also, of course, building approvals for renovations continue at a high rate in most states.

What can be expected from renovation activity for the rest of the year? It does seem very likely that at some point in the near future, there is going to be a downturn. At the very least that could happen post-January 2024, with level hitting their seasonal low, and not quite making it back up to current levels for the rest of the year.

Outside of that, the fate of the renovation market could mostly relate to the ongoing struggle for supply of goods. It supply constraints remain, there will be an ongoing increase in interest rates, and at some point this will hit lending for renovations.

One thing to bear in mind about this is that, while various construction bodies complained about the RBA lifting rates, the revue of the RBA did not only not correct that, it set the RBA up to pay even less attention to the housing market. Where in the past RBA decisions did take into account conditions in the housing market, for example, the bank now has a mandate to almost entirely ignore them, and to concentrate on the core economy instead.

What is happening in the residential construction industry?

The big question at the moment is, what is normal? The following are all factors that affect the industry:

Is there something like a "normal" that the industry has returned to, or have circumstances changed so much - and continue to change - such that any "normal" we might outline is so far from the previous, pre-2020 "normal" that the term loses all significance?

At the core of those questions is, of course, concerns about what FY2023/24 is going to look like. Will all these influences start to flatten out, with interest rates holding steady, albeit at a higher rate, inflation making it down to a more manageable 3.5% or so, supply increasing and stabilising in price?

In other words, while the issue of "normal" (inherited itself from the pandemic) remains pertinent, the real question is more whether we should look forward to things getting a little better, or a little worse.

To develop some kind of an answer, HNN has chosen to look at a range of statistics closely linked to the building work done statistics provided by the Australian Bureau of Statistics (ABS). At the core of this are the figures for actual building work done. Additionally, there are the numbers for building work not yet commenced, commenced and completed.

Overall, what HNN sees is a pattern that is more about return to median values than it is either collapse or rapid growth. It's true that the growth figures during the COVID period were exceptionally high, and there are some brief indications of a negative compensation for that. But overall the activity levels during calendar 2022 moved to be more broadly inline with past levels.

Business failures

That is not to say that there is not some degree of "chaos" in the construction market itself. There are a number of construction companies, big and small, that are failing or under considerable stress. Without commenting on any specific companies, it seems that in general - at least for the larger companies - what's really happened is that the circumstances of the market have moved beyond the management competencies of the companies involved.

While these failures have been largely blamed on price blowouts on existing construction contracts, that is only one factor in what has happened. Increased demand lured many construction companies to take pricing risks in order to secure a larger market share, which would have carried with it a number of benefits. Those risks did grow larger than expected, it is true, but ultimately it was less the size of the risk and more the future of the risk that ended those companies.

In short, the companies that might have secured those risks through additional financing chose not to. That decision was likely partly because the risks were too high to justify the available return, and partly because other and better investment opportunities were emerging in the post-COVID environment.

Looking at the data

So, on to the data. The figures for actual building work done (BWD) use chain volume measures. The ABS also has a great paper on what chain volume measures are:

Essentially, chain volume is a means of describing the volume of goods produced in dollar terms, while taking account for variations in pricing over time. Practically, this means we can compare a chain volume dollar value from 2022 with one from 2015, and have that comparison make sense.

What we wanted to do was to look at pre-COVID data, data during the three COVID years (2020, 2021 and 2022), and also have a "normal" (not in the statistical sense) value to compare these with. For that normal value, we chose the average for the five immediate pre-COVID years, 2015 through 2019.

Australia

Normally we would present the stats for Australia last as a summing up of those for the states and territories, but as the data is a bit diffuse, it's perhaps better to present the Australian stats first to provide a kind of framing. While it is true that the effects of COVID-19 were broadly different between the different areas in Australia (not only state-based, but also city and regional differences), nonetheless it was the entire country that went through the pandemic, and it affected everyone everywhere to some extent.

Just to provide a sense of what this kind of overview can provide, we can start with this chart, which shows houses and other residential (mostly multi-unit dwellings) not yet commenced. Chart 1 shows the raw numbers of dwelling units.

What makes this chart so intriguing is that you can see some relationship between houses and other-res. There is a series decline in other-res from June quarter 2020 through to December quarter 2021. At the same time, starting in March quarter 2021 through to December Quarter 2021, there is steady increase in houses. This pattern then to some extent reverses from March quarter 2022 through to December quarter 2022.

Another view is offered in Chart 2 in this case showing the same data in stacked bar charts:

The top graph is the same data as in Chart 1, but the stacked bars show a remarkable consistency from March quarter 2019 through to September quarter 2022. Only the bar for December 2022 breaks out above that level, and even then it is only a reversion to pre-2019 numbers.

Yet what does shift is the relationship between houses and other-res, with houses reaching their highest level for this data series between June quarter 2021 and December quarter 2022.

In the middle graph on Chart 2, for building commenced, shows both why concerns have been raised about the construction industry, and why these are probably note really warranted. There are two quarters of exceptional growth, for the June and September quarters of 2021, and the December quarter of 2021 is also high. The numbers for calendar 2022 are lower than that, but not exceptionally so on a historical scale. House builds are above the historical average, and other-res builds are below that.

In building completed, the bottom graph, we begin to see some of the dynamics in the industry emerge. One would expect after the surge in commencements for June and September 2021 to see a similar bump between four and six quarters later. In general, completions are slightly below the average for the pre-pandemic years post March quarter 2020.

Building work done

Houses

That brings us to the stats that indicate the actual work in process on construction sites, the building work done. Chart 3 shows BWD for houses. The three blue lines are for the pandemic years, and the black line is the average for the five years from 2015 to 2019.

The pale blue line shows the expected low level of work during calendar 2020. The medium blue line shows the sharp uplift in calendar 2021, and the darkest blue line shows a decline in activity back to 2020 levels for calendar 2022.

The mystery, of course, is the decline between December quarter 2021 to March quarter 2022. It's not in line with what one would expect from the commencements in the second half of calendar 2021.

Yet, for all that, the calendar year totals shown in the lower graph show that taken on a yearly basis the fluctuations are less than expected. For all the decline shown in 2022, the unusually high activity in March quarter 2022 is enough to boost the annual result to being just under the average for the pre-pandemic years.

Other residential

The BWD for other-res could not be more different from that for houses, as shown in Chart 4:

The upper graph shows that, as expected, the numbers for other-res during the pandemic years are simply dismal. It's notable that these had already begun to decline at the end of calendar 2019, though their best performance for the pandemic was in 2020, but by the September and December quarters of 2021, BWD had reached record low levels.

The lower graph bears this out, with the annual totals remaining below the pre-pandemic average from 2019 onwards.

Alterations and additions

On a happier note, the figures for alterations and additions (basically renovations) shows strong positive growth, as seen in Chart 5:

The top graph shows why hardware retailers had a good couple of years. It's interesting that the strong growth in these projects only really started in December 2020, then hit a peak in the September and December quarters of 2021, but showed something of a drop for the September and December quarters of 2022.

The bottom graph shows that clearly the pandemic years remained well above the pre-pandemic average.

Waterfall

HNN has prepared the waterfall graphs slightly differently from standard practice as we've represented the full amount of the average in the leftmost bar for Houses, in order to provide a real perspective for Chart 6.

There is a very clear and simple conclusion that comes from this particular chart: any real shortfall in BWD has its origins in a reduction in work done on other-res construction.

That's easy to see, but what actually does it mean? Is there a market for multi-unit dwellings that is not being serviced by the industry, meaning that funds available for construction are not fungible between the two categories? Or is there simply too much demand being funnelled through house construction, beyond the ability of the industry to support, where multi-unit is a more efficient way to deliver dwelling spaces?

Probably if one is looking for the source of the real distortions to the construction market it lies in this area. What might be happening, for example, is that the construction industry is reluctant to reformulate what it does to better accommodate the surge in demand for houses because - as the psychological effects of the pandemic diminish - the market will swing back towards multi-unit construction.

The degree to which that tension will determine the future of the industry is unknown, but that might be a good framework to use for analysing it in the future.

If, as was suggested in the introductory article to this series, the tension in the Australian construction industry have something to do with the balance between house and multi-unit construction, then New South Wales (NSW) represents a key area. It is the one major city that has most integrated multi-unit with houses in its real estate markets, due both to some natural city characteristics, and its long history of higher density living.

Construction progress status

Chart 1 shows the view of progress as represented by Australian Bureau of Statistics (ABS) building work done stats:

In the top graph for this chart what is most noticeable is that, for the most part, the non-commenced number for houses is relatively stable, while that for other-res varies considerably. It shows the same general pattern seen for Australia overall, with numbers of other-res reducing when house numbers increase, especially during the June and September quarters of 2021. As overall non-commenced numbers increase, this is largely due to growth in other-res.

In the middle graph, there is a familiar peak for commencements in the June and September quarters of 2021, followed by a relatively steep decline to March quarter 2022, and a partial recovery thereafter.

In the bottom graph, there is the same general mystery as to how the high rate of commencements seems not to be reflected in completions. Overall, there is a general drift downwards from a high rate of completions in the September and December quarters of 2018.

Houses

Chart 2 shows BWD for new houses.

One of the most interesting things to note about the top graph, which shows the BWD by quarter, is that 2018 was an exceptionally good year, outpacing even 2021. Equally, 2020 was an exceptionally poor year.

Of most note is that 2022 started out by providing the highest ever result for the first quarter, with the second and third quarters dropping down, but the year picking up in the final quarter to match the average.

The bottom graph shows that for the year overall, BWD was below the pre-COVID average, but not by much.

Other residential

By contrast, other residential building work done shown in Chart 3 indicates a very poor result for recent years.

In contrast to many other results, other residential is not only below previous year for the COVID-19 years, it doesn't really recover: results for 2022 are only marginally better than for 2021, and 2022 is well below the pre-COVID average.

Alterations & additions

Perhaps the most surprising thing about the top graph of Chart 3 for alterations and additions, is that it took under the December quarter of 2020 for this category to take off.

Though it's equally interesting that something significant happened in 2016. The COVID-19 years did end up breaking all the previous records. As the bottom graph indicates there was a slight decline in 2022, but the year easily went far beyond the pre-COVID-19 average.

Changes: waterfall

As Chart 5 indicates, there was a slight fall in BWD on houses, but a really steep fall in other residential, with alterations winning back a small but significant slice.

The pre-COVID-19 average for all categories was $26,466 million, and 2022 came in at $22,683 million, for a difference of $3,782 million, a loss of 14.3% on the average.

As was suggested in the introductory article, this relationship between the overall fall in value of work done and the split between houses and other-res is complex.

The construction industry in Victoria (VIC) represents a strong contrast to that for New South Wales (NSW). As Chart 1 indicates, on a proportional comparison, the number of not-commenced builds in VIC is significantly lower.

Also, with the exception of the surge during the June, September and December quarters of 2021, the number of non-commenced houses is relatively low. However there is the December quarter of 2022 a strong surge in non-commenced other-res.

In the middle graph, there is the familiar surge in commencements for the June and September quarters of 2021. What is most noticeable is the increase in the proportion of house commencements.

That different proportion is reflected to some extent in the bottom graph for completions, with the March quarter of 2022 showing a similar adjustment. The trend does adjust in the final three quarters of 2022, but the proportion of houses remains high on historical averages.

Houses

Chart 2 shows BWD for new houses.

The upper graph shows that in terms of beating previous historical highs, that is really only achieved in the September and December quarters of 2021, as well as the March quarter of 2022. However, the rest of 2022 is significantly lower than the previous year. Despite that, as the lower graph indicates, 2022 did beat the pre-pandemic average for work done.

Other residential

Other residential building work done shown in Chart 3 shows that while 2021 was a very poor year for this category, both 2020 and 2022, while below average, were not dismal.

As the lower graph shows, both 2020 and 2022 did manage to do better than 2015.

Alterations & additions

As the top graph of Chart 4 indicates, the renovation market was somewhat delayed in VIC, only really taking off in September 2021, but maintaining a high level through to the end of 2022.

That's backed up by the lower graph, which that 2020 met the pre-pandemic average while both 2021 and 2022 exceeded it by an increasing margin.

Changes: waterfall

As Chart 5 indicates, VIC was one state that was, overall, less affected by a drop-off in building activity for 2022. While there was a decline for other-res, this was most compensated by the strong rise in renovations.

Queensland (QLD) occupies a space somewhere between New South Wales (NSW) and Victoria (VIC) when it comes to integrating multi-unit dwellings into its overall housing market. That's reflected in Chart 1, which reflects progress in building work done.

The top graph shows that in non-commenced other-res has a dominant role through to June quarter 2018, after which it declines. In particular, from December quarter 2021, houses play a much strong role.

The middle graph for commencements shows a similar pattern, with houses particularly dominating for the June and September quarters of 2021, and to a lesser extent in December quarter 2021 as well. While there is a drop off in commencements in December quarter 2022, this is at a similar level as for March and June quarter 2019, pre-pandemic.

In the bottom graph, for completions, there is a surprising drop from March quarter 2019 through to June quarter 2021 for house completions, but then an elevated level for those completions from September quarter 2021 through to December quarter 2022.

Houses

Chart 2 shows BWD for new houses.

This chart shows how QLD has gone through a series of extremes during the pandemic years. The upper graph for 2020 shows a very low level of work down, contrasted with historically high peaks for the June and September quarters of 2021, and then a gradual collapse back to 2020 levels during 2022.

That's reflected in the lower graph, which shows QLD missing the pre-pandemic average in 2019, 2020 and 2022.

Other residential

Other residential building work done shown in Chart 3 indicates a steep decline in other-res, but one which began pre-pandemic in 2018.

As the upper graph indicates, both 2020 and 2021 show low levels of BWD for this category, though 2022 shows something of a recover in the September and December quarters.

The lower graph clearly shows that other-res has been below the pre-pandemic average for five years.

Alterations & additions

As the top graph of Chart 4 indicates, QLD has not had as good a renovation result as either NSW or VIC.

There were seven quarter of over-performance, from the September 2020 quarter, through to the March 2022 quarter, but the remainder of 2022 was somewhat muted.

That said, as the lower graph indicates, work done on renovations has exceeded the pre-pandemic average over the past five years.

Changes: waterfall

As Chart 5 indicates, QLD has suffered a decline from the average in 2022 for both houses and other-res, with renovations able to gain back only a slice of that.

At first glance, the headline chart for this series (Chart 1, shown above) would seem to suggest some very good news. It's evident - as all the charts will show - that the best news was the uplift in retail sales that started in March 2020, and has now been underway for three whole years. In this review, it at least looks like the most recent period - from March 2022 through to February 2023 - shows evidence of another burst of growth, though a smaller one. (Note that the statistics in this report are based on the trailing 12 months to February, which we designate as "periods". So p2020 represents the 12 months from March 2019 to February 2020.)

However, it's more likely that that most recent increase is rather down to inflation than an actual increase in market size - though it is also unlikely that, despite inflation, the market has seen decline. One fact that supports at least an underlying level of growth is that the distribution of growth is unevenly distributed, with New South Wales (NSW) growth at a rate higher than Victoria (VIC) - though VIC did recover from negative growth of close to -5% in p2022 to slightly positive growth in p2023.

Looking at Chart 2, which shows the period-on-period percentage growth rate, it's clear that both VIC and NSW are at the bottom of growth rates, and Queensland (QLD) is not doing much better.

South Australia (SA) had the highest growth rate, at 17.3%, a boost of $254 million over p2022. Western Australia (WA) had a growth rate of 8.6%, gaining an extra $216 million. NSW was up 5.0%, a gain of $371 million, while Queensland saw hardware retail grow by $289 million, up by 5.7%. VIC showed a marginal gain of only 0.7%, amounting to an extra $45 million. Australian Capital Territory (ACT) grew 7.0%, adding $35 million. Overall, Australian hardware retail revenue grew by $1273 million, an increase of 5.2%.

(As Northern Territory (NT) and Tasmania (TAS) stopped reporting revenue until last year, HNN has calculated a combined number for the two areas, for guidance purposes. The combined value grew by 7.8%, adding $64 million.)

Chart 3 shows the monthly performance for Australia, in both revenue dollars and percentage growth terms:

In the to graph for dollar value, tracing the red line marking p2023, it's clear this is well above the dark red like for p2022 from March to September, and after that it closely shadows the p2022 performance. The percentage change graph below shows a steady near 10% gain from March to August in p2023, followed by near zero growth, culminating in slight negative growth for February 2023.

New South Wales

Chart 4 compares the monthly performance for NSW, in terms of both revenue and percentage growth in revenue on a month-on-corresponding-month basis.

In the upper graph, revenue for p2023 is clearly higher than that for either p2022 or p2021, except for October 2023, where October 2022 delivered a sharp spike in value. In the percentage change graph below that, growth is relatively subdued for March and April 2022, then goes above 10% from May to August 2022, before going negative for September and October 2022, then sharply recovering to above 10% for November. The last three months of p2023 show diminishing growth.

Victoria

Chart 5 compares the monthly performance for VIC, in terms of both revenue and percentage growth in revenue on a month-on-corresponding-month basis.

VIC shows revenue levels for p2023 at or below the revenue for p2021 for eight of the twelve months. As the lower graph indicates, the upper range of growth was at 5% for p2023, with growth going significantly negative for the last four months of p2023.

Queensland

Chart 6 compares the monthly performance for QLD, in terms of both revenue and percentage growth in revenue on a month-on-corresponding-month basis.

The revenue graph for QLD shows revenue for p2023 exceeds revenue for p2022 for the initial nine months, fall under p2022 for December, then matches p2022 for January and February. The lower percentage growth graph shows that in p2023 the rate of increase actually declines steadily through p2023, then falls sharply for December 2022, before recovering.

South Australia

Chart 7 compares the monthly performance for SA, in terms of both revenue and percentage growth in revenue on a month-on-corresponding-month basis.

In contrast to the three larger states above, SA shows a degree of exuberant growth. The revenue growth shows the highest levels of revenue ever for the state during p2023, with the exception of May 2022. Historically peak revenue of $173 million was reached in December 2022.

The lower chart for percentage increase shows level of growth p2023 that come close to matching those for the first pandemic period, p2021. Maximum growth of 45% was achieved in July 2022 - though that was due to a steep fall in revenue for July 2021. It is also followed by a steep decline in growth August 2022, again a matter of August 2021 recovering sharply. Like the other states, growth for February 2023 shows an unusually low number.

Western Australia

Chart 8 compares the monthly performance for QA, in terms of both revenue and percentage growth in revenue on a month-on-corresponding-month basis.

WA follows a pattern closer to that of SA than the other states. Like SA, the top revenue chart shows the state breaking revenue records in p2023 - though not by much in some cases - with the exception of one month, May 2023. WA is, of course, also notable in that the pandemic boost was not as unique as it was for other states, with the results for p2021 not far off those for the boom period of p2017.

That's less true for percentage growth terms, as the first pandemic period of p2021 came after an underperforming p2020, so, as the lower growth graph shows, p2021 did generate historically high growth numbers. P2023 does show second-best growth behind that for March to August, before being overshadowed by other periods for the remaining six months. Unlike the other states, WA actually ends the period on February 2023 with an uptick in growth above 5%.

Australian Capital Territory

Chart 9 compares the monthly performance for QA, in terms of both revenue and percentage growth in revenue on a month-on-corresponding-month basis.

In general terms, the graph for revenue in p2023 shadows the maximum value for p2021 and p2022. The exception is March 2022, which sets a new maximum for around $45 million.

The lower growth chart shows a slightly different story, however. In growth terms there are three sections: the first bumping along close to 10% from April 2022 to July 2022, a second of exorbitant growth for August and September 2022, followed by a reset into mildly negative growth for the rest of the period.

Tasmania and Northern Territory

For completeness, HNN is including the charts for the combined TAS and NT regions in Chart 10.

Analysis

It's helpful to look at Chart 11, which combines the growth numbers for all the states and territories.

The overall impression of this graph is that there is a gradual slowdown in growth as the period progresses. The lows get significantly lower, and the highs are diminished.

That would be pretty much what the interest rate changes made by the Reserve Bank of Australia (RBA) would be aimed at achieving. Forecasting in the current market is very difficult, but HNN would suggest that this downward trend in growth is something that will persist and grow strong through to the end of FY2022/23.

Hardware retail sales stats from Australian Bureau of Statistics (ABS) show that the pattern established post-March 2020 of elevated sales has been maintained through 2022. As shown in Chart 1, the gains have been substantial.

In percentage increase terms for the year, South Australia (SA) leads with 19.2%, followed by the Australian Capital Territory (ACT) at 9.4% and Western Australia (WA) at 9.2%. In dollar gain terms, New South Wales (NSW) leads with a gain of $406 million, representing a 5.5% increase, followed by Queensland (QLD) with a gain of $323 million, a 6.4% increase. Victoria (VIC) managed an increase of 2.7% worth an extra $172 million. For Australia overall, the increase was 6.4%, and a gain of $1529 million.

Chart 2 shows the percentage increase for the calendar years across the states and territories. Perhaps the most surprising trend, reflected in the individual state graphs as well, is that the increase in interest rates does not seem to have much of an effect on hardware retail spending.

New South Wales

Victoria

Queensland

South Australia

Western Australia

Australian Capital Territory

Australia overall

The Australian Bureau of Statistics (ABS) has released retail stats for October 2022. This comes against the backdrop of a series of unusual weather events throughout the spring. The map below, from the Bureau of Meteorology, shows how much above average the rainfall for October and November 2022 has been.

In particular, there is news that Bunnings is seeing reduced sales for the spring season, resulting in its incurring high charges for warehousing excess stock.

While Bunnings might have seen some adverse effects from the weather, the story for Australia overall is more positive. In Chart 1 and the subsequent charts, HNN is using periods consisting of the trailing 12 months to October, which are designated with a "p" prefix. So p2021 refers to the period from November 2020 to October 2021.

As the top graph in Chart 1 illustrates, p2022 has been very much a record-setting period. With the exception of May, every month has seen hardware retail sales reach a monthly record for Australia. As the lower graph indicates, there has been steady growth throughout the period, the dark red line tracking just below 10% growth for seven months of the period. While growth for October 2022 is close to zero, sales for that month are nonetheless the second-highest ever achieved for Australia (the highest being in December 2021).

New South Wales

New South Wales (NSW) does show a significantly lower sales figure for October 2022 than October 2021. However, the sales figure for October 2021 was the record for the state, at $767.2 million. The October 2022 number was $705.2 million, which represents the third highest monthly sales for the state, indicated by the top graph in Chart 2.

It's likely that the retail figures for November and December 2022 will tell more about the state of hardware retail in NSW than the October numbers, given the exuberance of the October 2021 sales.

As the lower graph indicates, for p2022, there were two main periods of growth, from January to April 2022, when growth was around 5%, and from May to August, when growth was above 10%. The average growth for p2022 was 6.49%.

Victoria

Perhaps the most interesting feature that is developing in the sales chart for Victoria (VIC) is how contained sales for October have remained. In fact this applies to some extent for the entire early spring sales, from August through to October.

The upper chart shows a similar upward slope for those three months, and the lower chart shows that, in fact, the highest growth rate did not occur during the p2020, p2021 and p2022 pandemic years, but in p2019.

What this brings up is that much of the expansion in the VIC hardware retail market has been contra-seasonal, in that expenditure has increased from March to July. Looking at that period in the lower chart, there is the broad upward arc for p2020 (the green line), which is countered by the inverse arc for p2021 (the blue line), and then "evened out" by the flatter line for p2022 (the dark red line).

It is Interesting to compare pandemic sales growth between NSW and VIC. In the pre-pandemic period p2019, NSW had total sales of $5.78 billion and VIC had sales of $5.64 billion. For p2022, NSW had sales of $7.67 billion, an increase of $1.89 billion, or 32.7%. VIC had sales for p2022 of $6.64 billion, an increase of $1.00 billion, or 17.9%. However, on a population basis, VIC had sales of $1.01 million per 1000, and NSW had sales of $0.94 per 1000.

Queensland

Perhaps the best summary for Queensland (QLD) is that sales in p2022 have followed fairly closely to the pattern set in p2021, with additional growth.

As the lower graph indicates, growth for p2022 averaged 7.49%, peaking in June 2022 at 15% and exceeding 10% in March and April 2022. Total sales for p2022 were $5.40 billion, up by $1.36 billion from p2019, or 33.61%.

South Australia

In contrast with the NSW, VIC and QLD, we would have to conclude that p2022 has been an exceptionally good period for hardware retail in South Australia (SA). Prior to p2022, the highest level of monthly sales was $145.7 million in October 2021. Not only was that surpassed in October 2022 with $163.3 million in sales, it was also exceeded in December 2021 ($156.2 million) and September 2022 ($148.6 million) - and very nearly equalled in November 2021 ($144.6 million). Viewed in another way, p2022 set a record for monthly sales for every month, except May, where sales for May 2020 were slightly higher.

The average increase for p2022 over p2021 was 20.86%. Total sales for p2022 were $1.68 billion, an increase of $502 million over p2019, up by 42.69%.

Western Australia

In Western Australia (WA) sales for October 2022 represented an all-time high for the state, at $262.1 million. In fact, p2022 delivered the four highest ever sales results, for November and December 2021, and September and October 2022.

Total sales for p2022 were $2.69 billion, up by $697 million on p2019, or 35.03%. Average monthly growth for p2022 was 10.34%. As the lower graph indicates, in contrast to p2020 and p2021, growth was comparatively steady around that 10% mark, with only April 2022 and June 2020 showing a high and a low respectively further outside the range.

Australian Capital Territory

Ever unique, the sales results for Australian Capital Territory (ACT) show the territory closely following sales from p2020 from April 2022 onwards, as indicated by the upper graph.

The lower graph shows what we've come to expect from the ACT - a period of normality, followed by a period of, well, "crazy". Though in this case the "crazy" really has little to do with p2022 and lots to do with p2021, specifically the sudden drop in hardware retail sales for August and September 2021, followed by the sudden spike upwards in October 2021. That's reflected in the growth numbers, with 34% growth in August 2022 and 44% growth in September 2022, followed by -0.2% growth in October 2022.

Average growth for p2022 came in at 13.40%. Total sales for p2022 were $534 million, up by $162 million on p2019, an increase of 43.89%. The ACT does have one of the highest per-capita expenditures on hardware in Australia at $1.17 million per 1000.

Analysis

As HNN commented about the September 2022 retail sales figures, it seems quite clear that the increase in the target interest rate since May 2022 has had little discernible effect on the hardware retail industry. Obviously, inflation is playing some part in these sales figures, but it is clear that for most states and territories, sales are continuing to grow beyond that.

While it's understandable that this is good news for the industry, it also does bring with it certain troubling concerns. The governor of the Reserve Bank of Australia (RBA), Philip Lowe, has made clear that the RBA is engaged in a quite particular fight against inflation. What has made inflation different this time around is that its cause is split between the "demand" side (what people buy) and the "supply" side (what is available for them to buy). That is very different from inflation in the recent past, which was largely driven by surges in demand.

In practical terms, to beat inflation caused on the supply side, it is necessary to drive down consumer demand, not back to, say, the average level of the four or five years before inflation, but down to a level beneath that, one which matches the actual level of supply. The difficulty, as a number of economics commentators have pointed out, is that after two or more years of largely curtailed spending, many Australians have a "buffer" amount of savings. As higher interest rates reduce their spending capacity, they are utilising savings to retain their "normal" spending patterns.

With a bit of luck, some of those supply restrictions might lift a little during 2023. Petrol prices have already fallen, though not back to the levels of the time before Russian invaded Ukraine. Building material costs are continuing to come down, but not universally. It seems unlikely, however, that the supply issues will be resolved before the end of 2023.

It is quite clear from other comments by Dr Lowe that the RBA is settling in for a longer fight. The point that has to be reached is one where there is some reduction in external supply issues generating prices increases, interest rates are beginning to become of more concern, and - rather dauntingly - Australians are sufficiently concerned about the national economy that they voluntarily curtail their spending.

The question remains as to what exactly will be curtailed. Will it be only "high discretionary" items, such as eating out at restaurants and cafes, or will it extent to less discretionary items such as basic household goods, including hardware? The concern is that this slowdown in consumption could coincide with the end of the backlog of construction work that has built up, and thus produce a slump in hardware sales.

Related

Channel Nine's long-running "reality" television series "The Block", ended on what many have felt is a kind of failure. Five properties that had been built and renovated in the regional area of Gisborne, Victoria, were put up for auction at the end of the series, with the highest sale price determining the winner. While one property did sell in a range above the $4.0 million to $4.4 million suggested by the show's producers, three of the properties were passed in. The one that did sell did so just $20,000 over the reserve price, disappointing the contestants.

Had the show's producers taken a closer look at the available statistics, the surprise might not have occurred. While there was a surge in property purchases and developments in regional Victoria at the height of the pandemic, these have since fallen off sharply.

HNN has teased out those stats for the five states most affected by the move to regional areas. We've taken the number of building approvals, and divided them by the total number of approvals for each state, to provide the percentage of all approvals that were regionally based.

These are presented in 12-month periods, ending in September (the month for which the most recent stats are available). We refer to these with the prefix "p", so p2020 would be the period from October 2019 to September 2021.

New South Wales

New South Wales (NSW) has always had more complex patterns than the other states when it comes to regional building stats. That's because the state has a number of regional centres. By contrast, the next most populous state, Victoria (VIC) really only has one (Geelong), and it is quite secondary by size.

Chart 1 shows the contrast between building approvals issued for Sydney, and for the rest of the state.

The top graph shows the percentage of overall building approvals made up by approvals issued outside of Sydney. Perhaps what's most surprising is the degree to which the pandemic years altered seasonality more than numbers. Previously September had ben a high point in terms of proportion, but in both p2021 and p2022 September came to represent a low point.

Looking at the middle graph, of building approvals in Sydney, it can be seem why, as city approvals spiked during those two periods. Correspondingly, as the bottom graph shows, regional approvals were not at their lowest level, but far off the high as well.

As the bottom graph shows, the period from February 2021 through to August 2021 showed the highest number of approvals. Over the same period in the subsequent year, levels were elevated over pre-pandemic periods, but far off the highs of the previous year.

Victoria

These are the graphs that the Nine Network should have consulted before commissioning the recent "Block".

As the top graph shows, the proportion of regional approvals climbed steeply from October 2020 through to May 2021. There was an additional spike for March 2022, but for most of the rest of the time the pandemic regional approvals have been in line with pre-pandemic seasonal trends.

Contrasting the middle graph for Melbourne approvals with the bottom chart for regional approvals, its clear that regional approvals did make a considerable impression through p2021, trending well above the usual seasonal activity. Yet this seemed to come to an abrupt end at the start of p2022, in October 2021, outside of some additional activity in February and March 2022. Approvals basically reverted to the pre-pandemic norm from April 2022 onwards.

Queensland

Queensland (QLD) is, of course, its very own unique case as well. In fact, as the top graph of Chart 3 indicates, the proportion of regional building approvals reached its highest levels during p2022, peaking in March 2022, and from June to September 2022.

What is most striking about the middle graph, for approvals in the Greater Brisbane area, is that after a high level of activity from February to September 2021, the number of approvals has moved much closer to the historical average.

Meanwhile the bottom graph clearly shows that regional approvals have tended to trend well above the historical average for both p2021 and p2022.

South Australia

While QLD indicates ongoing activity in regional areas, South Australia (SA) shows a very strong upshift in regional approvals. As the top graph in Chart 4 indicates, in terms of proportions, SA reached its highest for regional approvals in September 2022.

The middle graph shows that while approvals in Adelaide reached peaks during p2021, approvals were still above average, but had retreated considerably. In contrast, the bottom graph shows that regional approvals in SA were well above average for both p2021 and p2022.

Western Australia

As with QLD, it's interesting to note that for Western Australia (WA) the proportion of regional approvals reaches a seasonal high for July to September 2022 as shown in Chart 5.

The middle chart illustrates just how astounding p2021 was for WA, with 11 of the 12 months setting new record highs for approvals in Perth. That's echoed in the bottom graph for regional approvals as well, with regional approvals tending to trend just above averages.

Analysis

What the executives at the Nine Network missed was that it is evident the transition to regional housing was very much a response to the pandemic, and not part of a longer term restructuring of the real estate market. That restructuring is more evident in many of the other states, where there has been more persistence in regional building approvals during p2022.

To a large extent, for VIC, this reflects a surprisingly centralised structure - given it is one of the smaller states geographically. NSW has its separate regional areas, and QLD has vast ex-urban areas that have long formed their own sub-regions.

The Australian Bureau of Statistics (ABS) has released retail sales figures for September 2022. The original numbers for hardware retail shows that the predicted trend has continued: not only has the high level of sales first established at the start of the COVID-19 pandemic in March 2020 continued, but the numbers have continued to grow.

Some extent of that growth has to be attributed to inflation. However, the counterpoint to this is that inflation could have created a decline in sales, or at least a levelling off. Instead, while the rate of growth might have gone down for September 2022, it remains surprising that given all the negatives - higher interest rates, declining prices for houses, more inflation, the promise of slow growth through to the end of 2024 (according to the Reserve Bank), sustained slower growth in wages, and future energy prices that will go up, but no one knows by how much - hardware retail continues to thrive.

To date, most of the projected barriers to continued hardware retail revenue growth have not eventuated, or were milder than expected. One such concern was over an increase in expenditure on travel reducing the pool of funds available for non-necessity expenditure. As the Chart below indicates, while expenditure on travel has increased through 2022, it still remains well below the level of 2019. The lower graph indicates that gap.

That said, it is also likely that this gap will continue to close during 2023, and this could still result in a reduction in hardware retail revenues, especially as the backlog of construction activity is reduced.

As usual, the charts below cover 12-month periods ending in the month for the most recent stats, which is September. We refer to these periods with the prefix "p", so p2019 would be the 12 months from October 2018 through to September 2019.

Australia

It remains surprising to HNN to look at these charts, and to see the big gap between retail sales prior to March 2020, and both the pandemic and post-pandemic sales. Looking at the top graph in Chart 1, the other point is just how consistently strong sales for p2022, with only the highest peak of p2020, in May, posting higher numbers.

The lower graph retraces a familiar pattern of growth post-pandemic. There is the high arc of sales growth in p2020 and p2021, from March 2020 through to January 2021, balanced by the decline in growth through the remainder of p2021. Growth for p2022 is evenly balanced between those two, which is a good indicator of stability.

New South Wales

New South Wales (NSW) continues to show the most robust growth of any state or territory, with half of p2022 producing over 10% growth, as the lower graph in Chart 2 indicates. Most notably, four of those six months were after the start of interest rate rises, running from May through to August 2022. While growth appears to have declined for September 2022, that is actually a consequence of very strong sales in September 2021.

It will be interesting to see if NSW can match the record sales for the December quarter that were produced in 2021, with those three months producing $2.16 billion. That contrasts with $1.60 billion for both 2018 and 2019, and $1.94 billion in 2020. This includes the highest ever monthly sales number in Australia, at $767 million for the month of October 2021.

Victoria

Total sales for Victoria (VIC) in p2022 were $6.64 billion, a modest 2.6% increase over sales of $6.47 billion in p2021, with p2020 producing $6.46 billion, and p2019 $5.61 billion in sales. So, the hardware retail economy has been boosted by an extra $1 billion in expenditure.

As with NSW, VIC has shown resilience in the face of interest rate increases, with sales from July to September 2022 showing steady growth of 5%, illustrated in Chart 3.

As with NSW, there is a challenge to see how sales go for the final quarter of 2022. Sales for that quarter in 2021 were $1.86 billion, and in 2020 were $1.90 billion. November has been the peak month for VIC, with the highest figure for 2020 at $677 million.

Queensland

Queensland (QLD) has continued to perform well during p2022. Total sales for the period were $5.38 billion up by 7.3% over p2021 with sales of $5.01 billion. Sales grew by 14.7% in p2020 and by 8.2% in p2021, providing a three-year average growth of 10.1%. That contrasts with average growth of 5.2% from p2013 to p2019 - though that includes two periods, p2013 and p2015, when growth was over 12%.

QLD has demonstrated steady growth through p2022, as the lower graph in Chart 4 indicates: for all but two months growth has been at or above 5%.

South Australia

South Australia (SA) is the only state to show a sustained high rate of growth in hardware retail revenue during p2022, hitting a peak of 44.9% in July 2022, as shown in the lower graph of Chart 5.

In part this is due to lower sales during p2021, but the increased sales were generally well above sales during the initial pandemic period of p2020. Sales during p2020 grew by 17.4%, by 1.1% in p2021, and by 19.1% in p2022.

As with the other states, sales in August and September 2022 indicate that economic conditions have yet to negatively affect the SA market.

Western Australia

Western Australia (WA) had a somewhat unique experience for the pandemic period, bringing in effective measures to remain nearly COVID-19 free until late 2021. While the state saw some significant growth, it remained modest, with the state's boom year of 2016 outperforming the pandemic gains in some ways, as shown in Chart 6.

WA saw retail revenues grow by 15.0% during p2020, by just 6.2% for p2021, and by 9.9% for p2022. Its peak sales month was December 2021, when it hit $241 million, but September 2022 was also very good at $224 million.

Australian Capital Territory

Like WA, Australian Capital Territory (ACT) had a somewhat unique pandemic experience. As Chart 7 shows, there has been a strong upswing in revenues for August and September 2022.

Like SA, the territory has seen some very high percentage increases in growth, topping out at over 40% for September 2022 - though that is driven in part by a sharp decline in sales for August and September 2021.

Analysis

One of the big questions that will be faced in calendar 2023 is how each state will fare individually as economic conditions continue to tighten. It seems likely that NSW will continue to be something of an economic powerhouse for Australia. However, HNN believes it is possible the VIC economy will struggle. The effects of its severe experience during COVID-19 are not generally understood all that well outside of the state, and these have left both scars on the community and the state's economy.

What does seem clear, however, is that the other states have made up some ground, at least in hardware retail, over the two major states, and there is some hope this will continue. The final quarter of 2022 will reveal much about each state's prospective future.

If there is anything that is in short supply at the moment, especially in retail, it is perspective. As we watch markets respond in unaccounted ways, with inflation driven by a range of diverse forces - from Russian imperialism to supply chains still under stress - accurate forecasting becomes difficult.

One good clue to where the economy is now - or at least in the recent past - can be derived from the producer price indices developed by the Australian Bureau of Statistics (ABS). However, this is such a welter of great data, that finding something like a clear path through it is difficult.

HNN's take on it for the most recent series, up to the September quarter of 2022, is to look at the data for construction inputs, and to present the 30 categories from the weighted averages for the six major capital cities that have showed the highest price growth. That price growth has been determined by the greatest difference in index from the December 2017 quarter through to the September 2022 quarter.

We're presenting the stats as both the index numbers and the percentage growth for quarter on corresponding quarter. We've selected the top 30 from the available 50+ categories.

Series I

It's easy to see why builders are in such stress when you look at the categories with the most growth in prices. These are, for the most part, the fundamental structural elements of house building, and they show rates of increase of over 40% in most cases.

Series II

The second group has some structural elements, but also more specialised items, such as metal garage doors.

Series III

The third group is largely dominated by metal manufactured goods, along with glass and waterproofing solutions.

Series IV

The fourth group includes more varied items, including cement, plaster and general builders' hardware.

Renovations have always been a little difficult to track in Australia, as they are one of the more amorphous areas of building and construction. The three major glimpses we do get statistically are through building approvals, loans taken out for renovations, and questions asked on the survey into household expenditure undertaken for the national accounts.

We've presented all three of those views here, relying on stats from the Australian Bureau of Statistics (ABS). The ABS is continuing to grow its monitoring of this area. Most recently it has introduced stats for not just the value of loans for renos, but also for the number of those loans, stats for which we now have just over three years' worth of data.

In terms of building approvals, the ABS does publish a very useful set of quarterly stats, which rely on chain volume measures. These provide a very direct read on how a particular market is faring. Chain volume measures adjust prices to "chained" price levels, so the resulting stats more strongly reflect true growth in the market, which is associated more with volume than price increases.

While building approvals for renos do capture the bulk of the expenditure, they are still limited to those projects that exceed a certain dollar amount or involve structural alterations that require approval. To counter this problem, the ABS includes questions about renovation and home maintenance in its survey of household expenditure, an important part of its quarterly national accounts reporting.

The eight-graph grids presented for each state provide the actual stats on the left, either in numbers or millions of dollars, and the percentage change on either a quarter-on-corresponding-quarter or month-on-corresponding-month basis on the right. The quarterly graphs present the financial years (FY), so the 12 months ending in June. The monthly graphs present periods consisting of 12 months ending in August, referred to with a "p" prefix. So p2021 represents the 12 months from September 2020 to August 2021.

While we're presenting the three major states in this report, we'll be following up with the rest of Australia in a subsequent report.

New South Wales

Starting with the top graphs, graph one for the national accounts figures shows there are two direct step-changes from the prior NSW reno economy to the latest version, the first relatively minor, and the second highly significant.

The start of the COVID-19 pandemic had little effect on renovations in NSW. The June qtr of 2020 covered the start of that pandemic period (the orange line), and the activity is not only flat from the March qtr, it is also the lowest value for renos for that qtr of all six years charted. Renos improve through to the September qtr, but they remain below the level of that quarter recorded for 2016 and 2018.

It is in the December 2020 qtr reno expenditure climbs substantially. Activity increases at basically the same rate as it did in the previous best period FY2017, though it remains below the level of that year.

It is really only with the March 2021 qtr that activity really begins to take off. This is the first really contra-seasonal increase, with only a small drop-off from the prior quarter, where in all previous charted years there was steep decline. This is effectively where the new pattern is established, with the subsequent 15 months continuing to follow seasonal patterns, but at an elevated level.

That new pattern can be clearly seen in graph 2, which shows the percent change, with unprecedented growth levels for both the March and June qtrs of 2021, and continued high levels in that year's September and December qtrs, before a decline in growth for the March and June quarters of 2022.

Building approvals

Those same patterns are reflected in building approvals (graph 3), with the black line representing FY2022, following very similar dips and rises as for the national accounts graph. However, the increase in the level of activity during the three end qtrs of FY2021 are even higher for approvals, as shown in graph 4.

Renovation building approvals increased by 34% for December qtr 2020, by 41% for March qtr 2021, and by 55% for June qtr 2021. As those rates of growth outstrip growth shown in the national accounts, that would indicate a shift to larger projects requiring permits over that time.

However, it is likely that was reversed somewhat for the March and June quarters of 2022, as growth in building permits goes negative for those quarters, while it continues to be flat for the national accounts numbers.

Renovation lending

Taken together, the graphs for renovation household lending numbers and value show even more outstanding growth - not surprising given the low interest rates during the COVID-19 pandemic.

In terms of the numbers of loans, graph 5 shows that starting in February 2021 a sharp increase begins, and really continues through to August 2022. Graph 6, showing the percentage growth in numbers, shows how high those growth levels were, going over 100% for June, July and August 2021, and peaking at close to those rates for November and December 2021 as well.

However, the increase in aggregate value for renovation loans is even more astonishing. The same general pattern in growth occurs, but this begins earlier, in November 2020, with growth hitting 80% in March 2021. Growth peaks at over 140% for July, August, and November 2021.

Putting those together, it's evident that while numbers did increase, the major change was a shift to much higher values of loans for renovations, a move which ran ahead of the increase in numbers.

Victoria

In contrast to the exuberance of NSW, VIC shows growth in renovations, but at a subdued level. Looking at the national accounts figures in graphs 1 and 2, it's evident that FY2021 was a relatively subdued year, and it is only with FY2022 that strong growth happened - though this was limited to 17% for December qtr 2021.

Building approvals

When it comes to building approvals, however, the story is more positive, at least for the four quarters that made up calendar 2021, as shown in graph 3. Growth in building approvals peaked at over 40% for the June and December qtrs of 2021, as graph 4 indicates. However, by June qtr 2022 the level had dropped back to that of 2019.

Again, this shows a likely shift in projects to more high value, with a greater proportion requiring building permits.

Renovation lending

While the levels of activity overall did not increase that substantially, the amount of renovation work that received financing did grow sharply. In terms of the number of loans, March 2021 showed the first surge, reaching a new high level in June 2021, indicated by graph 5.

The peak months were March and May 2022. The growth rate peaked in August and September 2021 at over 110%, and it remained above 50% from April 2021 through to March 2022, as detailed in graph 6.

The loan value picture is broadly similar. All of FY2022 has remained at record high levels, a trend which started in April 2021.

Queensland

The national accounts figures for QLD show something of a clean separation between FY2021 and FY2022 from the preceding years. Beginning with September quarter 2020 through to September qtr 2021, spending on renos remains above $2.4 billion, before declining slightly to $2.3 billion form March and June trs. of 2022, as shown in graph 1. That is reflected in the growth numbers in graph 2.

Building approvals

For building approvals, however, there is a different pattern. As shown in graph 3, there is a sudden and sharp lift in September qtr 2020, with a peak reached in March qtr 2021. This is followed by a steep decline in December qtr 2021, with the two subsequent qtrs returning to the levels of 2020, not much above the levels of 2019. That is reflected in the growth numbers shown in graph 4, with growth going negative for the final three quarters of FY2022.

While this shift does reflect the change in the national accounts figures, it is also a significantly stronger negative growth, indicating that more renovation was shifting out of permitted work.

Renovation lending

While building permits might have declined, lending remained strong in terms of both number of loans and aggregated value of loans throughout FY2022. The upwards surge began in March of 2021, and then reach peaks, for both numbers and value, in March and May 2022. In terms of pure growth, however, August 2021 was the peak, with number of loans increasing by 140% and aggregated loan value increasing by 209%.

Analysis

The goal of providing this kind of overview of renovation activity has been to look at the market from different angles and perspectives. It is evident both that there has been growth in the market, and that there have also been some shifts in the financing of the market - and it's important to acknowledge the differences.

NSW has seen substantial growth in the underlying market, and growth in financing. VIC has seen more subdued growth in the market, but a shift to greater financing. QLD has seen more subdued growth in the underlying market, and a decline in calendar 2022, as well as a shift away from financing.

While NSW shows strong growth, the other two states also represent a very robust market, and one that seems, at least to this point, to be not very influenced by the increase in interest rates. It seems most likely that there will be a slight shift down in financing during FY 2023, but ongoing strength in the underlying market.

Since the start of the COVID-19 pandemic, HNN has been somewhat circumspect about the future for hardware retail revenues in Australia. We were very concerned that, when the Reserve Bank of Australia (RBA) inevitably raised interest rates, and house prices began to decline, we could see a collapse in the market.

However, with current retail statistics covering four months of interest rate increases, and ongoing strength in retail, we are now of the opinion that the gains over the past 29 months or so do indicate that hardware retail revenues have lifted to a new and higher level in Australia.

That does come with something of a caveat, which is inflation. Inflation is - obviously - responsible for part of that increase. That's both overall inflation, such as the increase in petrol and diesel prices, which flowed through to higher supply and service costs, as well as very specific inflation in hardware, brought about by short supply of vital components and commodities for construction.

That said, though, the numbers are good, and the trend looks like they will continue to be strong through to the end of the current financial year.

As usual the statistics we present here are based on the trailing 12 months from the most recent month of results (August), which we refer to as periods, and designate with a "p" and the end year. So the period from September 2020 to August 2021 is referred to as p2021.

Australia

The scale of the change is quite unusually high for retail stats. As Figure 1 indicates, comparing the pre-pandemic p2019 with the most recent p2022, Australia saw overall hardware retail revenue grow by $5.83 billion, an increase of 29.8%.

While the Australian Capital Territory (ACT) and South Australia (SA) topped out the percentage increase, both at close to 40%, it is New South Wales (NSW) that has the most overwhelming gain in dollar terms, at 34.9%, for a gain of over $2.0 billion. That is in sharp contrast to the next most-populous state, Victoria (VIC), which gained 18.1%, amounting to a little over $1.0 billion.

Chart 1 shows the overall situation as it has developed over the past years. The top graph shows the progressive growth both in Australia's overall numbers, and in NSW in particular. The Australian market grew by $2.6 billion from p2019 to p2020, by $1.5 billion from p2020 to p2021, and by $1.7 billion from p2021 to p2022.

The lower graph shows the year-on-year percentage growth in revenues, with a rapid acceleration into p2020, a decline from the peak in p2021, and then a broad spread of ongoing increases in growth levels, declines and also flat results for both VIC and Australia overall in p2022.

Chart 2 shows how the growth was spread out over the past three periods across Australia in terms of actual financial increases.

There are, broadly, two patterns, with NSW and QLD showing a strong start in the first pandemic year, then a gradual tapering through the next two years. Other states show a strong first year, a much weaker second year, then a slightly stronger third year. VIC is exceptional, with a very strong first year, then quite weak growth over the next two years.

Chart 3 shows the seasonal patterns of retail revenue. What is most interesting in the top graph, which is simple revenue, is that the overall seasonal patterns have continued - after the abrupt shift upwards from March to May in p2020 (the pale blue line).

It's really this graph that has convinced HNN the uplift in revenues will likely have some permanence, as Australia is not only into its third year of these kinds of results, but also the return to seasonality indicates we're looking at an increase in demand through established patterns, rather than the imposition of a strong but temporary counter-pattern (as was the case in p2020).

That seasonality is largely pinned to two extremes: a strong drop in revenues for February (after a smaller drop in January), and a seasonal high sometime between October and December. If there is any shift, it is perhaps towards December as now being the peak month, where in the past it was either October or December (December has been the peak over the past four years).

The lower graph shows the patterns of month-on-corresponding-month growth. The p2020 results show a high arc, which is then countered with the negative growth arc for p2021 (the dark red line), which then averages out for p2022 (the red line). We've also provided pre-COVID-19 averages in the dark orange line (this is for the average for the five periods p2015 to p2019). What is most pertinent is the contrast between the p2022 results and that average, with p2022 averaging 3.0% up. That seems most likely to be due to inflation, and could even indicate a decline in overall growth, in those terms.

New South Wales

There is little doubt that NSW is the state which has benefitted the most from the COVID-19 boost. It seems to have rapidly normalised the increase. As the top graph shows in Chart 4 shows, after the initial boost from March to May in p2020, the revenue fitted back into the seasonal pattern, albeit at a much higher level.

NSW also has shown ongoing growth through p2022, as is borne out by the lower graph, which indicates revenue growth of above 10% for May through August - far outweighing any increase due to inflation. It's also notable just how strong the uptick for August - the start of the end-of-year seasonal uplift - has been for p2022, even as interest rates continued to increase at a historically high pace.

Victoria

VIC has something a unique pattern of COVID-19 revenues. As the top graph of Chart 5 shows, the immediate boom from March 2020 through to December 2020 was quite intense, but revenues for p2022 have tracked closely to those for p2021, except for - surprisingly - February 2022.

While there are still strong levels of retail revenue, these are converging on the revenue levels for p2019, and we will have to wait to see how that progresses through the remainder of the peak season for 2022. The lower graph shows that revenue growth for p2022 has remained under 5.0% through p2022, except for February.

HNN suspects that the COVID-19 pandemic had more economic consequences for VIC than are currently widely understood. These could emerge more clearly in early 2023, after the VIC state elections. The very long lockdowns, interstate migrations, coupled with cost-of-living factors could see the state suffer more than other states, even though employment rates remain high.

Queensland

As mentioned above, the COVID-19 response from QLD is most like that for NSW. As the top graph of Chart 6 indicates, not only did QLD get a considerable revenue boost, but that growth has continued through p2022.

The entire p2022 shows positive growth over p2021, though there is quite a small increase for November 2021.

The lower graph shows a near-symmetrical relationship between the high growth in p2020, and the negative growth pattern for p2021 - which is what you would expect when there is a fundamental shift in revenue patterns.

South Australia

SA shows the pattern of a relatively small jump in revenues for p2020 after the initial surge through to May 2020, followed by a p2021 that from February through to July 2021 showed a trend to converge with pre-COVID-19 revenue levels. That's clear in the top graph for Chart 7.

However, something happens in August 2021, which is then continued through the entirety of p2022, with revenues matching that high peak for May 2020. Looking at the lower graph, it's clear this trend begins with an over 20% growth rate for February 2022, and only ends with August 2022, as the revenues lap the start of the surge.

This illustrates one of the key points of this surge in hardware retail revenues. As pointed out above, where in the past economic progress has often been concentrated in NSW, VIC and (to a lesser extent) QLD, that's not the case for this economic change. In percentage terms, SA has benefitted far more than VIC.

Western Australia

For WA, the most significant graph feature is the red line on the lower graph of Chart 8.

This shows the growth in revenue for p2022, which is steady and constant for the entire 12 months (except, maybe, for October 2021, but that's due to a peak in revenues for October 2020). The average growth through p2022 was just over 10.0%.

Though the overall revenue levels seem a little subdued compared to other states, as indicated above, the revenue growth for WA in percentage terms was higher than for QLD through the combined past three periods. WA has simply been quietly performing better and better each year. It seems to be a pattern that is different from the boom periods of p2016 and p2017, with elevated revenue levels which were largely gone by January 2018.

Australian Capital Territory

The ACT is the only smaller territory/state for which historical revenue data is available, with both the Northern Territory and Tasmania not reporting numbers during the pandemic. (HNN has included a category for combined NT/TAS in the overall Australia stats, but this is derived by subtracting the totals for the other states and territories from the total for the nation.)

In percentage terms, the ACT benefitted the most of all the states and territories, and Chart 9 shows its revenues clearly tracking higher.

As the lower graph indicates, ACT is like WA in that its growth for p2022 was steadily above 10.0% for most of the period, excepting September. The average growth for p2022 was in fact just below 12.0%.

Analysis

If we accept the proposition that, though we might see some revenue declines during FY2023/24, there has been an effective "reset" of hardware retail revenues at a higher level, and that this is likely to persist over the next four to five years, the question shifts to whether there are any new, additional patterns emerging.

While it is far from definite, there does seem to be one or two indications. The first is a shift towards December as being the dominant month of the peak end-of-year season. The second, perhaps more pronounced trend, looks like a change for February. While this remains a "down" month, it is moderating just how far down it goes. That could be temporary, as the push to work through the backlog of construction projects wears off, but will likely persist somewhat through both 2023 at least.

HNN does remain concerned about what is going to happen moving into calendar 2024 in terms of construction activity. As we have detailed in the past, we see the primary economic forces at work being political support for higher house prices to make up for low wage growth, with the latter due to a lack of focus on growth in productivity.

Eventually, if housing continues to be exceptionally high-priced in global terms, the market will collapse. We estimate that point will be reached in mid-2024. It's not clear there is the political will to change course sufficiently to avert this.

Some of the newer data series from the Australian Bureau of Statistics (ABS) on housing loans - which started back in July 2019 for most states - can provide additional insights into loan values. While loan values do not directly reflect dwelling prices - there is a deposit and other factors involved - they do show where the money is going when it comes to loans for the purchase of established houses as compared to loans for construction and the purchase of newly-completed houses.

In this series we're looking at the average value of these loans (the total aggregate value of loans divided by the number of loans made) for dwelling construction, newly erected dwellings and existing dwellings, for both owner-occupiers (OO) and investors.

In addition, we're also looking at the value premium (which is sometimes negative) for loans made for newly completed dwellings as compared to loans made for dwelling construction.

New South Wales

It Is probably no surprise that the lowest average loan value for New South Wales (NSW) is for OO construction loans (the light blue line), with investor construction loans (the red line) tracking just slightly above that. This is shown in the top graph of Chart 1.

A similar situation is repeated, at a higher value level, for loans for newly erected dwellings, with loans for OO dwellings (the orange line) tracking slightly below investor loans (the dark grey line).

In both cases, the average value for investor loans is considerably more volatile than that for OO loans. It's also interesting to note that for the period that the sharp increase in interest rates would have most affected, June and July 2022, there was a slight decline in investor construction loan values, while OO construction loans continued flat, but both OO and investor loans for newly erected dwellings fell steeply, effectively down to the level of the construction loans.

That situation is slightly reversed for the average value of loans for existing dwellings. The average value of loans for OO tends to be slightly higher than that for investors, and both are less volatile than the other forms of loans. It's also clear that while there is some crossover in terms of top values with investor loans for newly erected dwellings, in general the loans for existing houses tend to have a higher average value than other loan types, a tendency that is enhanced as the COVID-19 pandemic continued post May 2021.

The lower graph in Chart 1 shows what we are terming the "premium" in average loan values for newly erected dwellings as compared to loans for construction of dwellings. For OO loans, there is something of a "through line" around a $75,000 to $85,000 premium, but with a notable increase between January 2021 and July 2021.

For investor loans, however, there is considerable volatility, with the loans reaching parity in December 2020, August 2021 and June 2022. It's also notable that the loans came closer to parity during the period most affected by interest rate increases, June and July 2022.

Victoria

Contrasted with NSW, the situation in Victoria (VIC) is a little more complex, as shown in Chart 2.

Starting with OO construction loans (the light blue line) in the top graph, there is a clear slump in average values between July 2020 and April 2021, followed by a steady and quite consistent rise through to April 2022. That contrasts sharply with investor construction loans, with their average values continuing to be quite volatile, though not entering the same kind of slump. The investor loans, however, did moderate from March 2022 onwards, while the OO loans climbed to a higher level of average values.

In loans for newly erected dwellings, the OO loans represent a relatively stable progression from a low average value in July 2020 through a steady incline to July 2022. In contrast, investor loans for newly erected dwellings (the dark grey line) show a very volatile situation. In October, November and December 2020 these loans have the highest average value of all the loans, and in February 2022 come close to repeating that feat. Yet in September 2019, March 2020 and October 2021, they have the lowest average value of all loans, and have the second-lowest value across another four months.

The biggest surprise is in the average values for existing dwelling loans, where there is an ongoing wide gap between the loans for investors and OOs, with the investor loan average values proving much higher in general. That is particularly the case between February and October 2021, with the gap widening again from May to July 2022.

The lower graph shows the premium value of loans for newly erected dwellings over loans for construction. From August 2020 through to November 2021, the premium on OO loans exceeded that for investor loans, with the exception of December 2020. The average premium for OO loans over that period was $77,500, while for investor loans it was around half of that, at $37,800.

From December 2021 to July 2022, however, the premiums became more equal. In fact, the investor premium was higher, at $58,900, while for OO loans it was $44,000.

Queensland

The three other major states tend to show a more narrow variance in the average value of loans, though generally across any period there is one loan type that stands out from the rest.

That's demonstrated in Chart 3, for Queensland (QLD).

In the pre-pandemic and early pandemic period from December 2019 through to June 2020, loans by OO for construction see average values spike higher than other loan types. There's a notable drop in average loan value for investor newly erected dwellings in May and June 2020 as well.

This is followed by a period of remarkable stability from August 2020 through to September 2021, where all loan types see average values increasing at a steady rate, with only a few slight variations. For example, both construction and newly erected dwelling loans for investors hit a low point in March 2021, while investor loans for newly erected dwellings peak in August 2021.

Starting in October 2021, however, there is a split in the average value of loan types. Average values for existing housing loans for both investors and OO, along with OO construction loans, continued the previous growth rates.

In contrast, average values for investor construction loans began to grow at a much slower rate, remaining essentially flat through to February 2022, before going higher in March 2022, then staying flat through to July 2022. Investor loans for newly erected dwellings also saw slowing growth rates in average values, but became highly volatile as well, for example peaking above all other loan types for June 2022, then dropping down below all other loan types in July 2022.

The average value of OO loans for newly erected dwellings became volatile starting in January 2022, showing the lowest value for all loan types in March 2022, then the highest value in April 2022.

In the lower graph, the premium for newly erected dwelling average loan values over average values for construction loans shows much lower values overall, as compared to NSW and VIC. The premium can be divided into two parts, the first extending up to May 2021, and the second from June 2021 through to July 2022.

During the first part, there is really something of a "reverse premium" for both investor and OO loans, with construction loans overall achieving higher average values than newly erected dwelling loans. For investor loans the premium is -$5500, and for OO loans it is -$8500.

In the second part the reverse premium for OO loans only increases, with an average of -$22,600, while for investors the premium for newly erected dwellings takes off, hitting an average of $27,100.

South Australia

With the exception of one loan type, South Australia (SA) shows broad similarities to QLD, as indicated by Chart 4.

That one loan type is the average value of investor loans for newly erected dwellings. From February 2020 through to October 2021, this loan type shows strong volatility, mostly on the downside as compared to other loan types, though it does also manage to achieve the highest value in April 2021, while it held the lowest value for the two preceding months, and continued to have the lowest value for the next six months as well.

This changes in November 2021, where it again jumps to the highest value overall, and then resumes its oscillations in value, though at a higher overall level, before declining lower than other loan types for June and July 2022.

The lower graph in Chart 4 shows that, as with QLD, there is a mild premium for OO newly erected dwelling loans over OO construction loans, while for investors there is a substantial reverse premium. There does seem to be something of a split in behaviours around February 2022.

Prior to that month, from August 2019 to January 2022, the reverse premium for investors averages out to -$35,900, while for OO loans there was a positive premium of $10,400. From February 2022 onwards the reverse premium for investors was -$9800, while the situation for OO loans completely reversed, going strongly negative to -$30,000.

Western Australia

As with SA, Western Australia (WA) has a very orderly set of statistics around different loan types - perhaps to be expected, as it was the one state that managed the COVID-19 pandemic very well, fully utilising its natural advantages, as is shown in Chart 5

The only exception to that regularity in its stats is the same one that applied to SA, for investor newly erected dwelling loans. As with SA, these tend to be highly volatile, but to trend overall with average values below that of other loan types.

The other loan type this is noticeable is for investor construction loans. Starting in September 2021, these overall trend to having higher average values than other loan types.

The lower graph points to something of a statistical anomaly that also appears in the upper graph, a strong spike of activity in May 2020, which sent the average value of investor construction loans very high, and thus spiked the premium for completed housing very low. This spike followed the unprecedented shutdown of WA borders in April 2020, which undoubtedly had a complex effect on the market.

We can regard that as a kind of demarcation point for investor loans. In the period before May 2020, the reverse premium was -$68,200, and in the period from June 2020 to July 2022, the reverse premium was -$31,100. For OO loans across the total statistical period, the reverse premium was -$15,700.

Analysis

In looking at real estate markets, it helps to be mindful of a very ancient Japanese saying about alcohol consumption: First the man takes a drink, then the drink takes a drink, and, finally, the drink takes the man.

We see more or less the same progress in markets from genuine demand driving increased market activity, to a combination of base demand and investor investment, and finally a market where investor speculation becomes the major market signal.

It is very clear that in the case of the VIC market, the investor portion of that market has been very influential from January 2021 onwards, particularly in existing dwellings, but also in newly erected dwellings. Its influence in construction has been more subdued.

NSW shows a far more mixed response, with OO housing loans keeping pace with investor housing loans. In QLD, OO housing loans have tended to slightly dominate investor loans, and the same holds true for SA. WA is closer to the NSW situation, with investor and OO loans playing a near equal role.

One of the biggest divisions is to see that there is a consistent premium for the average value of loans for completed houses in both NSW and VIC, but that premium is pretty much reversed for QLD, SA and WA, with construction loans attracting a premium over completed housing loans.

The other marked difference is that for both NSW and VIC the average value of loans for existing dwellings, both for investors and OO, has a distinct premium over all newer construction - and there are some tendencies towards this in the other states as well.

One aspect that could see this reverse somewhat in the future is increasing regulation around the energy conservation capabilities of houses. Currently the regulations are lifting requirements for new houses to move from a six-star rating under the Nationwide House Energy Rating Scheme (NatHERS) to a seven-star rating, though this only really starts to take full effect in the second half of 2023.

If we begin to see the introduction of regulations which mean that house renovation also need to meet minimum NatHERS standards - say, five-star ratings - there could be a further shift to increase the perceived value of new-build housing. The average NatHERS rating for most older housing is estimated to be less than three stars, and retro-fitting energy conservation can be surprisingly expensive. Australia continues to lag world standards considerably in this regard, with only an estimated 21% of Australian houses featuring double-glazed windows, versus over 80% in the US and Western Europe.

While energy conservation requirements have been quietly discouraged by construction industry bodies over the past three decades, for both hardware retailers and suppliers this is a very rich market. Given rising energy costs, and the potential for further imposts to reduce greenhouse emissions, investing in energy conservation is really a matter of moving expenditure around, investing in better houses to reduce future expenditures. No doubt over the next five years or so we will see the housing market adapt to this essential fact.

General statistics about loans for homes tend not to really answer to the needs of the hardware industry. Those stats include a large number of existing homes trading owners. While that is important to the market in general (especially as regards to DIY and renovations), the most significant contribution for independent retailers and their suppliers comes from new builds.

In these statistics, HNN is concentrating on stats for loans obtained both to construct homes and for the purchase of newly constructed homes. These are viewed both in terms of the number of houses, and their aggregate value, and further broken down into those for owner-occupiers and those for investors.

The graphic which opens this article illustrates the percentage change in all building work done in the five major states. As this shows, while we're accustomed to looking at high growth numbers for dwelling construction, the overall picture for construction has not been quite so good - with the possible exception of Western Australia (WA) (though not on a net basis through the charted period).

The charts for loans are based on periods which run from August through to July (with July 2022 the most recent data available. We refer to these as periods (p), to p2021 is the period between August 2020 and July 2021.

New South Wales

Chart 1 shows the housing loans for New South Wales (NSW) taken out by owner-occupiers.

This shows what is a common theme across several of these charts, namely that p2021 was something of an exception as contrasted with p2020 and p2022.

Graph 1 on the chart shows a surge in the number of loans taken out for the purpose of house construction from around September 2020 through to July 2021, though numbers continued at an elevated level through to December 2021, before hitting lows in both January 2022 and April 2022. Graph 2 shows that the aggregate value of those loans more or less keeps pace with the growth in numbers through p2021, but in p2022 shows a relative increase, reflecting both market price increases, and increased construction costs.

In terms of numbers of loans for newly erected houses, p2021 follows the surge in loans for constructing houses through to December 2020, the falls steeply for January and February 2021, before resuming a similar patter to graph 1. Interestingly, though, when it comes to values, where the value of loans for house construction during p2022 is entirely above the level for p2020, for the erected house loans the valuation is much closer to that for 2020.

Chart 2 shows the same stats for house loans taken out by investors.

Graph 1 on this chart shows that while there was a moderate spike in March 2021, it was not until May 2021 that investor loans grew strongly for construction, a trend that continued to a peak in June 2022. Graph 2 shows that aggregate value continued very much in trend with graph 1.

Graph 3 of Chart 2 shows number of loans for erected homes taken out by investors. This begins with a surprising high number of loans from August through to December 2019. It's not really until a year later, in December 2020, that the graph shows a new surge in the number of loans, with a second, lower surge in March 2021.

For most of p2022 the number of loans remains subdued below past levels, and is particular low in January and February of 2022, with a low streak from April to July 2022. Graph 4 of Chart 2 shows the value of the investor loans for erected houses, and mostly follows the trends of graph 3.

Victoria

Chart 3 details the loans taken out by owner-occupiers for houses in Victoria (VIC).

Graph 1 of this chart is a classic illustration of just how different p2021 turned out to be for the housing market in this state. In a trend that really ran from August 2020 through to August 2021, there is a very high arc in the number of loans issued for house construction, hitting a peak of 2700 in December 2020. Graph 2 shows aggregate value mostly tracking the number of houses, except for the second half of p2022, where the value tracks higher, indicating increased house prices.

Equally, it's interesting just how quickly activity reverts to past levels, with p2022 tracking close to p2020 from October 2021 onwards, though with a slight lift in May and June 2022 (perhaps as some house prices declined).

Loans for erected houses behaved quite differently, with the number of these remaining more in line with the past, until January 2021, with elevated levels continuing on to July 2021, as shown in graph 3. Again, graph 4 shows aggregate value closely following numbers, though the second half of p2022 shows elevated levels of value.

In terms of loans for investors, Chart 4 details those numbers for VIC.

Graph 1 shows something a market almost inverted from that for owner-occupiers in the state for house construction loans, with increased numbers only beginning in May 2021, and continuing through to July 2022. Aggregate values closely follow the same trends, as shown in graph 2.

Looking at the trends for recently erected houses in graph 3, there is the same steep fall for January and February 2020, as seen for NSW, followed by largely "normal" trends thereafter. It's interesting to note that investor loans for erected houses through the second half of 2022 have fared better in VIC than NSW. Again, aggregate values largely follow the same trends, illustrated in graph 4.

Queensland

Queensland (QLD) shows a trend for loans issued to owner-occupiers for house construction that is very similar to that of VIC, as indicated by graph 1 of Chart 5.

As with VIC, there is a grand arc in numbers of loans for construction by owner-occupiers, reaching a peak of over 1800 in December 2020 and February 2021. That is matched closely by the aggregate value of those loans, illustrated by graph 2.

Graph 3 shows that the number of loans taken out by owner-occupiers for recently erected houses does not surge as much as that for construction. However, there is still a significant increase that begins in August 2020, and continues through to December 2021. After that, however, the level reverts to that for p2020. Graph 4 shows that while the aggregate value roughly follows the trend of graph 3, there is an increase in per loan value for much of p2022.

Chart 6 shows the stats for loan issuance to investors for QLD.

Graph 1 again duplicates some of the features of the same chart for VIC. The number of loans for constructions issued to investors for p2022 is above the historical level. As with VIC, that surge began in the second half of p2021, with a steady increase from February 2021 through to May 2021, then the start of higher levels that persist through to July 2022, albeit with a trough for January 2022. Graph 2 shows aggregate value largely tracking the increases and decreases in number of loans.

Graph 3 shows the number of loans issued to investors for recently erected houses. It's a marked feature of this graph that the number of loans deteriorated sharply from March and April 2020 through to July 2020, and remained at a subdued level through to February 2021. Since then, it has become a largely volatile market with sharp peaks in December 2021 and May 2021, but also deep troughs in January 2022 and April 2022. While graph 4 shows that aggregate loan values have tracked numbers, there are also some exceptions to this, notably in July 2020 and March 2021.

South Australia

The sharp uptake of loans by owner-occupiers for house construction during p2021 is present in South Australia (SA) as well, though the big surge is delayed until February 2021 for the state. This is shown in Chart 7.

As graph 1 shows, the peak of over 950 loans was reached in March 2021. That surge lasted, in diminishing form, through until September 2021, after which the number of loans remained above that for 2020. Graph 2 shows that aggregate value of loans closely followed the numbers, though values seemed to have increased in the second half of p2022.

The peak for construction loans was echoed somewhat in loans for recently erected houses, as shown in graph 3. The surge began in February 2021, and continued through to December 2021. The peak was close to 200 loans issued in June 2021.

However, there was a partial collapse in this market in January 2022, which eventually saw loan issuance drop down to just 60 in April 2022, before recovering to over 120 in May 2022. As graph 4 indicates, aggregate loan value largely followed loan numbers.

Chart 8 shows house loan issuance for investors.

For construction loans, there was a comparatively mild surge from February 2021 to July 2021, with a peak of around 95 issuances in May 2021, as shown in graph 1. Starting with p2022, however, a new surge bean eventually reaching over 150 in March 2021, and 160 in May 2021. As graph 2 illustrates, aggregate value largely followed issuance numbers.

When it comes of loans for recently erected houses for investors, the comparatively small market creates a great deal of volatility. The only really outstanding feature from graph 3 are the peaks for August 2021, November 2021 and December 2021. Prices largely followed loan numbers, as shown in graph 4, except clearly for the August 2021 peak.

Western Australia

Western Australia (WA) shows a high rate of growth for home construction loans by owner-occupiers during p2022, as with VIC and QLD. This shown in graph 1 of Chart 9.

However, this is quite a late change, beginning in September 2020, and continuing through to August 2021. It features a steep fall in numbers in April 2021. From September 2021 there is a relatively steady decline in numbers, until in July 2022 it returns almost all the way to the number of loans issued in July 2020. Graph 2 shows that aggregate loan value largely tracks loan numbers.

The market for loans taken out by owner-occupiers for newly erected houses is substantially smaller than that for house construction loans, as graph 3 shows. The former shows something of an inverse relation to the latter. After a peak of over 260 loans in October 2020, from November 2020 to February 2021, as the construction loans peaked, the erected house loans remained under 200, then surged in March 2021, just before the construction loans fell steeply. Loans for p2022 indicate the same kind of gradual decline through to July 2022 as did the construction loans. Again, aggregate loan value is largely in-step with numbers of loans issued.

For house construction loans issued to investors, as shown by graph 1 in Chart 10, there is something of a unique pattern.

The number of loans issued begins to increase in October 2020, and effectively continues on smoothly through to April 2021, following a similar seasonal incline. In May 2022 (even as interest rates are rising) the number of loans reaches a new peak, followed by a higher peak in June 2022, then a steep decline in July 2022. It's interesting to note that at this time, the aggregate value of the loans does not follow those increases, peaking in May, but decreasing sharply for June.

There is a unique pattern for loans to investors for newly erected houses as well, as shown in graph 3. Growth begins in March 2021, and continues through to July 2022, except for a trough in January 2022. However, the aggregate value of these loans follows a complex pattern that would suggest a considerable surge in prices through p2022.

Analysis

The two sharpest "takeaways" from these stats is about both how unusual p2021 (which closely follows FY2020/21) really was, especially for loans for home construction, and how quickly that influence has faded looking at p2022 in almost all states.

That sheds some light on the behaviour we've seen in many builders, those which have over-committed to house builds at prices predicated on lower costs of material supplies. It is possible that effectively, they've been trying to grab hold of a market that is fading as rapidly as it has arrived.

There is also a real question posed here, as to just how rosy a future the house construction industry can really look forward to. While various building industry organisations offer assurances that the backlog of work is so large that it will take until 2024 to effectively clear it, is there really any guarantee that demand will return during or after that time?

Responsible and hard-working statistical agencies such as the Australian Bureau of Statistics (ABS) suffer something of a contradiction in how they must present their numbers. At one time there is a real depth to their stats, yet they must also provide - largely for the use of the political heads of government departments - single numbers that somehow sum up what is going on in a market or a particular area of the economy.

One technique to achieve this is the use of seasonally adjusted time-series statistics. Statisticians can look back over the history of time-series, and work out how much of the fluctuations in the numbers is down to seasonal influences. They then compensate for these, so that a single number can sum up considerable complexity.

For example, with renovations we're all aware that these tend to peak for the December quarter (October, November and December), as homeowners prepare for the holidays, and the weather improves, making outdoor construction work much easier.

Similarly, the March quarter (January, February and March) is usually a low-point for renovations. Much of construction shuts down over January, and homeowners are busy enjoying their recent renovations rather than engineering new ones.

It's possible to estimate what those fluctuations will be, and allow for them, so that you can, for example, make a comparison between renovation stats for the December quarter with the March quarter that goes beyond noticing that the former's numbers are always larger than the latter's.

Unfortunately, seasonally adjusted numbers also tend to get somewhat abused, especially by journalists in the mainstream news media not as well-trained in the use of data as some of their more specialist colleagues. Take, for example, these two opening paragraphs from a recent short article that appeared in the Australian Financial Review:

Australia's pandemic-fuelled renovation boom has run its course, with economists tipping higher interest rates, falling property prices and fewer sales will weigh on growth and cause a blow-out in stretched state government budgets.

After surging 25 per cent over the past two years, alterations and additions activity - a proxy for home renovations - is in decline, falling by 1.6% in the June quarter national accounts.

To begin, it's worth pointing out that state budgets will be troubled not by a fall in renovations, but by the decline in the value of dwelling sales, as the consequent stamp duty fees will decrease in the aggregate.

Leaving that aside, we're left with this 1.6% figure, which is presented without any statistical pedigree. We simply have to assume that this is a seasonally adjusted number, and that it results from a comparison of the June quarter 2022 figures with those of March quarter 2022.

The reality, however, of seasonally adjusted numbers in the COVID-19 pandemic and post-pandemic periods is that they don't mean quite what they did pre-2020. They are still relevant and helpful, but they are no longer quite the simplification they once were.

While we're not going to be using seasonally adjusted numbers in this analysis of renovations, the stats we use do point to the complexities of adjusting for seasonality. What we will be using is chain volume measure stats.

Chain volume measures are something of a hybrid between describing actual revenue generated and the extent of activity underlying that revenue, whether that is the number of products produced or the amount of service provided. The ABS has a really good explainer for chain volume measures at the following link:

They are especially useful when looking at something like renovations, because it's not possible to determine a unit value. With dwelling construction, we have actual dwellings, and we can divide them into apartments, town houses, detached dwellings, etc. Renovations come in all shapes and sizes, with different levels of involvement in terms of services and materials.

Australia

To start with the nation as a whole, there is probably no better chart to illustrate the difficulties and complexities of seasonal adjustment than Chart 1, which shows the quarter-by-quarter expenditure on alterations and additions for financial years. This is based on the ABS national accounts, which use survey data to estimate these numbers. As such these data are more representative, as other alts & adds data rely on building permits, which don't reflect lower-cost renovations.

Looking at the top graph, we can see that FY2021 and FY2022 are unusual, starting with the December 2020 quarter. It's clear here that there is certainly a strong seasonal component to growth, but it has both been massively enhanced, and dynamically altered.

The single most significant statistical point is actually not the highest peak ever for spending in the December 2021 quarter, but the strong result for the March 2021 quarter of $10.1 billion. The average expenditure for the three previous financial years in this quarter was $8.4 billion, so this is an over 20% increase from the average.

In slightly different terms, we could say it is also contra-seasonal, as that March quarter figure is $73 million more than the September 2020 figure - which is, statistically, pretty much flat, as this is only a 0.7% difference. The average difference between the September and March quarters from FY2013 through to FY2019 was 13.4%.

Knowing the context, it's possible to explore the reasons for this surge. The previous December quarter was higher than normal, but probably still represented some repressed demand, due to COVID-19 lockdowns couple with increased expenditure on homes in general.

In HNN's opinion, the second most significant statistical point is still not that December high, but rather the subsequent March quarter for 2022. The two Marches are almost identical, with just $25 million between them, but the significance is that this pattern repeated.

In fact, looking at the top graph, it's clear that FY2022 represented a return to the seasonal patterns of the years prior to FY2021, just at a much higher level of expenditure. Repeating the numbers for the March 2021 quarter in 2022 goes some way towards seeing the market establishing a new, higher level - though it is unclear it will remain at quite this high a level into the future.

Yet in pure growth terms, of course, the March 2022 quarter could be described as a poor result, as growth was close to zero, after four prior consecutive quarters of growth of over 10%. That also holds true for the June quarters in 2021 and 2022. The 2021 numbers show growth of 25%, while the 2022 numbers have zero growth.

The underlying reality is, of course, that the market can only absorb so much growth, given current conditions. When you factor in shortage of supplies, shortage of tradies, the increase in general cost of living and ongoing slow growth in wages, sustaining a renovation market at this level is a sign of very strong underlying demand.

Chart 2 shows the alts & adds numbers across the Australian states and territories, smoothed into the aggregate numbers for financial years.

The top graph, for expenditures, shows how dominant overall the three east coast states - New South Wales (NSW), Victoria (VIC) and Queensland (QLD) - are in renovations, and how dominant, even in that group, NSW remains.

The lower graph shows the percentage change in the expenditure numbers. This does illustrate the diversity in the response, with every state and territory showing positive growth for FY2021 - except VIC. FY2022 shows a tighter cluster of growth at between 5% and 10%, with VIC now showing the strongest growth at around 14%, while Western Australia (WA), Australian Capital Territory (ACT) and Northern Territory (NT) show negative growth.

New South Wales

Given its size and market robustness, it's clear that NSW contributes very strongly to the results for Australia overall in alts & adds. Chart 3 shows the trends illustrated in the Australia graph, but somewhat accentuated.

There is the same new high level established for the March 2021 quarter, though for NSW this is considerably higher than for September 2020, by $212 million, an increase of 6.0%. The March 2022 quarter did below that quarter in 2021, but the June 2022 quarter actually exceeds the June 2021 quarter by close to 5%.

Victoria

What is remarkable about VIC is that through FY2021, the state remained matched the historical average for expenditure on alts & adds, with the December 2020 quarter actually below the historical average, as shown by the upper graph in Chart 4.

That was likely due to the effects of several long and severe lockdowns, which both limited construction work, and also motivated many homeowners to consider moving over renovation.

However, the story for FY2022 has been quite different. This shows another highly elevated level for the March 2022 quarter, and ongoing growth into the June 2022 quarter.

The lower graph details this clearly, with the state showing growth over 12% in FY2022, including for the June 2022 quarter.

Queensland

Overall, QLD shows a pattern of growth closer to that of NSW than VIC, though its crucial datapoint is probably in December quarter 2020 rather than March quarter 2021, as seen in Chart 5.

However, unlike both NSW and VIC, the state has shown a considerable reduction in growth through the March and June quarters of 2022. Nonetheless, the March 2022 quarter was 26% above the average for the three years prior to the pandemic, and June quarter 2022 was 15% up on that average.

South Australia

South Australia (SA) has its own unique renovation market characteristics. In particular, the September quarter of 2020 was exceptionally low in expenditure, followed by a return to above average for the December 2020 quarter, and then, following the NSW and QLD trend, a markedly higher expenditure for both March quarter and June quarter 2021, as shown in Chart 6.

FY2022 started with a very strong expenditure for September quarter 2021, which represented a 30% increase over the prior year. The subsequent three quarters were virtually identical to the same quarters in the prior year - which of course means growth of next to zero.

Western Australia

As the state least affected by the COVID-19 pandemic, the renovation stats for WA are subject to a wider range of influences. Its expenditures have remained broadly inline with past years, as shown in Chart 7.

While there is strong growth for the March and June quarters of 2021, this is within range of the growth in FY2018. As shown in the bottom graph, that growth was followed by a steep decline in the March and June quarters of FY2022.

Tasmania

For TAS there are really only three datapoints that standout over the pandemic period, as shown in Chart 8.

Those are for the March and June quarters of 2021, and the September quarter of 2021.

Northern Territory

As with TAS, the NT has three quarters of note, as shown in Chart 9.

Interestingly, these occurred very early in the pandemic, from June 2020 through to December 2020. However, there has also been something of an uptick in June quarter 2022, with expenditure increasing by 9.4%.

Australian Capital Territory

The ACT probably has one of the most unusual graphs for alts & adds expenditure through the pandemic. It shows a strong influence from seasonal activity - except for FY2021, when it shows very little at all, as illustrated by Chart 10.

The pandemic boost in spending starts clearly in the March and June quarters of 2020, then ends in the September quarter of 2020, followed by three quarters of very high, consistent spending of around $185 million per quarter. Then spending returns to pre-pandemic levels for the September and December quarters of 2021, before virtually duplication the elevated levels of spending for the March and June quarters of 2020.

Clearly the September quarter has some very strong seasonal influences, and the December quarter something similar, but less determinative.

Analysis

Overall, the point that these graphs really make is both that seasonality during a time of change and crisis has reduced effects on markets, and that crisis can change and alter how seasonality comes to work on a market.

The other point made is just how diverse Australia remains in terms of its responses to stimuli such as a health crisis. The two states that economically appear somewhat similar, VIC and NSW, react very differently, while NSW and QLD, which are economically divergent, do have some similarities in their responses.

Seasonally adjust numbers that apply to Australia as a whole certainly do have a place - especially in the national accounts, which are, after all, national. However, when it comes to making an economic assessment of an industry or of markets, using Australia-wide figures seldom really works.

As Chart 11 indicates, the three major eastern states do dominate expenditure on alts & adds, with 83% of the total. And those three are dominated by NSW with 37% of the overall expenditure.

However, there is surprising diversity between those three major states, as well as within the states as well. It is certainly understandable that investors, governments, public service management and even some journalists would like to simplify analysis down to a couple of numbers. But as the ABS constantly reminds us through their (radically underfunded) efforts to provide accurate and useful stats, the reality is far more complex and nuanced that the convenient shorthand would suggest.

The Australian Bureau of Statistics has released retail revenue statistics through to July 2022. In surveying these stats, HNN is using the trailing 12 months to July, which we refer to as "periods" (p). Thus p2019 runs from August 2018 to July 2020.

Australia

Looking at the stats for Australia overall, total sales for p2022 amounted to $25.2 billion, up by 6.7% on the previous corresponding period (pcp), which was p2021. South Australia (SA) had the strongest growth at 17.9%, an increase of $246 million on the pcp. Western Australia (WA) had growth of 9.5%, up $227 million on the pcp, and New South Wales (NSW) had growth of 7.8%, with an increase of $558 million.

Victoria (VIC) had the lowest growth rate, at 1.7%, an increase of $111 million.

Looking at the comparative monthly numbers for Australia in Chart 2, it is evident that there has been a tempering of growth for April through July in p2022, though this echoes the same pattern for p2021. Growth has remained consistently high, at close to 10% since February 2022.

New South Wales

Retail revenues for NSW continue to climb. While the rate of growth is lower than for p2020, the revenue has exceeded p2021 since September 2021. Growth rates have actually picked up since the start of interest rate increases in May 2022.

Victoria

With the lowest growth rate for p2022, VIC's chart looks quite different from the other states. Revenues for p2022 have tracked fairly closely to those for p2021, except for an extra boost in February 2022.

As the graph for percentage shows, growth is tracking close to pre-pandemic levels of growth, essentially splitting the difference between the high levels of growth in p2020, and the retreat from those levels in p2021.

Queensland

As with NSW, Queensland (QLD) shows a positive boost to revenue, with increases beginning in March 2022. There may be some influence from interest rates in that July 2022 is essentially flat with June 2022, while previous years typically show a tick upwards for the month.

South Australia

SA has seen very strong growth since April 2022, tracking to a high of 45% for July 2022. This is partly due to a strong did during these months for p2021. Nonetheless, overall revenue has set new highs for every month of p2022 except May 2022.

Western Australia

WA has set records for its hardware retail revenues for every month in p2022 except May 2022, where it was narrowly below revenue for May 2020. Growth for p2022 has been consistently around 10%.

Australian Capital Territory

The Australian Capital Territory (ACT) achieved new revenue highs from November 2021 through to April 2022. However, overall growth has moderated since April 2022 to be below 10%.

Analysis

While it is true that we continue to see relatively high revenues, especially for the first seven months of calendar 2022, the impact of inflation has to be considered as well. If that does represent over 7%, then growth rates would be close to those of previous years. That inflation consideration also raises concerns with hardware retail in VIC, as its growth rate would then be negative since March 2022.

In general terms, the hardware industry is seeing what has been forecast, which continued demand, both from builders working through a backlog of projects, and from homeowners continuing to spend on their houses.

We've probably reached the point where presenting the Australian Bureau of Statistics (ABS) data for building approvals as a layer of years has reached the end of its utility. HNN adopted this form of graph because it was about the only way to make sense of the pandemic market, which defied previous assumptions about seasonality.

Its purpose in this series is to illustrate that, at least in terms of building approvals, the housing markets are near the end of the COVID-19 pandemic stimulus.

Of course, when we refer to "pandemic stimulus", we're not just referring to the drive that the pandemic itself created for people to move into houses that they owned. We're also referring to both the direct monetary stimulus supplied by the Reserve Bank of Australia (RBA) through lowering interest rates to historic lows, and the fiscal stimulus by the federal government, which included programs such as HomeBuilder and JobKeeper.

(As the Australian Bureau of Statistics has released these stats through to July 2022, we're basing the charts on 12-month periods ending in July, and refer to these as periods. The period from August 2020 through to July 2021 would be referred to as p2021, for example.)

House approvals

That return to something like "normality" is perhaps best illustrated by Chart 1, which shows the number of building approvals state-wide for the five largest states.

If we look at each of these graphs as they depict the most recent four months, April, May, June and July 2022, we can see that the RBA's increase in interest rates during those months is having the desired effect. While those rate rises only began in May, the RBA had signalled as early as March that it would be increasing rates, which affected the number of approvals.

For New South Wales (NSW), there is a steeper than usual fall for April 2022, followed by a rise for May which equals that for 2019 and 2020, then continued moderation through June and July, with the July number of approvals the lowest for that month in the most recent five-year period.

Victoria (VIC) shows a similar moderation, though that state also shows overall a low historical level of volatility for those months. Queensland (QLD) shows a distinct convergence back down to the levels of approvals for p2019 and p2020.

There is a slightly different picture for both Western Australia (WA) and South Australia (SA). For WA the number of approvals has trended down since December 2021, but still remains above the levels for p2018, p2019 and p2020. There is a similar pattern for SA, though where WA approvals dipped down further for July 2022, SA approvals have ticked upwards.

Non-house approvals

It has been generally accepted that over the past two and a half years, back to March 2020, the market for non-house dwellings, including terrace houses and apartments, has been in broad decline even as the market for houses surged. That was largely due to the effect of actual and prospective COVID-19 lockdowns, as it was thought to be considerably better to be confined to a house, with an outdoor area, than to an apartment.

However, if we look at Chart 2, which shows approvals for non-house dwellings in NSW, VIC and QLD, it's evident that if the market has not surged like that for houses, it has nonetheless remained lively throughout much of the pandemic period.

For NSW, while the numbers for p2022 are generally lower than for previous periods, there is still a great deal of volatility, with a high peak as recently as September 2021. VIC shows ongoing signs of a slight decline, but there is an ongoing pattern of periodic surges, with p2018 reaching new highs, a low p2019, then a surge during p2020 prior to March 2020.

Meanwhile, QLD is ultra-volatile, with peaks during 2021 that exceeded the peaks of p2018, and more recent peaks in p2022.

Equally, however, it does appear that the tightening of monetary policy might have a disproportionate effect on this sector. In particular, there is a subdued result for June 2022, and a distinct downturn for July 2022.

Regional building approvals

One of the significant trends that emerged during the pandemic was an increase in house approvals outside of the states' capital cities. Looking at the three most affected states, NSW, VIC and QLD, there has been a wide variance in the pattern of regional housing approvals.

NSW regional building approvals

While regional approvals did increase for NSW, they only exceeded the norm for a relatively brief period, from February 2021 through to August 2021, though they did peak again for February and March 2022. For the rest of the pandemic period, these approvals where within the ranges set during p2018 and p2019.

Chart 3 shows the number of approvals in the top graph, and the percentage change in approvals in the lower graph.

As the growth graph indicates, growth in these approvals has been subdued since December 2021, with an overall drift into negative growth, and a strong downtick for July 2022.

VIC regional building approvals

Of all the states and territories, VIC has the most defined "story" for growth in regional house building approvals. Chart 4 shows the original stats for the number of approvals in the top graph, and the percentage growth in the bottom graph.

There is a very distinct elevation in the approval numbers from September 2020 through to September 2021 - 13 months in all. From October 2021 onwards however, the numbers have returned to a level similar to that of the previous four years - except for a peak in March 2022.

The lower growth graph shows just how strong the growth trend was, peaking at 90% in March 2021, and how much of a correction p2022 has been, with growth trending negative to -30% for much of that period.

QLD regional building approvals

QLD follows closer to the trend for NSW than VIC. As chart 5 shows, the only really exceptional period for regional approvals was from March to May 2021, with most of the rest of the pandemic period trending under the regional approvals made for p2018.

As the lower, percentage change graph indicates, there were some strong year-on-year growth periods during p2021, but these were largely contributed to by quite low numbers for p2020. The graph also shows that for p2022 since September 2022 growth has largely been negative, as regional approval numbers converge back to pre-pandemic levels.

Analysis

There is a wide range of different forces at work on the building and construction sector at the moment. It's evident that actual demand remains quite high, but increased interest rates, and the subsequent effect on the housing market, has decreased the number of actual buyers on the market.

Equally, HNN would draw attention again to the problem we've been pointing to for much of this year, that having a heavy backlog of building projects is no guarantee those projects will be completed. There has been a number of articles in the mainstream press about builders struggling to complete contracts due to increased supply costs, which make those contracts less profitable.

It's worth pointing out that builders with those contracts won them by underbidding other builders, who might have had the wisdom to factor in increased supply costs. It's a simple fact that there are real consequences for just not being that great at the business you are working in.

One of the most interesting questions is whether we will see a full recovery in the non-house building market during 2023. This is largely a cultural issue. There are, of course, a great many cities in the world where the main form of housing is actually multi-unit dwellings - places such as New York, Paris, London, Madrid and San Francisco come to mind. Given that there is such a dire shortage of affordable accommodation, it would not be surprising if we start to see concessions being made by state governments to boost the building of more apartments.

The Australian Bureau of Statistics (ABS) has released hardware retail revenue stats for June 2022. Looking at the trailing 12-months to their numbers provides us with the standard financial years of July to June.

The two major issues that hardware retailers are concerned about is how the increase in interest rates from the Reserve Bank of Australia (RBA) will affect sales volumes, and what the mid-term effects of increasing inflation will be on their profitability and market share.

In terms of the first issue, we've already seen - as HNN and a wide range of other sources have been predicting since early 2021 - a decline in dwelling prices, with further declines likely as the cash rate edges up over 3.0%. It's also quite possible that by January 2023 the inflation rate will exceed 8.0%.

While these are important issues, the really interesting attribute of the current economy isn't its vulnerabilities, it's the unexpected robustness that it is showing. Unemployment remains at historical lows and demand remains generally high. That is despite inflation, largely caused by limited supply brought on by interruptions to the supply chain at the high point of the COVID-19 pandemic, coupled with international events such as Russia's invasion of Ukraine, and several recent natural disasters in Australia itself.

One possibility is that the Australian economy has survived as well as it has because it had been plunged into a low-growth period since around 2017 or so. That's the only real explanation as to why Australia has very low growth in the Wage Price Index, despite very low unemployment and surging vacancies in businesses. It's worth remembering that right before the COVID-19 pandemic, the federal government policy was dominated by a low-spending, low-stimulus plan, which was being marketed by then Prime Minister Scott Morrison and then Treasurer Josh Frydenberg as "back in the black".

Australia

Chart 1 shows the cumulative revenues for the states and territories over the historical financial years. (Note that recent historical numbers for both Tasmania and the Northern Territory are not available, so we've combined these into a single number, derived by subtracting the totals from the rest of Australia from the total for Australia. This is slightly inaccurate, as there are some revenues obtained outside of the states and territories, but is a reliable estimate.)

This shows that the major growth period was between FY2020 and FY2021, at 10.7%, while the most recent growth, from FY2021 to FY2022 was less that half of that, at 5.3%. For the states, South Australia (SA) had the strongest growth to FY2022, at 12.8%, a lift in revenue of $179 million, followed by Western Australia (WA) at 8.6% ($206 million) and New South Wales (NSW) at 6.8% ($485 million - the highest dollar amount gain). In contrast, Victoria (VIC) actually saw a decline, of 0.2%, and the Australian Capital Territory (ACT) managed only a 1.3% gain.

Chart 2 shows the percentage change year-on-year for the hardware revenue.

If we exclude the often volatile results for the ACT, it's evident that the most recent results show a wider spread across the states and territories than FY2020 and FY2021.

Chart 3 shows a year-to-year comparison for Australia.

This illustrates what is by now a familiar story. There is the sharp kick upward in revenues at the start of the pandemic for March in FY2020 (the green line), which continues on into FY2021 (the blue line), until it reaches March 2021, and growth goes negative as the early highs are averaged down. For FY2022, there is only modest growth through the first half, then a steady pickup from February 2022, with growth holding at just under 10%.

In terms of coping with inflation in statistical terms, though we are quite lucky to have the ABS break out hardware retail numbers, that luck doesn't quite extend to getting revenues in chain volume terms, which would give us better idea about performance with null inflation. It is quite possible that these numbers, and the detailed numbers for the states, really show less than 50% of the indicated growth.

New South Wales

Chart 4 shows the financial year numbers for NSW. This is the state that most closely echoes the national numbers.

Perhaps the most outstanding indication is simply that the revenues do not appear to reflect much influence from the increased interest rates for the May and June FY2022 figures.

Victoria

The VIC numbers reflect a less-positive picture than those for NSW. While the state had a similar sharp rise in revenues for FY2020, its performance in FY2021 moderated more swiftly, and 2022 saw lower revenues than FY2021 for nine out of the 12 months, as indicated by Chart 5.

There is also some evidence in these numbers that the increase in interest rates has had some moderating influence, pushing growth into negative territory for June 2022.

Queensland

The revenue results for QLD continue to sit somewhere between those for NSW and VIC, as shown in Chart 6.

While the initial kick in the second half of FY2020 is stronger than for those other two states, and remains at a high level through to January 2021, it falls steeply through to May 2021, and returns to positive growth in August 2021. It remains subdued through to February 2022, then lifts growth for the final four months of FY2022.

South Australia

The revenue numbers for SA show unexpectedly robust performance for the second half of FY2022, with growth peaking at 35% for June 2022, as shown in Chart 7.

In fact, results for FY2022 outperformed those of FY2021 for 11 of the 12 months.

Western Australia

WA showed the steadiest and most consistent growth through FY2022, from August 2021 onwards, as Chart 8 shows.

That said, there is something of a slight decline for the final two months of FY2022, which could indicate some sensitivity to interest rates.

Australian Capital Territory

For the ACT April 2021 through to October 2021 proved an underperforming period, with some months returning pre-pandemic levels of revenue.

From November 2021 through to the end of FY2022 the growth performance has been around 10%.

Analysis

The reality of the current global situation - which directly affects the supplychain - is that the COVID-19 pandemic is very far from being over, as illustrated by growing supply problems out of China. In Australia, the state and federal governments are currently banking on the very high death rates from COVID-19 - equalling the high numbers from earlier peaks - coming down as the current wave diminishes.

However, it is worth noting that the worst preceding wave took place in January 2022, and there is no guarantee that another deadly wave will come back for the next Australian summer. The other fear that goes with this is that while it seems to be the case currently that builders are able to work through the projects that have already been booked with them, despite delays due to material shortage and limited availability of skilled tradies, there is no guarantee that will last.

If the delays continue to get longer, even as new projects fade away with higher interest rates, the construction industry could face a difficult market.

The Australian Bureau of Statistics (ABS) has released its stats for the Producer Price Index, including for the category of inputs into the house construction industry. These are very useful stats for obtaining a better understanding of price rises for the building materials used in house construction.

In this overview and analysis, HNN is providing an overview of the main categories in these stats for Sydney, Melbourne and Brisbane.

It's often difficult to know exactly how to present these kinds of stats so that they are easy to understand, and unlikely to provide confusing indications. In this case we've chosen to present them in a year-by-year format. The years we are providing are the four quarters to the June quarter, which corresponds with Australia's financial year (FY), which is how we will refer to these periods.

Generally, this format is most useful where you have seasonal elements. While there is seasonality in some of these stats, we've adopted it here is because the most recent period, FY2021/22, is quite unusual in most of these stats, and this format serves to highlight that.

That said, one of the real difficulties with this format is that there is a visual discontinuity between the periods. It's helpful to track the stats from FY2021/22 (the dark red line) by seeing that it begins where FY2020/21 (the light blue line) ends. That's important because in many categories the climb in prices begins with June quarter 2021.

The prices are provided by the ABS as index numbers, and we've taken the percentage change for quarter on corresponding quarter - so March quarter 2021 is compared with March quarter 2020.

One other element to call out is that it's simply not possible to effectively use a single scale for the quantitative Y-axis as the data varies substantially, so it's a good idea to look beyond the slope of the graph lines, and to check the scale used for the index number and the percentage.

Sydney

In the overview of the basic components of construction, most categories show strong price increases for FY2021/22, with the exception of concrete products.

The steepest rise is for steel products, with a 36.0% increase in prices for June quarter 2022. Timber also increased sharply, up by 18.6% in March quarter 2022, while ceramic products (which includes bricks) and other metal products increased by over 12%.

For more complex products the rises were somewhat mixed, showing some sharp increases for FY2021/22, but a history of price volatility.

This was true for both electrical equipment and plumbing. Gas and electric appliances did show price index rises above the norm for FY2021/22, and other materials escalated prices substantially.

Melbourne

While steel products for Melbourne reached the price index of close to 160, equalling Sydney, the rise was from a lower base, resulting in a quarter-on-quarter increase of 45.0%.

With other metal products, however, the Melbourne price index was higher at around 150, with an increase of 25.0%. Timber rose especially steeply reaching a price index of 166 for June quarter 2022, with a quarter-on-quarter increase of 28.7%. Ceramic products also had a higher index than Sydney, and a percentage increase of over 15%.

In more complex products, gas and electric appliances showed a steep increase in FY2020/21, which was maintained in FY2021/22. Plumbing, electrical equipment and other materials also rose to new highs in the price index.

Brisbane

The price index for steel products increased by 58.8% for March quarter 2022 as compared to March quarter 2021, with the price index itself closing out FY2021/22 at 175.

The timber price index increased by 30.6% for the June quarter 2022, ending at 172. Ceramic products, however, dropped their price index for the first two quarters of FY2021/22, before equaling the price index for September quarter 2021.

For more complex products, while both electrical equipment and gas and electric appliances found new highs in the price index, they have a background of considerable volatility in Brisbane.

Plumbing and other materials, however, both found new highs in results broadly divergent from past stats.

Timber

While the ABS does not break down timber categories on the same basis, they do provide a weighted average across the capital cities.

As these charts clearly indicate, timber products have shown highly unusual patterns of growth in price indices.

Analysis

While most hardware retailers and builders have grown somewhat accustomed to see steep price rises since mid-2020, these charts make it emphatically clear just how steep and unexpected the rises in the current market have become.

The difficulty is that the current situation has increased in fragility. Current shortages are made up of the initial impact of COVID-19, followed by ongoing shutdowns in supplier sources such as China due to the Omicron variant of COVID-19, complicated by Russia's invasion of the Ukraine pushing up transportation costs still further.

The concern is, of course, that these rises will simply continue until the industry reaches a point of market failure. This also places further doubts over whether the industry can confidently expect the backlog of building projects to be completed over the next 18 months. With interest rates set to gain another full percentage point (100 basis points) this year, it's possibly many prospective homeowners will just decide to give up for another couple of years.

At this stage of the building supplies market, as both the boost of the pandemic wanes, and the shadow of increased interest rates on home loans grows, it's vital to get some sense of what is happening in terms of the housing market as it relates to new builds.

As the house market plays an outsized role for building supplies in hardware retail, we're limiting the stats series to only houses. We've combined several sets of stats to provide an overview of how the sector is doing in the five largest states. (The smaller states and territories really need a different set of stats.) Those stats include: monthly numbers of building approvals, to provide a sense of planned builds; stats for building work done, including work yet to be done and building work not yet commenced; and stats on the number of house transfers and their median price values, to track the demand side of the market.

New South Wales

While New South Wales (NSW) was socially not as badly affected by the COVID-19 pandemic as Victoria (VIC), its housing market and construction industry were changed more radically.

Chart 1 shows the stats for building approvals, with the top graph showing the basic number of approvals, and lower graph the percentage change for that top graph. These charts use 12 month periods ending in May, which are designated with the prefix "p". Thus p2021 refers to the period from June 2020 through to May 2021.

That narrative for house building approvals through the pandemic begins with p2020 (the light brown line). In the months immediately before the pandemic started, from August 2018 through to March 2019, building approvals run somewhat below the number for the two previous periods, p2018 and p2019. The initial response to the pandemic from March 2020 is subdued. It is not until February 2021 (the green line) that approvals begin to climb above past periods, where they remained from March 2021 through to August 2021 - which is in p2022 (the blue line). After that, with the exception of March 2022, where approvals surged, they have mostly remained in line with past periods.

Chart 2 shows house transfers and building work done.

In the top chart, the blue lines indicate median price, and the red lines indicate the number of transfers.

It's easy to spot the most immediate effect of the pandemic, which is the sharp spike upwards for established houses outside of Sydney (the pale red line, which references the scale on the left-hand side of the graph). This starts in the December quarter of 2020, and continues to a peak in the December quarter of 2021, before falling in the March quarter of 2022 below the level it held for the September quarter of 2020.

Similarly, median prices - the blue lines, referencing the scale on the righthand side - for both Sydney houses and houses outside Sydney start to climb in the December 2020 quarter, and reach a peak in the December 2021 quarter. They remain stable for the March 2022 quarter for ex-Sydney houses (the pale blue line), but decline for Sydney houses.

In the lower chart, the blue line indicates the value of work yet to be done, and references the scale on the RHS. Work yet to be done is derived by taking the total value of all projects not yet completed, then deleting the value of all the work that has already been done on those projects. It is essentially the "project load" on the construction industry for a particular quarter.

The brown line indicates the number of dwellings not yet commenced, and references the scale on the left-hand side of the graph. This is a slightly complex stat, as it refers to houses that have received a building approval, but not yet started construction. However, the ABS measures approvals one month back from the quarter. So, looking at stats for the June quarter of 2021 (April, May and June), this would include approvals made in the months of March, April and May 2021.

In terms of the value of work yet to be done, the blue line shows these dipped below previous quarters from the September quarter of 2019 through to the September quarter of 2020, then began a rapid climb in the June quarter of 2021, before peaking in the December quarter of 2021, and then declining in the March quarter of 2022.

Dwelling units not yet commenced tends to play off of the previous stat. During the periods where work yet to be done declines, the not yet commenced numbers climb, indicating that projects may be delayed. We can, however, see that this relationship changes for the December quarter of 2021 and the March quarter of 2022, as both measures increase substantially. That indicates growing stress on the construction industry, as it fails to clear the work that has to be done, and there is an increasing stack of projects that remain to be started.

Conclusions

These chart bear out much of the standard analysis that builders and hardware retailers put forward for the construction industry in NSW. Even as building approvals pull back their levels from the mid-2021 highs, the construction industry is struggling to get projects started, let alone completed.

The housing market itself is responding to increasing interest rates (and potentially other forces, such as inflation and increases in spending outlets) with a steep decline in the number of house transfers. However pricing, at least through to the end of March quarter 2022, remained relatively stable. Somewhat ironically, the ongoing limits to the capacity of the construction industry could contribute to a degree of stability in prices by effectively limiting supply, probably through to the end of Fy2022/23.

Victoria

Chart 3 shows the building approval numbers for private houses in VIC.

Overall the trends hinted at in the NSW approvals are more clearly outlined for VIC in the top graph. Approvals spike sharply up in p2021 and p2022, from February through to August 2021. After that, they revert to something close to previous, pre-pandemic years.

That said, this increase represents a substantial number of houses. Summing up approvals during that spike period, and subtracting the average number of approvals over p2017, p2018 and p2019 for same period, the result is close to 8500 extra approvals being made.

The bottom graph, showing percentage change, demonstrates this pattern playing out, with approvals for p2022 well into negative territory as the market reverts.

Chart 4 shows the stats for house transfers and building work done.

The pattern for house transfers in VIC is quite different to that of NSW. While the median house price for Melbourne and ex-Melbourne follows a similar pattern to NSW - though not reach the same heights - the relationship between the number of transfers in Melbourne and ex-Melbourne is quite different.

Transfers take a deep dip for the June and September quarters of 2020 in Melbourne, as the real estate market was almost closed during that time, due to lockdown restrictions. That results in a sharp spike back up in the December quarter 2020, followed by some volatility through to December quarter 2021.

However, ex-Melbourne transfers (the pale red line) initially dip through to June quarter 2020, then begin a long, steady climb up to an initial peak for June quarter 2021. After that they remain relatively synchronised with the Melbourne transfers. Both then decline quite steeply through to March quarter 2022.

The lower graph on Chart 4 for building work done shows a pattern also very different to that for NSW. Here the numbers of houses not yet commenced follows - in terms of growth - quite closely on the value of work yet to be done. That is, until March quarter 2022, when there is a sudden decline in the not commenced houses. It's a fall from 3133 in the December quarter to just 1534 in the March quarter - a drop of over 50%.

Conclusions

More than any other city in Australia, Melbourne faces barriers to building enough accommodation for its citizens. That is in part due to a state government policy of actually engendering a high degree of centralisation. However, one effect of the pandemic has been to overcome those obstacles, and to start to decentralise Melbourne (and therefore Victoria) in a de facto manner.

The most outstanding feature of these stats, however, is the steep fall in work not yet commenced numbers. One possibility is that, given the restrictions on house building in VIC, due to a shortage of labour and ongoing supply chain issues - as well as the failure of some home builders - this decline represents projects that have been abandoned.

That might be a temporary status, in that home builders are re-evaluating their options, or it could be a sign of a trend, as interest rates steadily increase and investors have second thoughts. Stats from subsequent quarters will verify what's happening.

Queensland

For Queensland (QLD), building approvals began to increase above average levels well before they did for VIC, beginning in October 2020, and continuing through to August 2021, as shown in Chart 5.

As the top graph shows, the general contour of approvals does follow the seasonal variation of previous periods, though the peak exceeds 3200 in March 2021, where the previous peak was around 2600. The lower chart also shows that starting in October 2021, the growth trend went steadily negative, as approvals dropped back to nearly match those for p2018.

While the pattern of approvals broadly followed that for NSW and VIC, Chart 6 for house transfers and building work done shows a unique pattern for QLD.

The top graph for transfers shows that the number of transfers for houses in Brisbane (which includes the Gold Coast) closely matched those for ex-Brisbane up until June quarter 2020. From September quarter 2020 through to December quarter 2021 ex-Brisbane transfers are on a steep growth line, outpacing slower (but significant) growth in Brisbane transfers. Both, however, experience a sharp fall for March quarter 2022, with ex-Brisbane transfers falling more in percent terms.

For median house prices (the two blue lines), however, Brisbane houses grew at a much higher rate than ex-Brisbane houses, closing in on $800,000 median, while ex-Brisbane median prices were around $550,000.

The lower graph on Chart 6 shows a steady constant growth in work yet to be done from September quarter 2020, through to September quarter 2021. The number of dwellings approved but not yet commenced in construction (the light brown line) shows a degree of volatility, but with growth eventually averaging out to close that of work yet to be done.

However, there is a sharp anomaly for September quarter 2021, which a steep decline from around 1500 in the previous quarter to below 1000. There's no apparent reason for this, but QLD has had similar drops in the past as well.

Conclusion

Perhaps the most interest statistical feature is the ongoing increase in house prices in the Brisbane area. Given that much of the growth is likely to come from interstate migrants to QLD, this might suggest QLD was the choice for many who didn't want to live in metropolitan Sydney or Melbourne, but also didn't want to move to the regions.

It is also notable that despite the sharp decline in transfers, the median house prices both in Brisbane and ex-Brisbane continued to rise.

South Australia

South Australia (SA) has had its building approvals numbers boosted considerably during the pandemic period, as Chart 7 illustrates.

One of the features of the top chart for building approvals that stands out is that, unlike the other states, SA almost escaped the "pinch" in approval numbers that occurs during January. Where approvals typically drop below 600 in that month, for January 2021 - at least - approvals remained relatively high, at over 800.

However, the general pattern of boosting approvals was otherwise similar to other states. The boost began in November 2020 and, aside from a slump in October 2020, continued to December 2021. It has persisted somewhat since then, albeit at a lower rate.

As the bottom graph on Chart 7 illustrates, at its peak in March 2021, the number of building approvals was up over 100% on the previous period. This means that even though the growth rate has fallen to below -20% in 2022, the actual number of approvals continues to be above the historical norm.

In terms of the house transfers and building work done stats shown on Chart 8, SA again shows some unusual characteristics.

While median house prices (the two blue lines) did both rise, the increase for ex-Adelaide prices (the lighter line) was far below that for houses in Adelaide itself. The Adelaide median price rose by 38%, and the ex-Adelaide median price rose by 25%.

In terms of building work done, the lower graph on Chart 8, this shows that SA had kept up with the flow of construction projects until the March quarter of 2021 with less than 2200 on average pending. However, over the next two quarters these shot up to a high of close 3700.

That was in response to an increase in the value of work to be done which increased from around $600 million in September quarter 2020, to around $1700 million in December quarter 2021.

Conclusion

Unlike QLD, SA had relatively little interstate migration during the pandemic period. Given that SA managed to get through this time with only relatively minor lock downs, this is an indication that the move to increased household formation is as much cultural as it is driven directly by the COVID-19 pandemic.

Western Australia

At the peak of the expansion of building approvals, during March of 2021, Western Australia (WA) saw a growth rate of nearly 200%, with approvals at nearly 2700. This is shown in the bottom graph of Chart 9.

The surge in approvals began in October 2020, and continued through to August 2021. Even as it slowed down subsequent to that, approvals remained above the historical average.

Chart 10 shows the house transfers and building work done stats for WA.

The spike upwards in transfers for Perth began in September quarter 2020, and peaked in the next December quarter. While Perth house transfers have declined through to March quarter 2022, they've remained higher than the longer-term average.

For the region outside Perth, house transfers began to increase at the same time, but grew steadily through to June quarter 2021, before beginning a gentle decline.

In term of median house prices, from June quarter 2020 through to March quarter 2022, Perth median house prices increased by 16%, while ex-Perth median price increased by 30%.

The lower graph of Chart 10 shows the expected surge in work yet to be done from December quarter 2020 onwards. Dwellings not yet commenced build to a peak of nearly 3200 in September quarter 2021, before falling sharply over the two subsequent quarters.

Conclusion

One force behind the continued increase in approvals, and growth in transfers for WA has been increased interstate migration, which has seen an influx of new residents from areas such as NSW and VIC. The isolation of the state meant it could reduce the initial impact of the COVID-19 pandemic, which helped to create a confident environment for real estate investors.

Analysis

One of the lessons from looking at the house market across Australia is how heterogenous it really is. While there are certain common forces at work, particularly in reaction to the pandemic, they tend to play out differently, according to the dictates of geography, past patterns of housing development, recent interstate migration levels, and local culture.

NSW is a more decentralised state than any other in Australia, QLD has a unique, dispersed structure, and VIC is probably the most centralised, so for each of these regions the concept of ex-urban housing is quite different.

In NSW increases in ex-urban housing picks up on an existing trend, while in VIC seeing ex-urban transfers come close to equalling urban transfers is a radical change. In QLD the surprise is the higher median prices of Brisbane houses. As we suggested above, that's likely people who do want to live in an urban environment opting to move to Brisbane over ex-urban NSW or VIC.

One of the universal characteristics is the increase in the value of building work yet to be done. From June quarter 2020 to March quarter 2022 - two years - this increased by 75% for NSW, 100% for VIC, 148% for QLD, 163% for SA, and a whopping 232% for WA. The total additional value across those five states was $10.9 billion. That's over and above the pre-existing levels of work yet to be done.

What's unique about this stat is that it is so universal throughout Australia. In past building surges, individual states would tend to surge while others remained slower, so that there could be a transfer of construction workers interstate. In this case all the major states show construction industries struggling to cope with the backlog of work.

The most concerning datapoint out of all these statistics, however, is that for work not commenced in Victoria, which saw a dramatic fall from 3133 house projects to just 1534 in the course of just one quarter. There may be other extraneous reasons for that fall, but the fear would be that this represents abandoned projects.

This could be the first sign that the backlog of construction work might not guarantee, as many commentators have suggested, another two years of busy construction work. This also goes to the point of what exactly is happening when construction companies fail in Australia. While this has been - a little simplistically - put down to material and labour costs exceeding those which went into project quotes back in 2021, there has to be more going on than that.

The failures don't result from construction companies seeing their bank balances decline to zero. All those companies rely heavily on finance from banks or other sources, and their failures indicate a lack of confidence in their future earnings. That could indicate that banks and other financial institutions see a bleaker future for construction than is discussed publicly.

One of the most useful set of stats that the Australian Bureau of Statistics (ABS) produces is that for building work done. While these are great stats, as they give a clear perspective on how the construction industry is performing (and thus an insight into the building supplies market), they are a little intricate to deal with.

That is in part because it's a complex industry to model statistically, and because these stats form a part of the calculations for Australia's national accounts, including gross domestic product (GDP). That means there needs to be a high level of formality to them, as they follow well-established guidelines.

From a hardware supply and construction industry perspective, the best way to understand them is to see that the stats fall into two groups. In the first group, the major concern is with the total value of the project. That's what is of most concern when looking at projects that are about to commence, that have newly commenced and that have been completed.

The second group are those stats that are concerned with how much work has been achieved on a project during each quarter, and in all the quarters to date.

Broadly, that first group of stats is about what is happening in the market, and the second set is about what is happening in the actual construction industry, as completes the work that has accumulated.

Building work done

To begin with the latter group, the stats for the actual building work done during a quarter are the most important numbers. Chart 1 shows the building work done in the private sector for houses, and for dwellings other than houses.

These graphs make use of periods (indicated by a "p") of four quarters, ending with the March quarter, and are designated by the year of the March quarter. Thus p2020 consists of the June 2019, September 2019, December 2019 and March 2020 quarters.

These charts take a slightly unusual approach, in that each line represents a quarter (e.g., the March quarter, which is January, February and March) as it progresses through the years

One reason for using this technique is that it shows clearly one of the major changes which have occurred, which is the demise of seasonality. Looking at the top graph, for houses, it's clear that in the past the March quarter lagged the other three quarters in terms of the value of work done. For p2021 and p2022 - the core COVID-19 pandemic period - that trend diminishes, with the amount of work done in each quarter broadly equalising.

However, in the bottom graph, for non-house dwellings, that trend does persist, along with a newly developed trend which shows a reduced value for work done during the December quarter as well.

When it comes to the core pandemic period, these graphs are charting two conflicting forces in the market: shutdowns and interruptions caused by the pandemic, and shifts in demand. Looking at the top graph for houses, p2021 shows a sharp decline for the June and September quarters, but a sharp uplift for the March quarter.

For p2022, there is sharp increase across all quarters, indicating a lessening of COVID-19 restrictions, accumulated demand from p2021, and increased demand for new house builds across Australia.

In the bottom graph, for non-house construction, a very different set of trends is evident. It's interesting to note that something of a decline was already underway pre-pandemic in p2020, but this continued on sharply through p2021 and p2022.

Market demand

In Chart 2, the focus is on projects as they enter into construction and are then completed.

The top graph shows the numbers of dwellings that are commenced and completed. The blue lines are for houses, and the grey lines are for non-houses (other residential).

Perhaps what is most interesting about the house stats is how relatively stable the number of completions is. While there is a low point in completions for the March 2021 quarter, and a local high for the December 2021 quarter, completions track largely between 26,000 and 29,000, with median value for the series from the June 2017 quarter through to the March 2022 quarter of 27,591. In terms of commencements (the pale blue line), there is a sharp spike upwards from the December 2020 quarter through to December 2021 quarter.

In terms of the non-house stats, commencements (the light grey line) have been at a relatively low level since the December 2018 quarter, until they spiked upwards during both the June and September quarters of 2021. Completions (the dark grey line) have, of course, followed these down, with a particularly steep drop in the most recent quarter, March 2022.

The middle graph on Chart 2 shows the quarterly progress of the value of commencements above the value of completions. It basically tracks by how much the value of new projects is replacing the value of projects exiting construction.

The graph shows a general "trough" in value replacement from the September 2018 quarter through to the June 2020 quarter. In the September 2020 quarter, the replacement value for houses picks up, and spikes up through to the June 2021 quarter. For non-house construction, the trough persists through to the March 2021 quarter, then lifts up to a lower high in the September 2021 quarter. Since their highs, both forms of housing have retained positive replacement, though at lower levels.

Finally, the bottom graph of Chart 2 shows the "backlog" of building projects that have been approved, but not yet commenced. This is something of a slightly tricky stat, though it is well-designed. The ABS actually moves the window for treating building approvals for this category one month back. That means that buildings that have been approved but not yet commenced for, say, the June 2021 quarter, would be in relation to approvals granted in the months of March, April and May 2021 (where the June 2021 quarter would be April, May and June).

Also, not all construction passes through this stat, making it a bit irregular. If a building was approved on 1 May 2021 and started construction on 20 June 2021 (for example) it would never show up in these stats, while a building that was approved on 1 June 2021 and started construction on 2 July 2021 would.

That said, as a general measure, these stats do tend to show when there is an increase in delays for construction projects starting. As this graph shows, for houses (the blue line), there were generally minimum delays through to the March 2021 quarter, but this delay increased slightly (but significantly) through to the March 2022 quarter.

The story for non-house construction is quite different. Since the local peak in the December 2017 quarter, there has been a steady and very significant reduction in the number of non-house dwellings that have been included in this category.

Performance

In Chart 3 we can see some indications of how construction is responding to the general forces in the market.

The top graph shows the value of work under construction, with is the total value of each construction job that is still underway. For houses (the blue line) there is a near constant value through to the December 2020 quarter, followed by a very steep increase through to the September 2021 quarter, then an ongoing, shallower rise through to the March 2022 quarter.

Non-house construction (the grey line) shows a steady decline starting in the June 2019 quarter, and continuing on to a low in the December 2020 quarter. Since then there has been a steady increase, but not back to the level of the June 2019 quarter as yet.

The middle graph shows the value of the pipeline of work. This stat combines the value of projects yet to be commenced along with the value of the work still remaining to be done on existing projects. It's essentially a measure of the "load" on the construction industry.

The most significant aspect of this graph is that it is surprisingly similar to the previous graph. What that means is that the work being done on construction projects is keeping pace with the introduction of new projects.

Finally, the bottom graph of Chart 3 shows stats derived from the ABS stats that indicates how much of the available work - the total value of all projects under construction - is being completed on a quarterly basis. The two most significant features of these stats is the decline shown for the June, September and December quarters of 2021 for houses, and the very steep decline for non-house construction for the same period.

Analysis

Taken as a whole, these stats show two main characteristics: the first is that the construction industry has been stressed by increased demand and interruptions to its productive capacity; and the second is that, in general, the industry is actually coping very well with those stresses.

That is evident in particular in the initial graph on Chart 1 for the value of building work done in p2022, and is echoed in the top graph for Chart 2 showing the number of completions.

However, there are signs of ongoing stress, as commencements have risen at a higher rate than completions, and there is a steady increase in the value of work in the pipeline.

If there are any inefficiencies evident, it is in the construction of non-house, multi-unit dwellings. Even with a fall-off in demand, there remains a significant and growing pipeline of work to be completed in that area.

The Australian Bureau of Statistics (ABS) has released its stats for hardware retail sales through to May 2022.

While the results remain predominately positive for hardware retail, it is worth noting that the market is beginning to reflect a series of stresses. There has been an uptick in builders finding themselves unable to complete contracts at the agreed price, leading some companies to default. That is largely a consequence of ongoing price rises for materials, combined with shortages of construction labour.

Most forecasts for FY2022/23 have been very sanguine about the future of construction spending, pointing to high levels of work backlogged, as the capacity of the construction industry fails to reach demand. However, there is some possibility that, as interest rates rise, shortages in construction materials continue and inflation continues higher, that some planned construction work will be abandoned.

Similarly, it is very difficult to work out from the ABS numbers how much of retail growth is due to increase demand, and how much is due to inflation. The number that will reflect that will be net profit for retailers. The increase in revenues would seem to be high enough and steady enough to reflect ongoing mild growth in the market.

That said, because inflation is being driven by a range of factors, it is to be expected that the Reserve Bank of Australia (RBA) is likely to pursue ongoing aggressive increases in interest rates. The factors contributing to higher rates include expenditure displaced from activities such as travel, ongoing supply chain issues, catastrophic weather events increasing food prices, the war in Ukraine, and continuing high levels of demand in key categories such as housing and automobiles.

That means the possibility of four more subsequent increases in interest rates by 50 basis points, bringing the target rate to over 3.0% by the end of calendar 2022. While that is regarded as an outlier possibility, HNN does think Australian banks are underestimating the likely increase, as this will almost certainly reach at least 2.3% by the end of the year.

Added to this concern is the fact that Australian state and federal governments have chosen to under-respond to the ongoing threat from COVID-19. Currently Australia has one of the highest rates of infection per 1000 of population in the world. There are signs of stress in hospital resources. It's a situation that could easily, over the next three months, see a return to mandated restrictions.

As usual with our statistics, HNN deals with periods of 12 months ending with the most recent month of results, designated with the prefix "p". Thus "p2021" refers to the period from June 2020 to May 2021.

Australia

The May 2022 stats for hardware retail turnover have not altered the statistical picture from April 2022 by much, except to further confirm the trends that began in January 2022. The Chart 1 for overall turnover shows the familiar results, with the two most recent periods showing a sharp increase over previous periods.

Chart 2 also looks familiar, though there are some changes evident as well.

Where previously there was an even spread of growth for p2022, there is a slight clustering, with Western Australia (WA) and South Australia (SA) both over 7.5% growth, New South Wales (NSW) and Queensland (QLD) at between 4.5% and 5.5%, and both Victoria (VIC) and Australian Capital Territory (ACT) at under 0.4% growth. VIC is the only region to show negative growth, at -1.0%.

Looking at the comparative revenues across the years at the top of Chart 3, p2022 continues to trace the seasonal patterns, as did p2021.

As the bottom graph on Chart 3 indicates as well, the growth in revenues has been almost flatline since February 2022. That indicates that the May 2022 increase in interest rates had little effect nationally.

New South Wales

NSW showed a sharp uptick in revenue, as illustrated by Chart 4.

As the top graph shows, NSW was the only state to exceed revenues for May 2020 with its May 2022 revenues. The increase of over 10%, as shown in the bottom graph, lifted the revenues above those for p2018, which it had tracked closely from January to April 2022.

Victoria

The most notable feature of the VIC charts remains its February 2022 results, which failed - unlike in previous years - to track down sharply. As shown in the top graph, revenues continued to be relatively stable from January to May 2022, as shown in Chart 5.

While the growth rate has been positive since January 2022, it has continued to decrease since February 2022.

Queensland

QLD has continued to grow over p2021 for most of p2022, but showed a strong uptick in growth for March and April 2022, which then decreased in May 2022, which Chart 6 illustrates.

Though its revenues have started from a much higher point, the growth rate is similar to that of p2018.

South Australia

SA is unique in that it has shown steadily increasing, ongoing growth through p2022, reaching a high of almost 30% in May 2022, indicated in Chart 7.

Where the revenues from February to May of 2021 showed diminished growth, they have remained at stronger highs during those months in 2022. As with VIC, revenues for February 2022 did not go into the expected seasonal decline.

Western Australia

WA has shown consistent growth in the 10% to 15% range since December 2021, as shown in Chart 8.

It has remained in the usual seasonal pattern, with a slump into February 2022, followed by a recovery in March 2022.

Australian Capital Territory

While in August and September 2021 the ACT showed a decline in revenues back to pre-pandemic levels, this corrected sharply in September 2021, and revenues in p2022 have been above p2021 since then.

As Chart 8 indicates, revenues have come closer to those of p2021 during April and May 2022, which growth closing in on 5.0%.

Analysis

The results for May 2022 were likely deeply affected by features such as the federal election, and the cautious policy stance taken at that time. Certainly without the election, it's possible there would have been stronger interest rate rises announced earlier.

The upcoming revenue results for June 2022 should show more effects from both the increase in interest rates, and continued increase in inflation.

Download hnn-brief-009

The housing market changed during the pandemic. This had a material effect on many hardware retailers. While much of the focus has been on the housing market "boom" (and we'll find out if it is really a "bubble" when interest rates hit 3.0%), there were significant shifts in the type of dwellings bought, and where those dwellings were located.

The Australian Bureau of Statistics (ABS) has released stats for the number of dwellings transferred for the March quarter of 2022. The ABS publishes these in categories that break out location by state capitals and rest of the state, as well as whether the property is "attached" - apartments, flats, townhouses, "granny" flats, etc. - or an unattached house.

Looking into these stats, and tracking how they changed through the course of the COVID-19 pandemic, can give us an insight into both the extent of any change, and the timing of the changes.

One reason why HNN has sought to present this particular data is that there is a debate about what the pandemic-driven changes "mean" for the future of the property markets.

While many changes the COVID-19 pandemic brought were "catastrophic" (in the sense of "a sudden and large-scale alteration in state"), the debate is whether these are incidental, and will fade out over the next couple of years, or if they are more foundational. If the latter is true, the suggestion is, what is really happened is that somewhat inevitable change has been brought forward.

In simpler terms, if we were absolutely certain there would be no more lockdowns for the next five years, would property buying habits revert to those of 2018, or would they retain much from 2021 instead?

Australia

This data varies substantially from state to state, and the meaning of the data also changes with geography and demographics. For example, property transfers outside of Sydney in New South Wales (NSW) incorporate several major urban areas such as Newcastle, the Central Coast and Wollongong. Similarly, for Queensland (QLD), outside of Brisbane there are dense regional areas such as the Sunshine Coast, Townsville and Cairns. In contrast, Victoria (VIC) is a far more centralised state: its second city, Geelong, has only 4% of the population of greater Melbourne.

That variance also means that aggregated data about Australia-wide trends has less meaning. However, we can look at another statistic, which is the median value for houses and attached dwellings (apartments, flats, townhouses, etc.) across the nation, to see broader, more general trends.

Chart 1 shows the median values for these two categories in the states most affected by the pandemic on the east coast, for both greater capital city areas, and the rest of the state.

The narrative of the graph on the left is well-established, especially the steep rise in the median value of houses for the Sydney area, echoed by a similar climb in values for the greater Melbourne area. If there is a surprise, it is in the rise in values for NSW outside of Sydney, with those values climbing steeply enough to overtake values for Brisbane. There is an echo of that increase for median value in VIC outside Melbourne.

The graph on the right, which shows median values for attached dwellings, contains a few more surprises. While the comparatively lower rises in median values for attached dwellings in both Melbourne and Sydney is well-understood, the sharp rise in those values outside the urban areas has been under-reported. Values for rest of NSW have risen so steeply that they have overtaken those in urban Melbourne. Rest of VIC values have also increased substantially.

Chart 2 shows the median values for these two categories in the rest of Australia, for both greater capital city areas, and regional areas. Again, the graph on the left, for houses, is not surprising.

The median value in the most urban area of Canberra has increased steeply, as it has for Hobart, and to a lesser extent for Adelaide. The one unexpected data point is that the median value for houses in Tasmania (TAS) outside of Hobart, which previously had been close to that for Darwin, has increased steeply as well.

The graph on the right shows the median value for attached dwellings. TAS is again the surprise here, as it shows a steep rise for Hobart, with Darwin also showing growth.

Finally, we have Chart 3, which charts the percentage growth in these categories. This takes the December 2019 quarter as a baseline, then compares that to the maximum value taken from all the subsequent quarters through to December 2021.

In houses - the left graph - the top three are rest of VIC, rest of NSW and rest of TAS. In attached dwellings - the right graph - the top three are rest of NSW, rest of VIC, and rest of Western Australia (WA). In fact, the biggest surprise is the extent to which rest of WA has outperformed Perth.

What these charts of median values indicate is the balance between supply and demand across these areas. The unusually high values for more regional areas are likely driven by both direct and indirect pandemic effects. The direct effect is families seeking to avoid difficult lockdowns in urban areas. The indirect effect is that as the urban median values rose, many households would have found themselves priced out of urban areas, and have elected to live in more regional areas.

Number of transfers

Moving from the median values to the numbers of transfers, we shift from supply and demand in the market, to looking at how the supply side of the equation has played out across Australia. For the most part, there is a balancing of forces at work here. Some of these are directly pandemic-related, and others - as mentioned above - are secondary effects stemming from the pandemic.

One dominant set of forces could be thought of as a revaluation of space. In a paper sponsored by the Australian Council of Social Service and UNSW Sydney, entitled "Housing Market Impacts and Housing Policy Responses - an International Review", authors Hal Pawson, Chris Martin, Fatemeh Aminpour, Kenneth Gibb and Chris Foye borrow from a study by the Bank of England to refer to this as "the race for space". The study identifies three types of changes to dwelling buying patterns caused by the pandemic:

The first is compositional in nature: the pandemic has changed the type of properties being traded, increasing transactions for detached houses and decreasing transactions for flats. Because, on average, the former are worth more than the latter, this has increased the average value of properties being transacted ...

The second dimension of the "race for space" also relates to property type, but this time the argument is that the pandemic not only changed the types of properties being transacted but also changed the amount that people were willing to pay for certain aspects of a property ... The Bank of England analysis suggests the pandemic increased the price that buyers were willing to pay for a house compared to a flat with similar characteristics (e.g. similar area, number of bedrooms) and this partial increase in demand explains about 20 percent of the overall house price growth ...

The final dimension of the race for space was spatial, and relates to the type of location people wanted to live in. For those who want to remain close to the city, but who no longer need to commute regularly, it appears to have led to a "doughnut effect" as demand shifted from the centre to the suburbs. Others, including those can work entirely from home, or who can no longer gain employment in the city, have moved even further away from the city.

This is an interesting approach, as it moves away from the absolute of families deciding "we must have a house", to their basing their decisions on a revaluation of some aspects. For example, in some regions the transfer of attached dwellings outside capital cities has risen, due both to price and a greater certainty that the space outside the dwelling will remain available, and not taken away by a lockdown.

As a brief note on HNN's approach to aggregating statistics, HNN has consolidated the quarterly data into 12-month periods, ending with the March quarter. These are designated with a "p" prefix. So the period p2020 would include June 2019 quarter, September 2019 quarter, December 2019 quarter, and the March 2020 quarter.

New South Wales

The outstanding characteristic of NSW dwelling transfers is the increase in transfers outside of Sydney. This is most directly indicated in Chart 4, which shows the raw number of dwelling transfers across the periods:

The number of transfers for houses in Sydney initially increases in p2021, up to the level of p2018, but then declines for p2022. In contrast the transfers outside Sydney in NSW increase sharply for both p2021 and p2022.

The number of transfers for attached dwellings follows a similar pattern. The Sydney transfers increase marginally, then fall, while the transfers outside Sydney increase so sharply that they are almost the same - the Sydney transfers are ahead by less than 1400.

This is clearly shown in Chart 5, which charts the growth for these categories between periods:

Attached dwellings outside Sydney grow strongly, while houses outside Sydney grow by around 35%, then decline back to 25% growth. Meanwhile for p2022 Sydney houses and attached dwellings decline by more than 10%.

Chart 6 shows the proportion of each category for a period:

This clearly shows the marked swing to areas outside of Sydney. For example, contrasting p2020 with p2022, transfers for attached dwellings outside Sydney increased by 10%, while those for houses outside Sydney increased by 5%.

Chart 7 shows the quarter-on-corresponding-quarter growth for the categories:

As this indicates, the big surge in transfers took place from the September 2020 quarter through to the December 2021 quarter, with a peak in growth for the June 2021 quarter. It's also worth noting that all categories went into negative growth for the March 2021 quarter.

Victoria

VIC shows trends that are similar to NSW, but in an environment with generally lower growth. Chart 8 charts the number of transfers by category for periods.

This shows a pattern of mild decline for both houses and attached dwellings in Melbourne, while houses and attached dwellings outside Melbourne show increased transactions.

One difference with NSW is that growth in attached dwellings outside Melbourne remains relatively subdued, while the number of house transactions outside Melbourne increases to be only1440 below houses in Melbourne.

Chart 9 shows the growth in transfers:

This shows that while the attached dwellings outside Melbourne transfers are numerically low, the growth rate has been high through p2021 and p2022.

That is indicated in Chart 10, which shows the proportion of overall transfers taken by each category:

After standing at 4% and under in the past, the attached dwellings outside Melbourne category grew to 13% overall in p2022. Both houses and attached dwellings in Melbourne shrunk by 5%.

At first glance, the chart for the percentage change quarter-on-corresponding-quarter for VIC looks broadly similar to that for NSW, but there are key differences, as shown in Chart 11:

While the attached dwellings outside Melbourne and houses outside Melbourne categories indicate growth similar to its NSW counterpart, the rate of growth is substantially higher.

Queensland

As was noted above, QLD has a unique composition, with a more distributed population - though it is important to know that the ABS includes the Gold Coast area in the statistical area for greater Brisbane.

Chart 12 shows the raw numbers for transfers:

The first thing that attracts attention is the lift in the number of transactions for houses outside Brisbane. But it turns out that this graph is somewhat deceptive - largely because while the curve near the bottom of a chart will be similar to one above it, the bottom curve, due to proportionality, will show a higher level of growth. That is clearly seen in Chart 13, which shows the growth percentages:

Unexpectedly, the category with the highest level of growth is actually attached dwellings in Brisbane, while that with the lowest level of growth is for houses in Brisbane. That "swap" can be seen in Chart 14, which shows the changing proportions for each category:

The proportions of house transfers outside of Brisbane and attached dwellings inside Brisbane have both grown, along with attached dwellings outside Brisbane, while houses in Brisbane has shrunk.

The quarter-on-corresponding-quarter growth shown in Chart 15 reflects this:

While the timing of the peak in the June quarter of 2021 is the same as for NSW and VIC, this chart differs from those by having detached dwellings through QLD as the main categories.

South Australia

The South Australia (SA) market shows as relatively static from p2016 to p2020, but then grows in all categories for p2021 and p2022, as shown in Chart 16:

Notably the number of house transfers outside Adelaide increases to equal transfers of attached dwellings inside Adelaide. The growth pattern is shown clearly in Chart 17:

Houses in Adelaide show the slowest growth, while attached dwellings outside Adelaide have the highest growth.

Chart 18 shows a relatively modest shift in the proportions of the categories:

Houses in Adelaide slip by 6% between p2020 and p2022, while houses outside Adelaide grow by 5%. Attached dwellings outside Adelaide grow by 2% over the same periods.

Chart 19 shows the growth in quarter-on-corresponding-quarter terms:

Once again there is a growth surge in the June quarter of 2021, dominated by the two categories outside of Adelaide, with attached dwellings leading over houses.

Western Australia

WA has some of the characteristics of SA, with the period from p2016 to p2020 mostly static in terms of growth of transfers, as shown in Chart 20:

Houses dominate the market, making up over 75% of all transfers during the static period. However, even though WA was insulated from most effects of the COVID-19 pandemic, transfers grew starting in p2021 and continued to grow in p2022, with the exception of houses in the Perth category. Chart 21 shows the pattern of that growth:

This shows an unusual pattern, with a level of high growth for p2021, which then declines for p2022, and even goes negative for houses inside Perth. The exception to this is transfers for attached dwellings outside of Perth, which grows at a high rate through to p2022.

The consequence of that growth can be seen in Chart 22, which shows the proportion of transfers in each category by period:

While attached dwellings are largely static in p2021, houses outside of Perth grow from 17% to 20%, even as the proportion of houses inside Perth declines by 4%. For p2022, there is a 4% growth in attached dwellings outside Perth, and further growth in houses outside Perth.

The details of that change can be seen in Chart 23, which shows the quarter-on-corresponding-quarter growth in categories:

There is a steeper entry into the peak period, which is still the June quarter of 2021, and primarily driven by attached dwellings outside Perth, with houses outside of Perth also peaking.

Tasmania

TAS represents some interesting problems in interpretation. As we've seen from the median dwelling values at that start of this article, prices have been steadily rising for the state during the pandemic. However, transfer numbers have been largely flat to negative in the same period. That would indicate there is a problem with supply.

Chart 24 shows the raw numbers for transfers:

Since p2018 most categories have been flat or declining, with only attached dwellings outside Hobart showing growth. The pandemic created a further reduction in transfers. Chart 25 shows the extent of the changes in the categories:

While p2021 saw the two categories for dwellings outside of Hobart leave negative territory to go mildly positive, in p2022 all categories are negative.

Chart 26 shows the established pattern for the proportion of the categories:

This indicates how little effect the pandemic had. There is a historical trend towards a reduction in the houses in Hobart category, and a compensating increase in the houses outside Hobart.

Chart 27 shows that there is once again a strong peak for the June quarter of 2021, but the two subsequent quarters are very different from those of the other states.

The peak is strongest for houses outside Hobart, followed by attached dwellings outside Hobart. It's also a much milder peak than other states, topping out at less than a 50% increase. It is also followed by a series of declines for all the categories, culminating in negative growth of lower than -40% for every category.

One possibility is that transfers were drawn back from December quarter 2021 and March quarter 2022 into the June and September quarters of 2021.

Northern Territory

Northern Territory (NT) shows a pattern where transfers for houses increased in both p2021 and p2022, while transfers for attached dwellings in Darwin fell for p2021, then rose in p2022. Chart 28 shows the raw data for transfers:

It's notable that the most volatile category is for attached dwellings in Darwin, which started at parity with houses in Darwin in p2016, then declined through to p2019.

The trends for the categories are shown in Chart 29:

This shows the highest level of growth was for attached dwellings in Darwin in p2022, though all four categories showed growth in that period. However p2021 shows that both house categories grew, while both attached dwelling categories declined.

The effect of this on the proportion of each category is shown in Chart 30:

There is a clearly established trend where dwellings inside Darwin are increasing in proportion, though houses outside Darwin did surge in p2021. Most notably, in contrast to most states, the proportion of attached dwellings outside the capital city is declining.

Chart 31 which shows the quarter-on-corresponding-quarter growth for categories does depart from the pattern of the states:

While the expected peak is yet again present in June quarter 2021, in this case including both houses in Darwin and outside Darwin as well. However, this is followed by a second, higher peak for attached dwellings inside Darwin for September quarter 2021. It is also noticeable that while the other three categories saw growth decline sharply for December quarter 2021 and March quarter 2022, this category maintained growth above 70% for both those quarters.

Conclusion

As HNN said in our introduction to this article, our intent in taking this deep dive into state-by-state ABS statistics on dwelling transfers was to provide some sense of how markets reacted to the stresses of the pandemic, in order to give a better picture of what is to come in FY2022/23.

The core issue, as was mentioned above, is whether the catastrophic change of the pandemic is a "blip" that will see markets gravitate back to conditions prior to the pandemic, or if it has instead resulted in fundamental change through the removal of established barriers - essentially a speeding up of inevitable changes.

The trigger

One identifiable trend across all of the states and territories has been a surge in transfers during the June quarter (April, May and June) of 2021. For the majority of regions, this was a peak, with the numbers of transfers in the adjoining quarters, March and September, rising as well.

The cause of this surge in transfers is likely a combination of factors. Firstly, this was right at the beginning of the advent of the Delta variant of COVID-19 into Australia - the first case was detected around 4 June 2021. This came about as the country moved through a succession of lockdowns as illustrated by this diagram from the ABS:

Secondly, this was also the time it became evident the Australian federal government had not obtained an adequate supply of COVID-19 vaccines. The early targets by the government, such as five million vaccinated by March 2021, had failed. It was not until October that Australia managed to vaccinate half its population - well after Delta had caused additional lockdowns.

Thirdly, the June quarter of 2021 was when it became evident that Australia was in the midst of a housing price boom, as illustrated by Chart 32:

It's interesting to note that price index increases remained in a relatively tight band for both the March and June quarters of 2021, but from the September quarter of that year onwards there was a broader spread to price increases.

Consequences

The belief that house buying has accelerated in response to the pandemic has some facts to back it up, especially in VIC. However, in both NSW and QLD, it is evident that attached dwellings continue to attract buyers.

What is almost universally true, however, is that there has been a substantial increase in transfers for dwellings in areas outside of state capital cities. However, this is likely to be a complex effect. Moving outside of lockdown regions might be part of the stimulus, but it could also be the need to seek less expensive properties to buy. And, of course, part of what contributes to that move to the regions is another effect from the pandemic, the development of increased working from home, cutting down on commute times, and making more remote living possible.

The changes

The first quarter of FY2022/23 is likely to be a somewhat rough ride for the economy. It is entering the unlovely state where interest rates are set to rise by at least 0.75% and more likely close to 1.1%, while inflation continues at close to 5.0% and the supply chain, for petrol and groceries - especially vegetables - continues to be constricted. Added to that are expected higher prices for electricity.

In those conditions, household formation may not only fall, but actually contract. Australia is also in the "hollow" of dwelling purchases through immigration - as the Australian Construction Industry Forum has pointed out, it takes about two years from arrival before immigrants are ready to buy a house, which means a decline from, roughly, March 2022 through to June 2024.

As house prices continue to drop through the rest of 2022 - as is probable - and families find themselves close to being "underwater" in terms of their mortgage valuation versus current valuation, it is likely there will an increase in forced sales into a market with lower demand, further deflating prices.

Additionally, in the near future of two years or so, if the pandemic remains contained, it's likely that many families will conclude they have over-invested in their homes. That will depend in part on what happens to wage rises. This has developed into a complex situation, with a number of micro-economic factors at work.

For example, many employers are operating in an under-staffed environment, because to attract new staff they would have to raise wages. However, wage rises for new staff would trigger wage rises for most existing staff - which have been held down for the past eight years - and employers cannot afford this.

The general prognosis would be that while growth in hardware retail revenues may slow, it's unlikely that they will fall by much from the highs of the past two years. However, that story may change sharply in FY2024/25, and the market may retreat, or diversify in unexpected ways.

The biggest problem facing the Australian economy at the moment - and therefore hardware retailers as well - is what we might term "persistency bias". Despite more than two decades of watching businesses and economic sectors persist in past practices until they fail in spectacular fashion, Australia and many other regions continue to not really believe in change until it has already happened. This failure to effectively forecast, listen to forecasts and plan consequentially has forced an enormous cost on the economy.

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The ideal home for 2022 is larger, more likely to be a detached dwelling, and more "multifunctional" than the ideal home of 2018. It has provision for some at-home recreation, a home office and a more extensive outdoor garden.

That has been a direct response to the potential for further pandemic lockdowns. But will the impending pressure on personal finances, with those higher interest rates and net inflation of above 5.0%, combined with low growth in wages, take consumer spending on home improvement projects back to the levels of three years ago?

Or, in other terms, will hardware retail remain a special category, which the pandemic has worked to boost, or will it revert to a more "normal" category, and become responsive to increasingly difficult economic times?

The past record of retail turnover for hardware retailers can provide a baseline to predict elements of future revenues. There will be a nationwide shift in hardware retail growth during May, June and July 2022 as the initial impact of increases in the target interest rate made by the Reserve Bank of Australia (RBA) take effect. The question is whether this will simply forestall future growth, or if there is a possibility that revenues will return to calendar 2019 levels.

It has become increasingly clear that the interest rate increases will be persistent, and seek to "front load" rates by increasing at a faster pace than the RBA's usual 25 basis points. Those increases, of 25 basis points in May and a further 50 basis points in June, have lifted the target interest rate to 0.85%. A further rise in July 2022 is almost certain, likely sending the target rate above 1.2%. The target rate is set to be over 2.0% by December 2022, and over 2.4% by June 2023. Central banks often seek this kind of front-loading as it is thought to reduce the final peak rate needed to deal with inflation, which makes future adjustments downwards less taxing on the economy.

The "double whammy" that always comes with efforts to curtail inflation, is that there is a period where both inflation and high interest rates co-exist. The entire purpose of interest rate rises, in fact, is to reduce demand. In current markets that will serve a dual purpose of leading to less aggressive pricing, as well as allowing the currently over-taxed supply chain to catch up with demand.

April revenues

The results for hardware retail revenues through to April 2022 need to be seen in that context. While they pre-date interest rate increases, most homeowners would have known interest rates were set to rise.

This is based on the hardware retail figures for April 2022, released by the Australian Bureau of Statistics (ABS).

As with data in HNN's previous statistics, we rely on 12-month periods ending with the current data month, which is April. We designate these with a "p" prefix, so p2021 is the period from May 2020 to April 2021.

It's helpful to refer to Chart 1, similar to those HNN used pre-COVID, which shows the cumulative revenue for the relevant periods. (Note that full data for Tasmania [TAS] and Northern Territory [NT] is not available yet, so the amount designated for those two areas is derived from Australian revenue minus the total for the other states and territories.)

This shows that the extraordinary growth in retail revenues took place in p2021. The following period, p2022, actually returned to similar growth values for the partially (two month) pandemic period of p2020. That's further detailed in Chart 2, which shows the growth between periods.

Finally in this series in Chart 3, which shows the distribution of revenues by state and territory over the periods.

As this indicates, while there have been some small shifts, these are below 1.0% overall. That's quite remarkable, bearing in mind the differences between the states and territories when it comes to rates of infections, deaths per thousand, and the duration and severity of lockdowns.

We can refer to the period comparative charts HNN has come to rely on during the "next normal" of the current markets. Chart 4 shows the monthly comparison across the periods.

This shows a continuation for April 2022 of the pattern established since October 2021, tracing the seasonal pattern of p2021, but at a higher level of revenue. That's confirmed in Chart 5, which shows the percentage change between corresponding months.

If you wanted to concentrate on the most encouraging element out of all of these charts it would be the near-flat red line for 2022 over February, March and April. In these three months across the periods, the green line for 2020 shows the steep rise at the start of the pandemic, and the blue line shows the "correction" for 2021. To see 2022 at least starting out with reduced volatility, but constant growth, is encouraging. Though, of course, that constant growth needs to be somewhat discounted by general inflation of over 5.0%.

New South Wales

In New South Wales (NSW) there is a similar pattern of stabilisation during the first four months of calendar 2022. The near-flatline plateau comes at just above 5.0% growth, as shown on the lower graph in Chart 6:

One difference for p2022 as compared to the Australia-wide figures is evidence of what we might term "hyper-seasonality". Where for Australia overall, revenues followed the general peaks and troughs of pre-pandemic years, for NSW the months of October and December showed unusually high growth rates, of 13.5% and 12.8% respectively.

One possibility would be displacement spending, where money that might have been put aside for holidays was instead spent on home improvements. Equally, it might be that with house prices peaking, and the looming possibility of interest rate rises, homeowners abandoned efforts to buy a new house and instead spent on improving their existing dwellings.

Victoria

The most distinguishing characteristic of Victoria (VIC) is that its total revenues for p2022 are below those for p2021, at $655.8 billion and $671.9 billion respectively, a fall of -2.40%. Only the Australian Capital Territory (ACT) had a similar fall.

That needs to be balanced against ongoing volatility looking ahead to calendar 2022.

There are similar signs of hyper-seasonality, but for November and December. However, the pandemic boost effect has been milder for VIC than many other regions - out of the 26 months that have been affected, only six months show growth beyond the range of previous growth numbers; for NSW, the most comparable state, that number is 11 months.

Queensland

For Queensland (QLD), the growth surge has been even more consequential, with 13 of the 26 months beyond previous growth patterns. Most of that growth shows up in the first 12 months of the pandemic, from March 2020 through to February 2021 - but it also includes the most recent data period, April 2022.

There is a sign of hyper-seasonality, despite QLD's more temperate climate, with the month of December showing peaks developing since the start of the pandemic.

South Australia

While the pandemic has had a significant effect on hardware retail revenues for South Australia (SA), it has not been quite as significant as that for other states.

There is some peaking in December, but not as pronounced as in VIC and NSW. The outstanding feature for SA is that its growth during p2022, far from plateauing, shows acceleration (and some volatility) from October 2021 onwards.

Western Australia

Western Australia (WA) shows the most consistent growth pattern for p2022. From August 2021 to April 2022 the average revenue growth rate was 9.7%.

Again, there is evidence of hyper-seasonality in the extreme December peaks, reaching a record $236 million in December 2020, which was surpassed by the $256 million for December 2021. Arguably, while the revenues for p2022 have lifted WA into new territory, those from p2021 were broadly similar to the high revenues during p2017 and p2018.

Australian Capital Territory

With smaller regions and lower overall revenues, the numbers tend to be more volatile, and that is certainly the case for the ACT.

Growth for p2022 has been relatively steady (for the ACT) from November 2021 to April 2022. That said, revenues for p2021 and p2022 were almost equal at $508 million and $502 million, a decline of around 1.0%. There is a strong revenue figure for December 2021, but it seems less of a trend than for other regions.

Analysis

Overall, the analysis of these revenue stats provides good news. The market seems to be maturing and becoming more stable at a historically high level.

That said, there are significant risks. With cost of living increases combining with increased target interest rates, there is a looming question as to whether spending on home improvement may decrease.

At the same time, however, concerns about the COVID-19 pandemic are far from over. In the short term, what we can say is that COVID-19 does remain as a significant threat in Australia. Australia ranks sixth globally in terms of infections per capita, and new variants are constantly being discovered. Vaccination rates are fairly high, - though the much-needed second booster shot has received little attention - and anti-viral drugs are now available.

Most people would likely dismiss the possibility that long and difficult lockdowns will recur, but there is a possibility that some pandemic restrictions - notably masks in crowded publish spaces - may come back. During the lockdown period, houses provided a direct physical kind of comfort and security to homeowners. It may well be that this effect has shifted to more of a psychological basis in 2022.

Globally, of course, COVID-19 remains an ongoing problem as well. There are new permissions for overseas travel, with testing - for example - no longer required for travellers to the US. However, many Australians remain hesitant, and it will likely not be until 2023 that overseas travel becomes widely acceptable, and departures return to 2019 levels.

Combined, the various factors mean that Australia is unlikely to see radical declines in hardware retail turnover for the remainder of calendar 2022. The peaks that previous years have seen for December sales may decline slightly, and there could be some negative growth in July and August 2022, as homeowners process additional increase in the target interest rates.

Hopefully, by the second calendar quarter many of the supply chain issues will be resolved, which should help to decrease concerns over inflation, and limit the top interest rate increase to below 2.5%. Significant risks do remain from the ongoing war in Ukraine, the potential of a recession in the US, and ongoing tensions with China. However, in all of those situations, there is good reason to hope for, if not an overwhelmingly positive outcome, at least a resolution that will do only limited damage to Australia's economy.

The Reserve Bank of Australia's (RBA) assistant governor (Economic) Luci Ellis provided the keynote speech of the Urban Development Institute of Australia (UDIA) held in Sydney on 25 May 2022.

It's a short, detailed speech that provides a broad but statistically supported view on the primary sources of the rise in demand for detached houses, as well as a well-reasoned view of how demand for housing and construction will develop through to 2024.

The PDF of the speech can be accessed via this link:

(Be aware that the RBA website has ongoing technical difficulties, and is sometimes not available, so it may take several attempts to access this information.)

Growth in demand

Dr Ellis follows conventional wisdom in agreeing that one major driver of the housing market during the two pandemic years was the desire for more household space, and particularly space with some kind of garden/outdoor area.

Yet while there has been much attention focused on increased demand through households "trading up" to these bigger and better spaces, Dr Ellis points out that there has also been a significant increase in new household formation - the same number of people are now occupying more houses. She provides the following chart to detail where this has occurred.

As Dr Ellis states in her speech:

Across the whole Australian population of more than 25 million people, a decline in average household size of the extent shown in Graph 1 would add about 140,000 households.

She mentions that this acted as an offset to reduced immigration to Australia:

Roughly speaking, the decline in population growth meant that there were up to 200,000 households that didn't arrive in Australia over the past two years, who would have done so if population growth had stayed where it was before the pandemic. But the decline in the average size of households that were already here broadly offset this.

It's worth noting that while this shift might apply to the rental market, it applies far less to demand for house purchases. As has been noted by the Australian Construction Industry Forum (ACIF), it typically takes about two years after arrival in Australia for an immigrant to consider buying a house. That means that in terms of house-buying, the pandemic probably only accelerated recent immigrants buying houses, but also that as of mid-2022 there is likely to be a data "hole" in this source of demand. That demand will likely reappear in early 2025.

One strong source of new household formation, as indicated on the chart, is the decline of people living in shared housing. The number of people moving in with a partner also increased. It is unclear how this would affect household formation in terms of impact on number of dwellings. Two people living independently could merge households, which would decrease demand. Alternatively, two people, both living in shared households, could leave to establish a new household, increasing demand. Certainly, though, more people living with partners would tend to increase demand on detached houses over multi-unit dwellings, as it is common practice to see two individually rented smaller apartments combined in the purchase or rental of a single larger detached dwelling.

As Dr Ellis states, the results from the 2021 census, due to be released in June 2022, will help to further clarify some of these matters.

Place-related change in demand

The desire for more space coincided with a second feature of the pandemic years, which was the move to work-from-home (WFH). This has recently transitioned into "hybrid" work, where employees split home/office time. With a reduction in the total time spent commuting, households found themselves willing to move further from major urban centres. Others, particularly in the state of Victoria (VIC), chose to move outside of urban boundaries so as to be subject to fewer COVID-19 lockdown restrictions.

As Dr Ellis points out, this showed up in terms of pricing changes to houses, based on distance from the nearest urban centre. Chart 2 outlines some of these pricing shifts.

It's not made especially clear in the graph, but it is necessary to reference the "Inner" and "Middle" labels on the x-axis to make sense of the information. The longer the vertical lines, the more the price differential between the outer ring of suburbs and the nominated rings was reduced during the pandemic.

She describes the price changes indicated by the graph:

The relative premium paid to be closer to the city centre, both in rents and purchase prices, narrowed during the pandemic. Housing prices increased over the two years to April this year across almost all neighbourhoods in the major cities; however, in general, price increases were stronger in the outer suburbs than in inner-urban regions. The premium for being close to the centre remains, but it is much smaller now and is closer to the premium for being in a middle-ring suburb.

Dr Ellis does give some detailed information about the demographics she sees as being most influenced by the shift to WFH. She notes that the ability to WFH previously varied by geography. She invents a category she terms the "laptop class", which are those people able to WFH nearly all of the time.

The "laptop class" of people who can mostly work from home on an ongoing basis are in fact a small minority - a minority, who, prior to the pandemic, were not evenly distributed across geography. Rather, they were concentrated in inner-urban, higher-priced areas. Data from the 2020 HILDA [Household, Income and Labour Dynamics in Australia] survey suggests that around 60% of people who lived within five kilometres of a city centre could work from home, but less than 40% of those who lived more than 20 kilometres out could do so. As a result, a shift in the location of some of the laptop class will be more noticeable than if they had initially been more evenly spread.

While Dr Ellis did not present this data, it is worth referencing this HILDA survey from 2020 which asked people if they were currently WFH, and if they would like to continue WFH after the pandemic ends.

There have been a number of surveys published over the past two years, with wildly varying interpretations of intent to WFH as a career choice. The reality is that for at least 50% of "white collar" jobs in Australia, WFH will become both a feature and benefit over the next decade, even if that means that WFH is only one day a week.

Future rates of construction activity

For hardware retailers, perhaps the most significant part of the speech by Dr Ellis dealt with forecasts for construction activity. This chart for the "Residential Pipeline" provides an overview of the work approved, but still to be completed.

In referring to the chart, Dr Ellis states:

All the signs point to the fact that the residential construction industry is at capacity and cannot work down this pipeline any faster. To be clear, this has nothing to do with land availability or governments approving enough homes. The land has been made available and the building project is already approved... Currently, [liaison contacts] are telling us that it is averaging around nine months.

Looking to the future, Dr Ellis presents the following chart on new dwelling inflation and costs:

She sees the rising costs as being a function of demand and supply, with high demand currently driving high costs, but with a short- to medium-term reduction in demand providing future cost relief.

Prices of existing homes have been easing in some cities, so the relative attractiveness of building a new one is reduced. In this environment, it is likely that buyer interest in new homes will ease as well. The current pipeline will sustain activity for quite a while, but the backlogs and strained capacity will ultimately work themselves out. Exactly when that will happen is hard to know.

Analysis

If we look at the current housing market in Australia, especially for New South Wales (NSW) and VIC, one aspect that is outstandingly evident is that there is nothing rational about it. While it's tempting to apply market equilibrium theory (demand creates increased prices, drives supply, excess supply decreases prices), Nobel Prize winning economists such as Robert Shiller have spent much effort suggesting this is only a partial explanation of anything to do with house prices. The more important explanation is always psychological, and sometimes sociological as well.

The reality of the current Australian housing market is that it is largely driven by a somewhat panicked reaction to the crises created by the COVID-19 pandemic. There are many families in Victoria - which had by far the most severe and lengthy lockdowns - living in small apartments who made it through the pandemic in good shape. A big house does not - obviously - protect a family from disease. But big houses have become a symbol of security.

In other words, moving from an apartment to a house, buying a larger house, or expanding an existing residence in 2022 is largely an anxiety response. It's right up there with people who, without being able (often) to really articulate a reason, refuse to get vaccinated, or have not had that vital booster shot required to keep immunity at a high enough level to matter.

It's a difficult statement to make, but it has turned out that while, societally, Australia might overall be a pretty tough nation, there was something about the pandemic that has revealed an underlying vulnerability. The trivial matter of wearing a mask indoors, for example, achieved a kind of symbolism of its own, that lingers today, even as Australia how has the highest infection rate per 100,000 people in the world.

The biggest expression of that vulnerability can be seen in the increased demand for detached dwellings. Yet it's also true that Australians tend to recover very rapidly. Droughts, floods and bushfires certainly do have some lingering effects, but generally everyone reaches a point where they just want to "get on with it".

If you are forecasting future demand for detached dwellings, the major factor is how long that anxiety is going to persist. For example, if January 2023 comes around and people discover that it is simple and safe once again to hop on an airplane and go to Paris, New York or Disney World in California, will they feel different about buying a bigger house?

Housing approvals, even commencements are not a guaranty of completions. It is quite possible that when people are looking at interest rates over 2.1% in 2023, with ongoing construction delays and high prices, they decide it's better to stop than continue.

It's not a risk the RBA seems equipped to contemplate, but it is certainly something hardware retailers should take into consideration.

With the recent federal election now behind us - itself a negative influence on the economy - the hardware retail industry now needs to turn its attention to a changed environment in the housing market. As we all know, it's very likely that the base interest rate will increase to over 2.0% during the coming financial year. That will have consequences for all retailers, but especially for hardware retailers, who have been direct beneficiaries of the historically low interest rates, and the stimulus this has given to the housing market.

Finding the combination of statistics that will help to monitor what will happen in the economy is always difficult, as you need to predict both where change may take place, and where that change will be measurable.

In these stats, HNN has chosen to look at the value of building approvals for houses, non-houses and renovations. In addition, we're also looking at the value of building work done in those categories.

Once again, we would like to thank the Australian Bureau of Statistics (ABS) for providing these statistics so rapidly and comprehensively, despite the budget constraints that have been imposed on this vital function.

These stats follow the conventions we've established at HNN. Each period represents the 12 months ending in the final month/quarter for which the ABS has supplied data, and is designated as a period by the letter "p". Thus p2021 for the building applications represents the 12 months in the period from April 2020 through to March 2021.

Similarly for the building work done stats, which are quarterly, the designation p2021 would represent the four quarters for the months ending in June 2020, September 2020, December 2020 and March 2021.

Houses

Figure 1 shows the charts for houses Australia-wide. The top chart is for building approvals by value, the middle chart is the percentage change, month on corresponding month, for these approvals.

The bottom chart represents the value of building work done. Note that we've presented the building work done data in a slightly different format. Each line represents one of the four quarters of the year, and these are charted across the years. It's our sense that this best conveys how this data changes.

The characteristics of the top chart follow a familiar pattern. September 2020 (the blue line for p2021) shows the start of a four-month arc, followed by the seasonal fall for January, and a very steep rise to March 2021. The approval values remain elevated through to November 2021, fall steeply to January 2021, then climb again in 2022, but at a level that is below that of p2021.

In the middle chart, this is seen in percentage change terms. There is some of the negative "mirroring" effect HNN noted in the retail stats for Flash 94, but it is not statistically stable enough to mark as a trend. What is statistically significant is that growth has been under -10.0% from December 2021 through to March 2022.

The bottom chart for building work done illustrates some of the problems that the construction industry has experienced. Looking at the lines for p2022, the June, September and December quarters all show substantial growth over p2021 - though p2021, shows a decrease in value for the June and September quarters as compared to p2020.

Historically, of course, the March quarter has underperformed the other quarters in value terms, from p2016 to p2020, though for 2021 it hit a historical high of $9.18 billion. Yet it is puzzling that it recorded only a very slight increase for p2022, despite ongoing high levels of demand. That could indicate the difficulties of supply constraints, especially in timber, but it might also hint at further underlying problems.

Not houses

For the ABS category of "Other Residential", a very different picture emerges. The best periods for this category were from p2016 to p2018, with total period approvals of over $30 billion. By contrast, the total value for p2021 was $22 billion and for p2022 it was $27 billion. Nonetheless, of course, the growth from p2021 to p2022 of over 20% is interesting.

As the top chart indicates, p2021 was a particularly rough time for non-houses, with the six of the months under the previous poorest year (in the sample) of p2020. However, beginning with March of 2021, the category staged something of a recovery.

Those changes are shown in the middle chart, for the percentage change. Where growth for p2021 was negative for seven of the 12 months, for p2022 it was only negative for four months, and hit historical highs in growth for three months. That said, however, it also plunged to a historical low for March 2022.

It's when it comes to building work done, as shown in the bottom chart of Figure 2, that the real industry picture emerges. Building work on not houses has hit a new low. The value of building work done is at its lowest point for the past seven years.

Given the higher numbers for approvals, that could indicate cancelled projects, or simply that what resources there are available are being diverted to house building instead.

Renovations

More correctly termed "alterations and additions" by the ABS, these statistics show a number of marked trends.

Looking at the top chart, for building approvals, this indicates that while approval values did start to spike in September 2020, growth became exceptional from February 2021 through to August 2021, then remained broadly positive through to December 2021. That is more clearly illustrated in the middle chart, which shows the percentage change in renovation building approval values.

February and March 2022 both show negative growth. While this is from a very high level historically, as March 2021 reached a historical high, it could also indicate the beginning of a trend.

The bottom chart of Figure 3 shows some of the ways in which the renovations market has been altered. It's evident that December 2020 (which is in p2021) was the first big surge in renovations, with the following March quarter equalling the September quarter. Looking to p2022, perhaps the most interesting feature is how building work done for the June quarter surged to a new high, with the following September quarter actually higher than the December quarter.

Yet, after the initial growth in p2021, the March quarter retreated somewhat. Again, it is difficult to know how much this is due to market expectation and how much simply ongoing restrictions on supply.

Analysis

One of the slight "disconnects" that HNN has observed among retailers and suppliers in the hardware industry is that, when they are asked the question regarding why so many builders seem to be in a somewhat parlous financial situation, with several collapsing, they refer to supply constraints, rising prices for materials, and a shortage of workers.

Those are all forces at work, but ultimately larger builders do not collapse due directly to those causes, but rather because they are unable to obtain further financing. If these shortages and market constraints are all that is at work in the industry, then we would expect financing to be readily available. It would essentially be a bridge over short-term problems.

Certainly, one aspect of the current market is that unusual stresses are being placed on it. However, what remains remarkable is that there are few, if any, efforts being made to improve productivity, or even to change some of the restricting fundamentals of the industry.

The banks and other sources of finance may be reacting to expectations that builders may soon face a raft of cancellations as higher interest rates take effect, but equally they must have concluded that this is, simply, not a resilient industry at all.

The serious economic problem that is looming is that, indirectly, past federal government policies have essentially made housing a special asset class, one which will be protected against significant devaluations. There is a range of social, cultural and economic reasons why that has come about, but history clearly shows that the creation of such an asset class typically ends in disaster.

It's a somewhat unpopular viewpoint in the current economic conditions, but it must be pointed out that housing construction contributes less to the economy than many think. Good housing is certainly a prerequisite of a functioning social structure, but it has few if any genuine spillover effects (as economists call them) that translate productivity and investment in one sector to increased productivity in an adjacent sector.

In fact, housing and construction are often used as a means to disseminate wealth that is earned elsewhere in the economy. That is particularly the case in economies that are increasingly driven by technological achievement more than the transformation of raw materials into simple material goods.

As more and more finance goes to housing, and as it becomes the central asset to the investment plans of many families, the actual productive economy will start to suffer.

That said, what matters most at the moment isn't the immediate past history of two or three years. It is really what happens next that will mark out the future. There is little doubt, however, that this future must contain a pathway to making housing a far less protected asset class, and shifting investment to the most productive sectors of the economy.

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The Australian Bureau of Statistics (ABS) has released hardware retail revenue statistics through to March 2022. Given that these statistics have become difficult to interpret through the usual means, HNN has moved to charting these in comparative 12-month periods.

The current charts are based on the time segments for the 12 months ending in March, which we refer to as "periods", and designate with the abbreviation "p" followed by the year of the end month. So the time segment from April 2020 to March 2021 would be p2021.

So as to get a better grasp on the growth levels as well as overall revenue, we've included a second chart to accompany the primary revenue chart. This second chart shows the month-on-corresponding-month (MoM) growth rates as a percentage.

Australia

It is always somewhat difficult to determine whether it is better to build the statistical picture by starting with individual components of a statistical view, and then build these into a statistical overview, or to begin with that statistical overview.

In this case, the nature of the statistics indicates that the overview might be the best place to start, so we will start by looking at the ABS figures for hardware retail revenues across Australia. Hopefully the reasons for this will become evident.

Looking at the most recent results, for March 2022, the strong uptick for this month that has become a feature of the pandemic period is repeated in original revenue terms. However, in terms of the growth rate (shown in the bottom chart) a difference is apparent.

The March 2020 growth rate (green line) shows the initial sharp uptick that surprised the industry, up 18.0% in MoM terms. For p2021 that fell to 4.3%, then in the current p2022 rose to 8.8%. That is a significant increase, but it is slightly less than the increase for February 2022, which was 9.0%.

Taken in a broad view, the percentage change chart shows that what has happened is a historically large surge in growth from March 2020 through to February 2021. This includes the very high rates for April, May, June and July 2020, which were respectively 26.39%, 37.62%, 31.88% and 27.85%. This contrasts with the best growth rates post the global financial crisis (GFC) and pre-pandemic of 10.61%, 7.61%, 2.26% and 1.69% for those four months in 2016.

That growth surge moderated to around 4.3% in March 2021, then went under -5.0% for April to July 2021 - an almost mirror-like inversion of the growth surge in the previous year.

That mirror-like inversion could benefit from further investigation. Chart 2 has broken out the revenue growth for p2021 and p2022. The dark grey line that has been added is simply the average of these two growth rates.

Looking at the time segment from April through to February, while the growth rates for the two periods fluctuate strongly, the average of the two fluctuates between 14.1% in December, to a low of 9.7% in August - a range of 4.4%. The average growth rate for that period is 11.8%.

March 2022 presents itself as a (temporarily) unique datapoint. That is because it is the first month of the third year of the pandemic. That means that, unlike February 2022 (for example) its revenue is the culmination of three years of higher, pandemic-era growth rates.

Given that, it's perhaps not that surprising that the growth rate for March 2022 breaks out of the "mirrored" range that has held for the previous 12 months. This is really the first somewhat significant statistical indication that there may be a reset downwards in terms of expected growth rates for the future.

If this analysis is correct, and the March 2022 figure is statistically significant in this way, we can start to add some structure to the interpretation of historical hardware retail revenue figures, and set some firmer forecast expectations.

We will delve into that modelling in the Analysis section of this article.

New South Wales

Original hardware retail revenue for New South Wales (NSW), shown at the top of Chart 3, indicates the familiar pattern from the Australia-wide chart, with p2021 and p2022 seemingly disconnected from the four prior, pre-pandemic periods.

Looking at the MoM growth rate chart on the bottom of Chart 3 shows, again, how much of this change took place in p2021. In this case the growth surge extended from April 2020 through to February 2021, albeit with a dip below 20% growth in November 2020.

The mirroring between p2021 and p2022 that can be observed in the national figures is only intermittent for NSW, evident in April through to July, and then in a diminished form from December through to March.

In fact, what is most interesting about the MoM growth chart is that growth rates through p2022 are not for the most part historically high, with growth rates for p2017 and p2018 close or higher - only December 2022 shows unusual growth.

The conclusion from this is that while growth in p2021 was largely driven by pandemic factors, for p2022 those diminished, and were overshadowed by the more familiar factors associated with the tight housing market in NSW.

Victoria

As the state that arguably suffered the most during the pandemic years, there is often an impression that Victoria (VIC) also saw the sharpest rises in hardware retail revenue. However, as the chart shows, the state's experience is mid-way between that of NSW and South Australia (SA). There are periods of a surge, but for the most part revenues are boosted, but have some relation to pre-pandemic revenues.

For example, the annual high spending period from October through to December was certainly boosted considerably during the pandemic, with November 2020 revenue hitting an all-time monthly high of $677 million. In fact, as shown by the top revenue chart, if there is a single anomalous number to point to, it would be for revenue in February 2022, which did not decline on January revenue as much as would be expected.

The bottom chart shows the familiar surge starting in March 2020, but it truncates quite sharply in August 2020, with growth dropping below the level of August 2019. There is a brief resurgence in November and December 2020, but from January 2021 through to March 2022 growth levels are below those of p2019 - with the exception of those numbers for February 2022.

In terms of a mirroring between p2021 and p2022, there's a muted form of that from April through to October but then it begins to break down. As with NSW, the housing market has a strong influence on hardware retail revenues in VIC.

Queensland

In some ways, it is Queensland (QLD) that displays the most clearcut increase in hardware retail revenues through the initial year of the pandemic. As the top original revenue chart in Chart 5 shows, the two pandemic years show a wide gap back to the pre-pandemic years.

Looking at the MoM growth chart on the bottom, it can be seen that from March 2020 through to February 2021, the growth rate remains above 20% - except for a blip down to 19.0% in August 2020.

We can also make the case for a degree of mirroring between p2021 and p2022, as shown in Chart 6.

It's a relationship that holds up fairly well from April to November, as illustrated by the relatively flat average line, with the average growth rate at 12.4%.

South Australia

The hardware retail revenue trend for SA is somewhat like that for NSW in that the p2022 revenue has mostly exceeded the p2021 revenue, but it is also like VIC in that the boost to revenue still follows the pattern from pre-pandemic years.

If there is something unique about the SA figures, it is the ongoing high level of performance through the first quarter of 2022, with all three months significantly above the 2021 levels.

Looking at the MoM growth chart, there is the familiar surge starting in April 2020 and continuing to September 2020, with a resurgence in November and December 2020. For most of p2022 the growth rate is less than that of p2018, with the exception of the final three months, January to March, with the growth rate going above 20% in February.

Western Australia

At first glance, the two charts in Chart 8 for Western Australia (WA) seem a little contradictory. While the red line marking p2022 is clearly above the others in the top chart for original revenue, in the bottom chart for MoM growth it is the blue line for p2021 that dominates.

The reason for this is that the comparison that needs to be made for the growth chart is between the green line, for p2020, with the blue line for p2021. What makes that hard to see is that two periods, p2017 and p2018, both outperformed p2020.

This really goes to indicating that the fluctuations in hardware retail revenue for WA have been considerable in the past as well. One of the important facts about WA is that there was a sustained period of declining revenues, producing negative growth, from January 2017 through to May 2019, with the only exception being August of 2017, which showed growth of 1.0%.

For example, the May 2020 spike in growth to 40.4% is based on revenue of $212 million in May 2020 compared to revenue of $151 million in May 2019. However, compared to the local high for revenue in May 2016 of $174 million, the increase for May 2020 was "only" 22.0%.

That said, WA did see the same surge, running from April 2020 through to January 2021, with only September 2020 and November 2020 dropping below a 20% growth rate.

It's probably best, given its revenue history, to remember that while WA is influenced by events such as the pandemic, they are not as determinative as they are for the other states and territories. Particularly with its reliance on natural resources it seems likely hardware revenues will follow a more positive pattern than that of the rest of Australia.

Australian Capital Territory

The Australian Capital Territory (ACT) obviously has a number of unique characteristics: it's small, dominated by the Canberra economy, and relies for its prosperity largely on government funding.

As a result, its revenue statistics are unique in their pattern. While the other states detailed above all do have at least some form of mirror symmetry to their stats, the ACT does not. It does have a p2021 growth surge, which begins actually in p2020 for its March 2020 figure, and continues on to February 2021.

Yet its growth then does go negative during p2022, from April to September 2021, before climbing to over 10% in December 2021, and continuing at that level.

Analysis

When we speak about "mirroring" and symmetry around an axis of averages, we're really referencing a system where there is a burst of activity, followed by countervailing activity which "balances out" the burst, and provides an ongoing average.

That average is really key to understanding what is going on, as it represents the forecastable growth rate going into the future. When that forecastable rate changes sharply, however, this can signal the end of that "give some, take some" regime, and the resumption of a less-balanced process.

When we look at the numbers for Australia as a whole, the symmetry becomes most obvious, because across that wide of a range the major "signal" in the economy becomes clear, and the minor signals - which differ from region to region - tend to counter each other out, diminishing into background noise.

That "noise" for the most part is going to consist of forces related to the property market, the differing effects of lockdowns and COVID-19 itself, as well as cultural assumptions. That is likely why QLD represents a better symmetrical model than other states. It was less affected than other states, and its housing market operates under very different constraints to NSW, VIC and SA.

Future influences

One way to look at the surge in demand that hardware retail has experienced is to see the pandemic as a catastrophic event that caused people who had one kind of living situation to change this as swiftly as they could to a different living situation.

There are some real questions about how we forecast future demand that arises from this set of changes. Will that transition be completed, and spending fall off, or is the transition more constant, resulting in a continued elevated level of spending? Will the spending be displaced in the future by other spending, on activities such as overseas travel?

Then, of course, there are the linked economic concerns of inflation and interest rates. There is going to be a steady lift in interest rates over the coming financial year, to a level likely above 2.0%. That is in response to increases in inflation, and consequently the cost of living. It should be noted that the purpose of a rise in interest rates is to reduce demand, resulting in a surplus, which will then decrease prices.

That is made more complex by ongoing supply-chain concerns, which create periodic scarcities, and add inflationary pressure through increased logistics costs.

It's also important to note at this point that the COVID-19 pandemic is very far from being over. There are still building sites that get shut down because some key operator has contracted COVID-19 and needs to isolate/recover for a week or more. There is always the potential for a more contagious/severe form of COVID-19 to take hold, and bring back restrictions.

Outcomes

The best that HNN can say at the moment is that the next several months of statistics, through to June 2022, are going to be vital in developing a longer-term forecast. We can say that the March 2022 stats do seem to mark some kind of a turning point, and that the initial analysis looks like there will be a net decrease in growth from the historically high averages of the past two years through the June quarter of 2022.

We would also signal that in terms of a longer-term forecast, given the current status of the housing market, we believe that the need to change policy to reduce house price growth will result in change. For example, we could see a change in taxation policy that would phase in a maximum limit to the amount of interest that can be tax-deducted, with a higher limit for first home buyers.

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What happens next in Australia's housing market - and hence in the construction market - is the key question every forecaster wants to answer.

That is particularly a key question when it comes to renovations - referred to by the Australian Bureau of Statistics (ABS) as "alterations & additions" (alt-adds). Many hardware retailers rely on expenditure in the alt-adds category more than in the new buildings category for revenue.

It's a difficult question to tackle, mainly because the two-year period between March 2020 (when the COVID-19 pandemic began) and February 2022 (the most recent statistical period) saw the housing market follow highly unusual patterns. This is especially the case with the ABS stats for building approvals, which we are examining in this article.

At the moment, forecasters are trying to work out to what extent the market will be exceptional during calendar 2022, and how fast underlying, long-established market patterns (such as seasonality) will begin to reassert themselves.

For example, in most of Australia's states and territories, the long-established patterns for January and February (which consist of a sharp decline in January followed by a moderately sharp increase in February) do appear to have continued to exert a strong influence. However, what happens in December does not, for many states and territories, follow any kind of pre-existing pattern.

As that analysis indicates, one thing HNN has changed for this period is the kind of charts we're using to better understand the stats. Without set patterns, we've found the best charts are typically those that layout 12-month periods on a monthly basis so that it is easier to compare year-on-year results.

It's also the case that the pandemic has affected each state and territory in a unique way, which means that overall Australia-wide stats have less relevance to retailers. So in the analysis that follows we adopt a state-by-state approach.

With the most recent stats available ending in February 2022, we're using 12-month periods that end in February. So the period from March 2020 to February 2021, for example, we will refer to as p2021, using the ending year in the reference.

New South Wales

Arguably the first break from the standard pattern for approvals began in November 2020 for New South Wales (NSW), though the value of building approvals in both September and October 2020 equalled or exceeded previous highs.

Then in January 2021 the value of approvals went below that for January 2020. However, February 2021 saw the first really sharp spike upwards, followed by abnormally high values through to November 2021, followed by an incredibly high value of $410 million in December 2021.

To put that in perspective, the nearest high to that was the figure of $329 million in February 2021, and prior to the pandemic, the highest monthly number was $324 million in March 2017. For p2022 total building approvals were worth over $4 billion, up from less than $3 billion in p2021.

The real question is what to make of the values for February 2022, with building approvals totalling $312 million lodged. That's below the February 2021 value of $329 million, but far above the next highest February number of $259 million in 2016.

Victoria

For Victoria (VIC) p2022 was close in total value to that of NSW, coming in at just under $4 billion, while p2021 for VIC was about $50 million less than for NSW, at $2.92 billion.

Values of building approvals during p2021 were actually relatively subdued in VIC. If the high values at either end of the period, for March 2020 and February 2021, are excluded, the total value of approvals over the remaining 10 months was just 2.2% up on those for the same 10 months in p2019.

The way in which VIC got to the high number for p2022 was very different from NSW. The peak for VIC was in August 2021, with a secondary peak in March 2021. December 2021 was still up considerably on both December 2020 and December 2019, but nowhere near the peak achieved in NSW. The drop in January 2022 was shallower than in NSW, and the sharp gain in February 2022 was a little higher.

Queensland

The trajectory of the value of alt-adds building approvals in Queensland (QLD) is also unique. Unlike NSW and VIC, the lift in value starts very early, in June 2020, reaches its peak in February and March 2021, peaks again in August 2021, then remains elevated but declines through to December 2021. In January and February 2022 the levels return to be in line with those for p2020 and p2019.

Value of building approvals reached $2.6 billion in p2022, up from $2.3 billion in p2021, and $1.8 billion in p2020.

One way of reading these trends is that the state received a strong stimulus through to August 2021, and since then has been converging back to the historical trends.

South Australia

In South Australia (SA) the pandemic stimulus to alt-adds approvals seems to start in November 2020. One of its first effects, which continued from p2021 to p2022 was that values for December, which typically sees a fall from a moderate peak in November, were elevated, followed by a steep fall in January, and steep recovery for February.

The three major peaks in values took place in May 2021, September 2021, and February 2022. Total value for p2022 was $605 million, $477 million for p2021, and $424 million for p2020.

Western Australia

As the one Australia state that was relatively unaffected by the COVID-19 pandemic, alt-adds values were relatively contained during both p2022 and p2021.

There was a significant increase in February 2021, and elevated levels continued through until September 2021, with, arguably, elevated levels also for December in both 2020 and 2021. However, the values have returned to follow long-term trend patterns since October 2021.

Total value in approvals was $737 million for p2022, $616 million in p2021 and $542 million in p2020. It's worth noting that p2016 recorded total value of approvals at $715 million.

Tasmania

As with other smaller regions in Australia, the value of building approvals tends to be more volatile in Tasmania (TAS). Nonetheless, there is some evident stimulus based on the pandemic.

Identifiable stimulus probably started in September 2020, and continued through to February 2022, though December 2021 saw a low in line with past trends.

Total value of approvals for p2022 was $186 million, for p2021 it was $159 million and p2020 was $133 million. The two major peaks were reached in March and May 2021, at $19.9 million and $19.4 million respectively.

Northern Territory

The Northern Territory (NT) shows next to no stimulus due to the pandemic. The only two months that might show stimulus are June and November 2021, but these are within the range to be the result of other causes.

Total building approval value for p2022 was $111 million, for p2021 it was $99 million, and for p2020 it was $131 million.

Australian Capital Territory

The Australian Capital Territory (ACT) is highly unusual in that there is a moderately strong stimulus during p2021, but only a very mild stimulus evident in March and January for p2022.

The p2021 stimulus ran from July through to February, but with drops to a close to historical range for both October 2020 and January 2021. Total value of building approvals for p2022 was $106 million, for p2021 it was $149 million, and for p2020 it was $144 million.

Analysis

The housing market has long been thought to see new construction boost hardware sales during housing market booms, and renovations boost hardware sales during times of housing market busts. The markets which the COVID-19 pandemic gave rise to have led to extreme activity in the housing market, and this seems to have boosted demand in the alt-adds market as well.

Partly that is simply because the nature of the pandemic - and the reality or threat of lock-downs where families were confined to their homes - increased demand for more interior space, and better exterior spaces. Also, with house prices increasing, more families found it made sense to renovate where they lived - which added to their dwelling's amenity, but also increased the value of the residence.

Looking to the future, there are multiple questions as to the future of the housing and construction markets. One major factor is how much impact an increase in interest rates will have. With inflation hitting a high in March 2022, rates are now forecast to being increasing in May 2022 - a big revision from the Reserve Bank of Australia's previous position that they would increase near the end of 2023. It seems likely now that rates of 3.0% are likely during calendar 2023.

Equally important is the actual role of inflation, which will impose its own restrictions on spending. The three-way combination of inflation, rising interest rates and sub-par increases in wages could see the Australian economy under stress by the end of 2022.

This combination will not only likely see market prices for dwellings decrease, but also homeowners will find budgets stretched to the extent that they are likely to cut back on renovations as well. Thus we could see a market move from a boom in both dwelling construction and renovations, to bust in both areas.

From a longer term perspective, the question that lingers is whether the pandemic has permanently altered how Australians regard their homes, or whether the concentration of wealth and investment in houses will diminish by the end of 2023.

In terms of the short term, the most likely outcome will be in FY2022/23 for renovations to revert in NSW, VIC, QLD and SA back to the level they held back in FY2018/19, which is to say somewhat below the average levels of between FY2014/15 and FY2019/20.

In WA, there may well be a belated increase in alt-adds approval values, as the resources market continues to increase in value over the coming financial year.

For TAS, NT and ACT it's likely that highly local factors will continue to influence their building approval values.

In a broader, macro sense, however, it is likely that FY2022/23 will see the beginning of a push to re-imagine how the capital cities manage building zoning and restrictions. The high levels of the property markets, the ongoing lift in the price of even entry-level housing are clear signals that cities need to evolve and change to meet the needs of a changing society.

The Australian Bureau of Statistics (ABS) has released its stats for Building Activity. One of the more interesting categories of these stats is that for "Number of Dwellings Approved but Not Yet Commenced".

This is interesting because it could provide some information relating to whether there has been a material change in the willingness for builders to go ahead with construction, as the COVID-19 pandemic nears its end, and the markets grow more certain that interest rates are set to rise, likely slowing the housing market as a result.

Chart 1 shows these stats on a trailing 12 month basis for new houses, which, as they end with the December quarter, is the same as the calendar year.

The reddish-brown line for all Australia uses the right hand axis for values. This indicates that there has been a sharp change, Australia-wide, with the value going from around 39,000 for 2020, to around 53,500 for 2021.

In terms of the states and territories, New South Wales (NSW) is something of an outlier, as it indicates the peak number occurred in 2017, reaching over 15,000. The 2021 number is 13,100.

For Victoria (VIC), South Australia (SA), Western Australia (WA) and Queensland (QLD), 2021 represents a peak over the past 12 years, though this is fairly muted for QLD at around 5900.

Chart 2 shows the percentage change between each years and the previous corresponding period.

Aside from the Australian Capital Territory (ACT) - which tends to be highly volatile - WA and VIC show the steepest increase, while most of the other states are close to the Australian average of 38.0%.

Analysis

While it is evident from these charts that something is certainly happening in 2021, it's not entirely clear what that is. This could be due, for example, to a lack of capacity in the construction industry, which, coupled with an uptick in building approvals, has resulted in higher levels of static projects.

However it is also possible that we are seeing a harbinger of the first shadows cast by the upcoming increase in interest rates.

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The release by the Australian Bureau of Statistics (ABS) of hardware retail sales through to February 2022 is a good opportunity to look in clear detail at the effects of the COVID-19 pandemic. Those effects began in March 2020, so we can see, by looking at these sales for the 12 months ending in February, exactly how the two main pandemic years have shaped the market.

HNN refers to these 12 month timespans as "periods" (p), and they are designated by the year in which they end, so p2022 goes from March 2021 to February 2022.

It's perhaps best to begin by setting some context to these stats. One thing that we find in the stats for most states is that both p2021 and p2022 show significantly higher retail sales than those for the period prior to 2021. But how much higher, in general?

To provide guidance on that question, Chart 1 takes the average of p2021 and p2022 (the recent grouping) then compares that to the average for the five periods p2016 through to p2020 (the past grouping), and represents the difference as the percentage growth of the recent over the past grouping.

As that chart indicates, on an Australia-wide basis the recent group shows consistent growth of between 25% and 30% as compared to the past group as an average. That would be a big change in any market, but it's particularly outstanding in hardware retail, as there has not been such a big shift over the previous 30 years.

The big question, of course, remains as to whether those elevated sales will persist through FY2022/23. It's evident that p2021 was heavily influenced by consecutive pandemic lockdowns across Australia, while p2022 was partially affected by those, but also by extraordinary housing price rises.

In particular, if interest rates rise above 2.0% (as seems likely by the end of calendar 2023), will there be a slide in housing prices and a consequent decline in hardware retail sales?

These questions really come back to the key question: over the past two year have we seen ephemeral events that have boosted sales, or have we seen some structural changes to the hardware market?

HNN's own view, as we will detail in our Analysis section at the end of this article, is that it's not just we do see evidence of both these, but that structural change may be based on these boosts in sales. In brief, as hardware stores have become more a part of the monthly shopping routine, the breadth of products they can sell has also increased.

New South Wales

Chart 2, for New South Wales (NSW), shows (as do those for several, but not all, states and territories) how sharply demarcated the two pandemic years have been.

It's possible to see these stats as consisting of three different "bundles"; bundle one for the periods between 2011 and 2014, bundle two is for the periods 2016 through to 2020, and bundle three is (so far) the two pandemic periods. In addition, there is a transitional period, p2015, between bundles one and two.

Chart 3 shows the total retail sales for each of these periods over 30 years.

While there has been a historical period of ongoing increases, such as from 1999 to 2006, and from 2014 to 2017, there is nothing that comes close to steep increase from 2020 through to 2021 and 2022.

Victoria

The effect of the pandemic on hardware revenues in Victoria (VIC) was quite different to NSW. One key difference is that while both states saw revenues increase at historically high levels, VIC was more subdued than NSW - in part because where in NSW revenues for p2017 partially exceeded revenues for p2018 through p2020, in VIC revenues for both p2019 and p2020 were significantly higher than the preceding four periods. This is shown in Chart 4.

For example, in both 2020 and 2021, revenues for the month of October were around $590 million, while in 2019 they were $563 million - on average an increase of 16.5%. Similarly, in February 2021, revenues were $478 million, quite close to the pre-pandemic revenues of $459 million in February 2020.

That said, the 12-month numbers do show how significant the revenue gains still were for VIC. This is shown in Chart 5.

It's also notable that, in contrast to NSW, revenues for p2022 were lower than those for p2021. That's largely because VIC did suffer significantly more from long and very tough lockdowns than any other state or territory. With a reduction in federal emergency support funding (such as JobKeeper), and the interruptions to the construction industry, the economy itself began to suffer.

VIC has also seen less of a boost in house prices. The ABS Residential Property Price Index (which has ceased as of 2022) indicates that in comparing the December 2020 quarter with the December 2021 quarter, Sydney saw a price rise of 26.7% while Melbourne rose by 20.0%. CoreLogic's index through to 28 February 2022 shows an annual increase in Sydney house prices of 22.4% versus Melbourne's 12.5%.

Given that, probably the single most significant figure in all the VIC stats is the revenue for February 2022, which at $536 million is the highest it has ever been for that month, and 12.2% up on February 2021. Given a fading house market, and the fading of pandemic influences, this could be a pointer towards a sustained higher level of revenues for VIC.

Queensland

While Queensland (QLD) was less directly affected by the pandemic (though heavily indirectly affected due to a decline in the tourism industry), it did see a very strong growth in interstate migration. For FY2020/21 QLD recorded a net increase through interstate migration of 30,939 people, while both NSW and VIC saw net losses.

The result of this and a range of other factors saw QLD benefit as much on a percentage basis as NSW and VIC. Chart 6 indicates this.

Chart 7 indicates the level of overall gains on a 12-month basis.

This is very much a fundamental, structural change to the QLD market. While its effects may fade in the future, as its intrastate migration numbers decline, it's unlikely that these will reverse quickly. One major factor is that QLD is less centralised that both VIC and NSW. While the medium house price in Brisbane is close to that of Melbourne, in the regional areas, housing remains more affordable - for example, the median house price in Bundaberg is under $350,000, according to CoreLogic

South Australia

While in South Australia (SA) the revenue pattern for p2021 followed a similar pattern to other states, the pattern for p2022 is unique. In that period revenues declined sharply from April to July 2021, before increasing sharply in August 2021. The July 2021 revenue number was $92 million, only slightly above the July 2019 number of $90 million. Yet by August 2021 revenues had climbed to $121 million, well above the August 2019 number of $93 million. Chart 8 shows this pattern

That seems to have been triggered by a renewed lockdown that began in July 2021, in response to the Delta variant getting out of control in NSW.

Whatever these variations are, the 12 monthly numbers show how sharply revenues increased for both pandemic years, as seen in Chart 9.

Given the steeper than usual fall in revenue through to February 2022, it's likely that March 2022 will be a vital statistical month in forecasting future revenues for SA.

Western Australia

It's slightly difficult to comprehend just exactly how much Western Australia (WA) escaped the direct influences of the COVID-19 pandemic. Perhaps the simplest number is just how few deaths were COVID-19 related in the state, totalling only 88 by the end of March 2022, compared to 2830 in VIC, 2190 in NSW and 796 in QLD.

WA does show some signs of revenue stimulus from April through to August 2020, but these can be difficult to judge, as seen in Chart 10.

The initial impression is that revenues have seen only a moderate increase, but that's really only in comparison with p2017 (the dark blue line). The pre-pandemic period, p2020 (the black line), shows that the increase in revenues was really more inline - in percentage terms - with that of VIC. Comparing the average revenue across the two pandemic periods with that of the average of the five preceding periods, there was an increase of over 20% for May, July and January.

Chart 11, tracing the 12 monthly figures shows this more clearly.

Still, while that increase equals the other states in relative terms, it is evident that across a broader, historical context, the increase is less unusual.

Given the ongoing increases in commodity prices expected through FY2022/23 it is likely that WA will be the state most insulated from the looming negative effects of an interest rate increase.

Australian Capital Territory

The Australian Capital Territory (ACT) is always difficult to compare with other Australian regions as it has such a unique composition. Not only is it a relatively small region, it's also highly urbanised, and has an economy largely reliant on government employment.

Given those factors, it's not that surprising that it showed a very strong boost in revenues across the two pandemic periods, as shown in Chart 12.

This shows a very high level of stimulus, along with some very high volatility. Chart 13, for the 12 monthly periods, shows how unusual this pattern is for the territory.

It's possible to draw a nearly straight trend curve from p1998 through to p2020, with the only major bump in 2010, showing a steady, constant increase in revenues. That makes the sharp increase for p2021 and p2022 stand out.

Comparing the average revenue across the two pandemic periods with that of the average of the five preceding periods, there are seven months registering increases of over 48%, with a peak in April of over 54%.

Northern Territory and Tasmania

Obviously, combining stats for the Northern Territory (NT) with those from Tasmania (TAS) makes little or no sense. However, the ABS was not able to source revenue numbers for much of the pandemic period, so we can only derive these numbers by subtracting the sum of the other states and territories from the total, Australia-wide revenues. As such, they are slightly inaccurate, as a number of other, very small areas are included in the Australian total.

However, some reference may be preferable to no references at all. Chart 14 shows the monthly comparison:

Chart 15 shows the 12 monthly periods:

Australia

The effect of the Australia-wide statistics is to average out the results from all the states and territories. This can be seen clearly in the Chart 16, for the monthly numbers.

Perhaps the most interesting characteristic of this chart is how the numbers for p2022 overtake those of p2021 from September 2021 onwards. That is likely a strong indication of the effect of the prices rises in the housing market.

Chart 17, for the 12 monthly periods, carries its own surprise as well:

While this chart does indicate elevated levels for revenues in p2021 and p2022, these seem somewhat less out of sequence from the historical record. Comparing the average revenue across the two pandemic periods with that of the average of the five preceding periods, the only outstanding period is May, with an average increase of 36%. Seven of the monthly periods show an average increase of below 28%.

Finally, it's worthwhile looking at a broader historical chart for Australia. Chart 18 shows the monthly numbers going back to 1984.

Perhaps the most interesting characteristic of this chart is the gradual evolution of both October and November as higher revenue periods, which seems to have started back in 2002.

It also demonstrates just how unusual the last two periods have been for revenue growth. There is simply no other similar rapid increase.

Analysis

As we mentioned in the introduction to this article, the hardware retail industry has to grapple with considering how much of the recent increases in revenues are going to be ephemeral, and how much indicates a structural shift.

Added to that is what exactly the effect of an interest rate rise will be. It's possible that some structural changes have been made, and that these could to some extent be undone by interest rate increases.

That is going to depend to a large extent on just how rapidly interest rates do increase. While some economists predict rates as high as 3.0% by the end of 2023, a more modest prediction would be that rates could hit 2.0% by the end of FY2022/23.

Even at that rate of increase, however, which would likely take place over six separate stages, homeowners are likely to find themselves facing new financial stresses. As HNN has suggested in the past, it's not as though homeowners haven't known this was coming. They have decided that, given the upward trend in the housing market, it was better to take the chance on somehow "muddling through" a time of financial stress.

It's likely that much of that stress will be concentrated on VIC and NSW, which is to say Melbourne and Sydney, with some stress also in Brisbane. What is just as concerning as the direct effect on homeowners, is the spillover effects into the economy. The ongoing low wage growth has been a strong indicator, in HNN's opinion, that the economy contains fragilities. A sudden decline in consumer demand could see a partial collapse in some industries.

That could be of particular concern to hardware retailing. One of the secondary effects of the pandemic increase in revenues has been an increase in local foot-traffic into independent stores. This has enabled stores to expand their ranges to include more "common purchase" items, such as light bulbs and pet supplies.

This can have a dual effect. Not only do retailers pick up an extra sale - a customer comes in for a can of paint, and buys a dog collar as well - but reverse sales also happen - a customer stops by for a lightbulb and picks up a small screwdriver.

Once foot-traffic drops down below a certain level, maintaining those lines becomes less possible, and the sales revert to highly trafficked stores such as supermarkets.

That said, it is most likely that the increase in interest rates will be more of a short- to medium-term event, with an eventual "normalisation" by the end of 2024. So the question for the hardware industry really comes down to how best to handle a moderately high level of uncertainty over the coming 30 months.

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With the Reserve Bank of Australia (RBA) highly likely to increase interest rates in either June or July 2022, there is considerable attention focused on just what that will mean for housing markets, and the general cost of living.

While hardware retail typically has managed to be less affected by these changes in the past - when house sales go down, renovations go up - this increase is more likely to have a strong effect. On house prices alone, many economists are predicting a fall in the double digits during the 2022/23 financial year.

One statistic that is useful in sorting out what might happen in the property market is the Australian Bureau of Statistics' (ABS) counts of building approvals. As New South Wales (NSW) and Victoria (VIC) are the two states that have seen the highest increases in house prices, HNN has focused on these. To provide a good sense of context, we've charted these numbers over the past five consecutive years, looking at 12-month periods ending in February (the most recent stats are for February 2022).

New South Wales

There are some interesting trends popping up in NSW - in places you might not usually expect them.

Houses

Looking back to the pre-pandemic year of the 12 months ending in February 2020, it's evident that from August 2019 onwards house approvals were at a five-year low.

They only really began to improve from September 2020 onwards, but stayed below or close to the levels for 2017 and 2018 really from March 2021 through to August 2021. Since then, they've followed a similar path to 2017/18, though January 2022 saw them fall close to January 2020.

Terrace houses

The big surprise here is that there was a strong surge in terrace house approvals in NSW for March through to May of 2021.

While since then they've trended down to be closer to past approval rates, they have continued to, in general, outpace past levels.

That's a bit startling because the level of approvals for March 2020 through to February 2021 was quite low, with the exception of October 2020.

That higher level of performance returned somewhat in January and February of 2022.

Apartments under four storeys

This has not been a big category for NSW since August 2018.

There have been some small surges in the pandemic years, notably in October and November of 2020, as well as May 2021. However there has been a strong slump from August 2021 through to February 2022.

Apartments of four to eight storeys

This was a category that performed strongly in the past, particularly from July 2017 through to February 2018.

During the pandemic time, there has really only been one spike, in September 2021, but that followed a steep drop in August 2021. In general, it is a category that has slightly underperformed the numbers of the past five years.

Apartments nine storeys and above

This tends to be a somewhat volatile number, in part because each building typically provides a large number of dwellings.

In the two pandemic years, there has really been only one significant peak, in April 2021, though both November 2020 and September 2021 showed high numbers. In general, however, this category has underperformed in pure numbers, and has seemed to go down since May 2021.

Victoria

Where the NSW market seems elevated, but shows past volatility that would have been more significant at the time than the volatility of the pandemic years, the VIC market has evidently been very strongly stressed by the pandemic.

Houses

That stress shows up very clearly in the chart for house building approvals.

It's notable that approval levels were a little elevated from September 2020 through to January 2021, but from February 2021 they really took off, reaching a peak in March 2021, and remaining above past numbers through to August 2021. Since then, they have fallen, but just essentially back to the levels of previous years, though January 2022 did mark a low point.

Apartments under four storeys

As with NSW, this has not been a very active category over the past five years.

The most startling number is the sudden surge upwards in February 2021, followed by relatively high numbers in both March and April 2021.

It's all the more startling as from February 2020 through to January 2021, the numbers were very low, and more recently have remained subdued since May 2021, excepting a peak in December 2021.

Apartments from four to eight storeys

The story in this category is the contrast between the numbers for the 12 months to February 2021 with the 12 months to February 2022.

While this has also been a somewhat volatile category for VIC, it's clear that during 2020 it underperformed even the lacklustre 2019 period. In five-year terms, it managed the lowest numbers over five months. In fact 2021 started poorly, with the lowest numbers from February through to April.

However, after May 2021, the numbers began to pick up, and remained relatively robust through to November 2021 before falling to another five-year low in January 2022 - only to recover strongly enough to hit a five-year high in February 2022.

Apartments nine storeys and above

This has always been a somewhat subdued category when compared to NSW, with the exception of late in 2017, so while numbers were low during the pandemic years, that was not really exceptional.

Perhaps the most notable numbers are the higher levels achieved in both December 2021 and February 2022. But record five-year lows were achieved in January and February 2021, April 2021, as well as September and October 2021.

Analysis

What does all this data tells us? The primary thing is that February 2022 numbers indicate what we might take as a period that is mostly post-pandemic, and also mostly pre-interest rises. There is a kind of "normality" in the generally steep falls in January 2022, followed by that recovery back to generally higher numbers.

The March and April 2022 building approvals are likely to be highly influenced by events such as widespread flooding in NSW and Queensland, and the growing uncertainties brought about by the impending federal election.

In terms of interest rates, this is nothing that is going to surprise anyone - though one expects just how quickly the rates climb back above 1.5% may still surprise some.

HNN concluded some time ago that Australian homebuyers have largely decided that low interest rates meant that this was their only chance to convince banks they could afford to buy certain houses - especially in VIC. While cognisant of the upcoming increase in their house payments, they've decided to "tough it out" for three or four years of potentially high repayments and even the prospect of their homes going "under water" (in the financial sense, of course).

How well that works out for them is going to depend largely on how the wider economy performs. There are real economic weaknesses that remain unaddressed. It's particularly distressing that low wage growth, for example, is seen as a causation, and not as a strong symptom of underlying problems. As HNN has repeatedly stressed, the real cause is continuing lack of re-investment in businesses, which is partly driven by a lack of productivity growth - which is, in term driven by a lack of investment.

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The recent Australian Bureau of Statistics (ABS) numbers outlining the record-breaking increase in capital city house prices during calendar 2021 have focused attention on the potential for a housing market crisis developing in FY2022/23.

The ABS numbers indicate that overall residential prices increased by 24% in capital cities across Australia. However, when the focus is shifted to house prices, on a quarter-on-corresponding-quarter basis, increases have gone over 30% in some capital cities, as illustrated in Chart 1.

Concerns have increased as the US central bank, the Federal Reserve, has signalled US interest rates will reach 1.9% by the end of calendar 2022 in a move to curtail consumer spending and thus curb inflationary trends. That rate target has increased certainty that Australian interest rates will also head upwards early in FY2022/23.

None of this is unexpected. For the past four years (at least) many respected senior economists have been sitting at their desks with their fingers - metaphorically - pressed into their ears, waiting for the housing market to implode.

That irrationality has been clearly detailed by economists such as the Nobel Prize (2013) winner Robert Shiller, who has explained in his book Narrative Economics how little rational basis there often is to price rises in housing and other markets. There is not much doubt that in the market's current state, achieved in the second half of 2021, house prices are now going up just because, well, house prices are going up. House buyers are now worried they will miss out on the investment opportunity. So, the market has achieved that circular logic where past rises fuel future rises, in a structure somewhat like a Ponzi scheme.

The problem is, of course, that once that positive market signals goes negative, or even declines significantly in strength, the market can crash.

Rationality in the housing market

Rationally, house prices should rise in response to improving economic conditions. In the 2021 boom, however, it has been quite the reverse. House prices have risen due to the application of a strong stimulus, in the face of an economy that did not fare as badly as expected.

The real stimulus, however, has actually been a lack of certainty and a perception of threat. Faced with lockdowns and the need to make their houses be everything from a schoolroom to an office to a gym, homeowners wanted to either get a bigger house, or move outside of metropolitan regions.

The real problem is that now the economy could be heading towards a triple-threat. While there are signs that the latest mutation of COVID-19, the BA.2 variant of Omicron, is more contagious, and is boosting infection rates in New South Wales (NSW), the most likely solution to that is an increase in takeup of the third, booster dose of a vaccine - and potentially a fourth vaccination as well.

Secondly, of course, there is the effect of inflation, and how this relates in particular to increases in wages. In classical economics, wage equilibrium is achieved when wages growth is equal to non-wage based inflation plus productivity. According to Australia's Productivity Commission, multifactor productivity went up just 0.18% in FY2020/21, below the five-year average of 0.35%. Labour productivity in contrast went up by 1.07% for FY2020/21, above the five-year average of 0.91%.

As Chart 2 shows inflation has moved to be above growth in the wage index, even without taking productivity gains into account. While some inflationary pressure comes from resolvable supply issues, other causes, such as rising petrol prices, are likely to persist through to the end of 2022.

Thirdly, there is the problem of how you stop inflation in an economy. That means cutting government expenditure and allowing interest rates to rise - essentially, you reduce consumer expenditure. Demand falls, supply increases, and prices are cut, bringing inflation back down.

So Australia could face a reduction in the perception of the pandemic threat (thus limiting housing demand), inflation above 3.0% which continues to reduce real wage growth, and the introduction of higher interest rates to curtail inflation. That combination would likely result in a fall in overall residential dwelling prices.

Of course, that is not what the Australian federal government has planned. Some factors, such as the resolution of constrictions in the supply chain, will reduce inflation - or so it is hoped. But the key cornerstone to the government's plan is that a continuing decrease in unemployment will lead to an increase in wages.

It's a case of classic market economics: more people employed means fewer people available for jobs, so wages rise as some employers move to hire employees away from other employers. Yet that relationship does not seem to hold in the current economy. As the governor of the RBA, Philip Lowe, put it in his keynote address to the AFR Business Summit on 9 March 2022:

The RBA's central forecast is for growth in aggregate labour costs to pick up further as the labour market tightens. This pick-up is likely to be gradual, though, given the multi-year enterprise agreements, the annual review of award wages and public sector wages policies.

There are, however, uncertainties about the future growth of labour costs. This is partly because we have no contemporary experience of a national unemployment rate below 4 per cent. The closest experience we have is that in the years leading up to the pandemic some of the larger states had unemployment rates around 4 per cent and wages growth hardly moved.

Chart 3 shows the relation in NSW between the percentage increase in hourly wages to the unemployment rate.

NSW makes the best test case because its monthly unemployment rate has dipped below 4.0% during certain months recently. This chart does indicate that there may be some relationship between a falling unemployment rate and increases in hourly wage rates. Yet it is not quite the optimistic relationship that the current government, or even Mr Lowe, might hope for. It looks as though, mathematically, if the unemployment rate does go down to 3.7%, for example, hourly wages will increase, but probably to a level around 2.7% to 2.8%. If inflation remains at around 3.0%, and labour productivity continues to improve at around 1.0% a year, then real wages, or simply "fair" wages, will continue to go backwards.

What is hoped for, of course, is that there will be a "magic" unemployment number that will see the relationship between unemployment and wage rises become exponential - a curve rather than a straight line. That might be possible, but it is likely to require that the unemployment rate is held down below 4.0% for two or three quarters. With the government signalling there will be a reduction in stimulus during FY2022/23, it's more likely the unemployment rate will settle at between 4.1% and 4.5%.

There are other factors that mitigate against this notion of a magic number. One is simply that unemployment benefits - JobSeeker or NewStart payments to the unemployed - have been deteriorating over the past six or seven years. The payments are now around 40% of the age pension, and the conditions to obtain these benefits have become steadily more onerous. That means that people are often forced to accept very low-wage jobs simply to escape from grinding poverty.

Another is that it has become increasingly apparent that Australian business in general has for some time been in a cycle that favours profit-taking over investment in growth. The chart that HNN keeps re-publishing that relates to this is straight from the RBA's own "chartpack" and shows business investment represented as a percentage of nominal gross domestic product.

Between 2003 and 2015 this was over 14% of GDP, reaching a peak of over 18%. Since 2018, it has been below 12%, a level not seen since the mid-1990s, 30 years ago.

Under conditions of profit-taking, there is a focus on cost-containment. In terms of wages this means that businesses are motivated to operate with unfilled job vacancies, even if this reduces output, rather than raise wages to compete for employees and thus increase expenses.

While that lack of investment in growth has broader origins than government policy, it's no secret that the government has, for at least the last five years, been "slow-walking" what is seen worldwide as the best growth opportunity, software-based systems. That can be seen clearly in the government's aversion to technology based renewable energy sources, and a truly retrograde attitude towards the adoption of other technologies, such as electric vehicles.

Solve for inequity or for growth?

This combination of a society more accepting of inequity, a business focus on immediate profit, and a somewhat cultural aversion to the changes needed to embrace technology-driven growth affects more than just increases in the wage index. In fact, its imprint can clearly be seen on the housing market, and proposals to change this for the better.

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The Australian Bureau of Statistics (ABS) has released stats for hardware retail revenues through to January 2022. Overall, the stats indicate that retail continues to grow Australia-wide, albeit at a rate below that of underlying inflation.

Growth for the trailing 12 months to January 2022 over the previous corresponding period (pcp), which was the trailing 12 months to January 2021, was 0.94% nationwide. New South Wales (NSW) led the growth charts with 4.6% or $328 million of growth, followed by Western Australia (WA) with 3.56% of growth over the pcp, or an extra $86 million in revenue.

However this growth was balanced by a -4.7% decline for Victoria (VIC), down by $318 million. The Australian Capital Territory (ACT) also saw a significant decline of -2.4%, losing $12 million in revenue.

Unofficially, HNN has derived an estimate of historical retail revenue for Tasmania and the Northern Territory by subtracting the revenue from the other states and territories from the total for Australia. By this measure, retail revenue grew in TAS+NT combined by 5.4%, or $42 million.

Chart 1 shows the cumulative totals for the trailing 12 months to January.

Hardware retail percentage change

The percentage change in hardware sales follows the familiar pattern of a peak for February 2020 through to January 2021, followed by a reduction in growth through to the following 12-month period.

It's notable that the two major states, VIC and NSW demarcate the extremes of growth for the 12 months to January 2022.

Hardware retail month-on-month change

Since August 2021 when growth picked up again from a slump from April 2021 through to July 2021, there has been steady overall growth in the month-on-month numbers for retail revenue for Australia.

For January 2022, NSW has gone back to its growth levels for September 2021 of around 4.0%, while VIC is showing its highest growth level since January 2021. That combination has helped to keep the Australian average at close to 5.0% growth.

Conclusions

Australia finds itself caught in something of the same paradox that many Western economies, including the UK and the US have found themselves in. While the underlying numbers are good - with the possible exception of inflation (though given externalities such as supply chain obstructions, even that is not as bad as political overstatement would make it seem) - there is a sense of hesitancy in economies, with a particular focus on the housing industry, and thus on hardware retail.

From an economics standpoint, it is simply difficult to interpret the data from charts that show a sharp spike of decline followed by a sharp spike on the upside. Is there a trend developing, or is this mostly just compensatory activity?

Charts from the Reserve Bank of Australia (RBA) show that consumer sentiment declined in February 2022, back to its long-term average. Meanwhile, housing prices are up 20% in February on a rolling 12 month basis. Housing loan commitments are over $31 billion, passing the previous record of $23 billion in 2017, with investors accounting for only $10 billion of that. Given that Australia is facing some kind of interest rise in the next six months, there are questions about how much fragility is built into this situation.

On the business side of things, business investment is at around 6% of gross domestic product (GDP), the lowest it has been since 1994 or so, with that number remaining above 14% from 2003 through to 2015. Business confidence and conditions in the NAB survey are close to neutral. Wage price index growth, at less than 2.5% continues to lag inflation, despite high employment figures.

The question for hardware retailers in the short term is whether Australia can expect a third year of higher than historical rates of retail revenue, or whether when interest rates increase there will be a sharp retreat. In the medium term there are additional questions, such as how the DIY market is set to develop, whether regional housing markets will continue to grow, if there will be a shift back to multi-unit dwelling in 2024, and so forth.

The fact is simply that the rest of 2022 is set to be an uncertain time. It seems reasonable, to HNN, that we will eventually see growth in hardware retail go flat and begin to drift downwards, especially when international travel becomes more normalised (not just due to increased travel spending, but also a range of additional recreational expenditures). Even if that prediction did come true, getting the timing right on it seems almost impossible.

The Australian Bureau of Statistics (ABS) has released stats for building approvals through to January 2022. One of the shifts that the hardware industry is tracking has been the COVID-19 inspired move of house builds from urban areas to regional areas. While there are no stats currently available that divide up building approvals into these two categories, a decent proxy can be obtained by taking whole-of-state/territory stats, and taking out approvals for the capital cities.

Obviously there are some problems with this, as there are non-capital city regions that are more urban than regional, but this does act as a general guide to the greater dispersal of building approvals, and a proxy to growth in regional areas in general.

The stats as presented here make use of the 12 months ending in January, so the most recent 2022 data encompasses from February 2021 to January 2022.

New South Wales

There are really two slightly surprises to the chart for New South Wales (NSW). One is that it is only in the most recent period that growth in regional housing approvals has surged above historical levels. The second is that after ongoing growth in regional approvals from 2014 to 2019, they went to lower levels in both the 2020 and 2021 periods.

That latter trend follows the overall number of housing approvals. The 2020 period is pre-pandemic, as it runs up to January 2020, and the pandemic did not have an effect until March 2020, so that year's data reflects the overall decline in the housing market which had led the Reserve Bank of Australia to cut interest rates during calendar 2019. (Arguably this was in part the result of fiscal austerity measures introduced by the federal government in efforts to produce a surplus, the so-called "back in the black" campaign, pushing stimulus into monetary measures instead.)

However, it is surprising that the 2021 figures, which would have covered the first wave of the pandemic, show only a modest rise in regional building. That might reflect the very moderate approach Sydney and NSW had taken to pandemic restrictions, but it also indicates a misplaced trust in inadequate forecasting. The betrayal of that trust no doubt helped support the strong surge in regional building approvals for the 2022 period.

Victoria

In many ways the Victoria (VIC) figures could be described as a "classic" pandemic response. Even so, it is evident that in general reporting there has been some exaggeration of the immediate effects of the pandemic.

The single most outstanding aspect of the data is the steep rise in housing approvals between the 2021 period and the 2022 period. In fact, the data for 2021 indicates only a slight recovery back to only slightly above the numbers for 2019 - though the number of Melbourne house approvals in the 2021 period remained below the level of 2019, while regional approvals were 1700 higher in 2021 than 2019.

That's a little counter to some representations of this shift. It is really testament to just how strong the pandemic reaction has been in VIC, when you consider that the approvals for the 2021 period would have been boosted by government incentives such as HomeBuilder, while there were fewer government incentives in 2022.

Queensland

In looking at the stats for Queensland (QLD) one of the most interesting first impressions is how much building approvals in regional areas declined from historical averages for the 2019, 2020 and 2021 periods. After spending six years above 11,800, these hit a low of less than 9000 in the 2020 period. Even going into the 2022 period, house approvals in Brisbane increased by around 3300 in Brisbane, but only by 2700 outside Brisbane.

That might well be because what QLD offered to interstate migrants was the opportunity to live in the urban environs of Brisbane with lighter pandemic restrictions. People willing to live in regional areas might have chosen that option in NSW or VIC instead. It's worth noting that net migration to QLD for the four quarters ending in the March 2021 quarter was 30,800, up from 24,000 in the previous four quarters.

South Australia

Like QLD, South Australia (SA) saw overall house building approvals reach a historical high, but much of that boost went to houses in Adelaide rather than regional areas.

From the 2021 period to the 2022 period, regional housing approvals went up by around 800, while housing approvals in Adelaide increased by over 1900. Part of that might have been driven by urban house prices in SA being lower than in other parts of Australia, coupled with pandemic restrictions which were harsh at times, but lower than in NSW and VIC.

Western Australia

After reaching a 12-year low in the 2020 period, regional house building approvals did grow for the 2021 and 2022 period in Western Australia (WA). However, they were overshadowed by the growth in Perth building approvals.

In fact, for the 2022 period, the regional approvals made it back to around 3400 after the 2020 low of 1840, while Perth approvals recovered from the 2020 low of around 9650 to 17,500.

That's to be expected, of course, as WA saw only limited exposure to COVID-19 prior to March 2022. While the recovery for the 2022 period was substantial, it is still below the levels reached for the 2014 and 2015 periods, and only slightly above that for the 2016 period. Net migration to WA for the four quarters ending in the March 2021 quarter was 3250, up from a net loss of 3200 for the preceding four quarters.

Tasmania

In contrast to other states, Tasmania (TAS) did see strong recovery in regional building approvals, with both the 2021 and 2022 period reaching historical highs. Of course, one reason is that there are substantial urban centres outside of Hobart, notably Launceston, which reported a population of over 75,000 in the 2016 census, compared to Hobart's 178,000.

The most recent low-point for regional approvals was the 2017 period, though this recovered substantially in the 2019 and 2020 periods. Nevertheless, both the 2021 and 2022 periods showed approvals of around 1500, up from a figure around 1450 in 2020.

Given that the increase in overall and specifically regional approvals pre-dated the pandemic, it's likely that the continued growth seen in TAS for the 2022 period was driven by a range of factors, including comparatively low house prices.

Northern Territory

As the Northern Territory (NT) will generate fewer than 900 house building approvals in any 12-month period, this tends to be a more volatile region to analyse. As with many other Australian regions, the 2020 period proved to be a low point in approvals, and while the 2021 and 2022 periods improved on this, they stayed below the levels reached over the nine periods prior to 2020.

That said the number of regional approvals for the 2022 period was only surpassed by those for the 2011, and effectively tied for the number of approvals in 2018.

Conclusion

One final chart provides an overview of the percentage of regional approvals of all approvals across Australia:

In general terms, it's interesting to note that the Australian average reached a peak in the 2013 period at 40%, then declined to hold steady for the past eight periods at close to 35%. NSW has always trended above that average, while VIC has always trended below it.

However, since the 2018 period, there has been substantial growth in the percentage of regional house approvals for VIC, while NSW has also made upwards progress over that time period. While QLD has an overall higher than average regional approval percentage, this has declined sharply since 2013, flatlining at just under 45%.

In terms of what this means for the future, that is largely going to depend, at least through to 2024, on what happens with COVID-19 in the general population. Past that, it will depend on how former urban dwellers respond long-term to regional living. Will they adopt it as a desirable lifestyle, or will they eventually find difficulties in accessing secondary education and health services - for example - daunting?

As with most of these kinds of changes, we're likely to see a mixed result. Families with older children will likely find the transition to regional life simpler than those with younger children. Some will see regional life as an interesting three- or four-year experiment, others will find it to be very satisfying. The result is likely to be a net reduction of regional housing approvals, but one which remains above general historical levels.

The Australian Bureau of Statistics (ABS) has released the numbers for retail sales through to December 2021. This gives us a chance to reflect on the past truly extraordinary calendar years - though the real change, of course, originated in March 2020.

Australia-wide

Chart 1 shows an overview of retail sales across Australia over the past 12 years. These are the standard ABS figures for original sales (as the trend series has been suspended).

Perhaps the biggest surprise remains that sales for calendar 2021 not only retained the gains from 2020, but managed, from September 2021 onwards, to continue to generate growth. In fact, as the chart clearly shows, Australia-wide sales hit a new monthly record for December 2021.

It is also interesting to see, in a broader historical context, that the years can be placed in three groups. There are retail sales for the period prior to 2014, a second grouping after 2014, and then 2020 and 2021. The year 2014 itself is something of a transitional year.

Chart 2 is the familiar chart of month-on-corresponding-month sales for the individual states and territories, going back two years.

This shows that most of the extraordinary growth took place during the first 12 months of the COVID-19 pandemic, from April 2020 to March 2021. In particular, May, June, July and August of 2020, as the first lockdowns took effect, show steep growth, with the overall Australian rate of growth above 25%, reaching a peak of over 35% in June 2020.

Equally, we can see something of a comparatively mild retreat from that growth from May 2021 to September 2021. However, the final quarter of 2021 showed renewed growth, with the exception of Victoria (VIC).

Chart 3 shows what the effect of this growth has been cumulatively for the listed states and territories (historical data for both Tasmania and the Northern Territory remain unavailable).

Chart 4 shows the Australia-wide numbers:

Hardware retail in Australia from 2019 to 2020 grew by an astonishing 20.2%, increasing from $19.67 billion to $23.63 billion - a $3.96 billion lift. The growth from 2020 to 2021 was milder at 1.9%, or $0.44 billion, but simply sustaining that high level was amazing.

Chart 5 shows the growth rates comparing calendar years:

Perhaps one of the surprises to this chart is how evenly distributed the growth rates have been in 2020, with - excluding VIC - a similar tight spread for 2021. This does lend some credence to the notion that, at least for these two years, part of what happened was a reformation in the market for hardware retail, rather than only a direct response to pandemic lockdowns.

That said, the journey each state and territory has taken has been unique and different, so we'll turn to those individual numbers now.

New South Wales

Chart 6 shows the retail sales in NSW by year and month.

The steepest increase for the state came in May 2020, when sales reached $624 million, up from $457 million in May 2019, an increase of 36.6%. For 2021, the top rise was for January, reaching 28.0% - though that was of course a comparison to a pre-pandemic month, January 2020. NSW did show overall negative growth in 2021 for the months of April though to August. Growth for 2021 overall was 6.2%, down from the growth figure of 20.6% for 2020.

Total sales for 2019 were $4.0 billion, for 2020 $4.9 billion, and for 2021 $5.1 billion.

Victoria

Chart 7 shows the retail sales in VIC by year and month.

VIC saw retails sales surge by 36.6% in June 2020, with May at 33.6% and July at 33.9%. Sales reached a peak in November 2020, at $677 million for the month. For 2020, overall growth was 18.3%.

However, VIC saw comparative growth during 2021 for only the first two (pre-pandemic comparison) months. For the rest of the year, growth was negative, reaching a low of -9.9% in June 2021. Overall, for 2021 the state showed negative growth of -4.5%.

Total sales for 2019 were $5.7 billion, for 2020 $6.7 billion, and for 2021 $6.4 billion.

Queensland

Chart 8 shows the retail sales in Queensland (QLD) by year and month.

The strongest period of growth for QLD over the past two years was in May 2020, when growth reached 41.0%. Maximum sales were reached in December 2021, at $509 million for the month. Growth overall for 2020 was 21.5%.

As with the other states, for 2021 maximum growth was reached in the first two months, with growth of 26.9% in January 2021. However, growth was negative for April through to July of that year, though it did lift to a positive 8.5% in December 2021. Overall growth for 2021 was a positive 3.5%.

Total sales for 2019 were $4.0 billion, for 2020 $4.9 billion, and for 2021 $5.1 billion.

South Australia

Chart 9 shows the retail sales in South Australia (SA) by year and month.

SA grew very strongly during May and June 2020, recording 43.2% and 41.6% growth respectively. It reached its maximum revenue in December 2021, with $156 million in sales.

Maximum growth for 2021 was in January, of 21.6%. Growth was negative from April through to July 2021, including a dip of -23.7% in May and -21.9% in July.

For 2020 overall SA produced growth of 21.4%, and for 2021 it managed to stay in positive territory at 0.1% growth.

Total retail sales for 2019 were $1.2 billion, for 2020 $1.4 billion, and also $1.4 billion for 2021.

Western Australia

Chart 10 shows the retail sales in Western Australia (WA) by year and month.

WA had its strongest growth performance in May 2020, with a lift of 40.4%. For 2021, the strongest growth was in January, up by 19.1%, though there was another strong lift in November 2021 of 14.2%. However, growth was negative from April to July 2021, with the largest drop in May of 11.7%.

The strongest month for sales in WA was December 2021, with revenue of $256 million.

Growth in 2020 overall was 19.7%, and a respectable 4.2% in 2021 overall. Revenue in 2019 was $2.0 billion, for 2020 it was $2.4 billion, and in 2021 it was $2.5 billion.

Australian Capital Territory

Chart 11 shows the retail sales in Australian Capital Territory (ACT) by year and month.

As a smaller, less-populous region, revenues for the ACT tend to be somewhat volatile. During 2020 the territory had four months where revenue growth was over 40%, from April to July. The highest growth was in May 2020, at 46.3%.

For 2021 the highest growth was in January, at 32.5%. Growth was negative in the ACT from April through to September, with the low in September of 32.0%.

The sales peak for the previous two years was reached in December 2021 at $54.4 million.

Sales for 2019 overall were $372 million, for 2020 $491 million, and for 2021 $485 million. Growth for 2020 was 31.9% and for 2021 was negative, at -1.1%.

Analysis

What has sustained hardware retail spending at such an elevated level, and can we still expect a future correction back to 2019 levels?

One source, of course, is the continued surge of activity in the construction industry, both in new home builds and renovations/additions. Gardening, as people seek out safe outdoor activities, continues to be a growth area. There are also the inflationary impacts of supply chain shortages, which have lifted the retail cost of items such as timber.

It is possible, however, that the main cause for high levels of hardware revenue is that spending opportunities remain severely limited. Overseas trips will likely not recover until the final quarter of 2022, and even regional Australia travel remains a fraught issue.

That said, there do seem to be some fundamental structural shifts, when it comes to cultural and business changes such as the acceptance of work from home at many larger businesses.

The question as to whether there will be a correction to levels of hardware retail sales will depend in large part on both the progress of the COVID-19 pandemic, and how the housing market changes during 2022. It has become accepted as a near-fact that interest rates will likely rise during 2022, though there is debate about exactly when that will be in the given range of August to December. Will that cause a big shift, or have homeowners already allowed for a period of reduced prices? The answer is likely "both", depending on the region and markets.

It is likely that this year will, overall, see something of a retreat from the high numbers of the two previous years. While the housing market might decline, this is still likely to be compensated - as has been the case in the past - with more renovation activity.

While given the current uncertainty, it's too difficult to predict, the real problem year is more likely to be 2023 than 2022. As the medical response to COVID-19 continues to increase in complexity and effectiveness, we can have some hopes that the pandemic will be in its final stages by the end of 2022. If the world opens again to travel and commerce, it's possible there will be a surge of that activity and a consequent reduction in spending on hardware retail.

The Australian Bureau of Statistics (ABS) has released statistics for building approvals through to November 2021. The figures are especially interesting across the three states most affected by the COVID-19 pandemic, New South Wales (NSW), Victoria (VIC) and Queensland (QLD).

New South Wales

Chart 1 shows the numbers of house and non-house building approvals (LHS scale) completed, as well as the total planned expenditure on dwellings (RHS scale) for the 12-month periods to November in NSW.

This does clearly illustrate that, at least in that state, the previous building "boom" was largely made up of non-house construction, with that peak reached during 2016. Since that time there has been a steady, steep decline in non-house approvals through to 2019 - pre-pandemic.

In the initial eight months of the COVID-19 pandemic, through to November 2020, house approvals moved ahead of non-house approvals. Compared with 2015 through to 2018, the overall level of approvals does remain relatively low. However, there is a strong surge in planned expenditure, with this exceeding the levels reached at the peak of the previous boom in 2016. It is also interesting that the planned expenditure, particularly in 2019, does not decline as much as the number of approvals does.

Chart 2 illustrates the change between these 12-month periods, with the addition of the change in expenditure on alterations and additions (alts & adds).

This chart clearly shows the slow to negative rates of growth from 2017 through to 2020, followed by the very strong surge in growth for the 12 months to November 2021. One characteristic that is unusual to see is that planned expenditure on alts & adds surges during that final period at a similar rate to the planned increase in construction, where in the previous two growth peaks for 2013 and 2015 it remained more subdued. This doubling up of demand is, of course, one reason why hardware retail revenues have continued to increase.

Chart 3 shows the month-on-corresponding-month percentage change in the stats from Chart 2 in the period from November 2019 through to November 2021.

The number of approvals for houses is comparatively non-volatile from September 2020 onwards, while both non-house approvals and expenditure on alts & adds become increasingly volatile after that month.

Victoria

It's clear in looking at Chart 4 that the dwelling market in VIC is substantially different from that of NSW.

The market is far more dependent on houses, though the peak in non-house approvals from 2014 to 2018 contributed substantially to the market. It's notable, too, that while the COVID-19 pandemic has been blamed for the steep decline in planned expenditure on non-house construction, the low-point was reached pre-pandemic in 2019.

Chart 5 shows the percentage change in the key measures.

This shows how difficult a year 2019 was for the housing market, with all four measures indicating negative growth. The sharp recovery into 2020 is actually surprisingly modest, and it is important to note that the planned expenditure on all dwellings had essentially the same growth of under 14% for both 2020 and 2021.

That contrasts sharply with the very strong growth in planned expenditure on alts & adds for 2021.

Chart 6 shows the month-on-corresponding-month percentage change in the stats from Chart 5 in the period from November 2019 through to November 2021.

Again, this shows very sharp peaks in planned expenditure on alts & adds in both April and August 2021. The last three months covered - September, October and November 2021 - show an interesting change in behaviour, with growth in approvals for houses flattening out, while approvals for non-house dwellings surge.

Queensland

Chart 7 shows that the QLD market is quite different - yet again - from the other two states.

While in one sense we can say that the overall property boom in QLD is largely down to the lift in non-house building, since 2019 it has been more supported by the house market.

That is further illustrated in Chart 8, which shows the percentage change in the key measures.

There is a clear demarcation line at 2016, where the non-house growth goes negative, and stays negative for five years, while the house market goes negative to a lesser extent in 2018 and 2019. Interestingly, though, growth in alts & adds remains consistent from 2017 to 2020, then grows sharply in 2021.

In fact everything grows sharply in 2021, with expenditure on planned buildings in particular reaching a new high in the level of growth.

Chart 9 shows the month-on-corresponding-month percentage change in the stats from Chart 8 in the period from November 2019 through to November 2021.

Perhaps what is most interesting in this chart is the sharp demarcation that occurs in December 2020, with all measures strongly up on those for December 2019, a spike that is then duplicated in March 2021. While houses continue to contribute strongly, there also seems to be a shift back to non-house approvals. That is especially the case when looking at the final three months, September, October and November 2021, where growth has slowed substantially, but non-house approvals recover strongly in November.

Analysis

It's worth reflecting, looking at these charts, on the situation that existed in Australia in the eight months of FY2019/20 that preceded the COVID-19 pandemic beginning in March 2020. The Australian federal government had embarked on its "Back in the Black" push to produce a small budget surplus, which meant it had sharply cut back on fiscal stimulus, pushing the burden of economic support onto the Reserve Bank of Australia (RBA) and monetary policy.

The RBA lowered the cash rate target for interest rates by 0.25% in June, July and October 2019, bringing it down from 1.50% to 0.75% - a stimulus that had only mild effects on the property and construction markets.

The advent of very low rates in 2020, with a promise they would remain low for three years, and actual fiscal stimulus from the federal government in the form of the HomeBuilder grants, aimed at Australia's middle-classes, played into what had really been contained demand from the previous two or three years.

That stimulus enhanced the existing characteristics of the markets in each state, but was also shaped by some unique characteristics of the COVID-19 pandemic. Given the difficulty of enduring lockdowns, VIC saw its longstanding preference for houses given an added push, while the market in NSW balanced out a little more towards houses, but continued to support non-house dwellings as well. The situation in QLD is more complex, as its house market has apparently been growing for some years, but it would seem the non-house market might see something of a recovery - because it is a "no lockdown" state, comparatively.

The real difficulty is, how is all of this going to affect the markets as they develop in the future? Are we looking at a situation where people have taken this opportunity of historical low rates and reduced discretionary spending to fill the need for housing, so that the markets will fade somewhat in the second half of 2022? If interest rates do increase (and HNN subscribes to the theory they probably will in 2022, but not until November/December), what effect will that have?

The other core difficulty is the matter of the affordability of housing. While this has been seen largely as a problem of people entering the market, it's also possible that more people will disinvest from the market, simply on the basis that having such a large proportion of savings in one asset class is inherently risky. That disinvestment may take the form of more people moving to more rural locations, a trend assisted by the prevalence of both work-from-home and fully remote working.

One thing that HNN would suggest, however, is that much of this investment in housing is not solely fuelled by a desire to participate in a high-growth asset class. Many home purchasers at the moment are fully aware, we believe, that their real estate assets may suffer a loss in value. Their investments are driven as much by a need to seek security and comfort for their families, in what have become, for many, dire times.

A wider view the problem, as HNN has suggested in the past, means understanding that home construction is, at best, a form of second-order growth for an economy. That is to say, its chief purpose is to enable the growth in other, more productive sectors. To put that differently, wealth is not the same thing as growth and economic vitality. While other nations are emerging from the COVID-19 pandemic with enhanced vigour (most notably the USA), others, such as Australia, are likely to find they have slipped further behind. That may end up being a far bigger problem than the price of a three-bedroom house in a nice neighbourhood.

The Australian Bureau of Statistics (ABS) has released stats for hardware retail sales through to November 2021.

Looking at Chart 1 (top), which represents the cumulative totals of hardware retail sales, excluding Tasmania and the Northern Territory (as the ABS has not provided stats for these areas), it is evident that for the most part sales through to this past November were flourishing. While the large increase from 2019 to 2020 did not repeat for 2021, sales not only maintained the elevated levels of 2020, but managed to improve on them.

New South Wales (NSW) outperformed all other states and territories in the 12 months to November 2021, growing by 6.7% over the previous corresponding period (pcp), which was the 12 months to November 2020. This growth represented an additional $458 million in revenue.

In percentage terms, Western Australia (WA) came in second, with 5.1% growth, and a revenue increase of $119 million, followed by Queensland (QLD), which increased by 4.9% and $233 million more in revenue. Victoria (VIC) was the only state to post negative growth, of -3.0%, with a drop in revenue for the period of $202 million. Australia overall (including TAS and NT) grew by 2.85%, an increase of $662 million on the pcp.

Trailing 12 months to November, percentage change

Following up on the actual numbers for hardware retailing, Chart 2 shows the percentage change, comparing trailing 12 month periods through to November.

This chart illustrates, yet again, how unusual 2020 was as a year for hardware retailers. The percentage changes for the previous period, the 12 months to November 2020, as compared to the 12 months to November 2019, fall within a very narrow range - with the exception of the Australian Capital Territory (ACT), which recorded sales growth of 28.6%. The other states ranged from a high of 19.4% for South Australia (SA), to a "low" of 17.9% for WA, a variance of just 1.5%.

The range for the most recent period is much broader, at 9.7%. It's evident that the 12 months to November 2021 saw a more regional response to the situation the COVID-19 pandemic has created.

Month-on-month percentage change

Chart 3 is a way to track these changes on a monthly basis by comparing the revenue of each month to the same month in the preceding year.

It is perhaps best to view this chart in relation to another two charts, which detail the COVID-19 pandemic over this period. (Note that all these charts go up only to 30 November 2021, and that the Y-axis of the growth is to a log scale. The log scale is used to better accommodate the high peaks of growth.)

Chart 4 illustrates the progress of reported COVID-19 cases, and deaths:

Chart 5 illustrates comparative rates that show the progress of the pandemic.

These charts are sourced from Our World in Data, a well-respected source of this and other statistical information:

It is possible to see some link between the pandemic intensity and retail sales. In terms of 2021, there is an indication that during the time between high vaccination rates helping to contain the Delta variant of COVID-19 and the advent of the Omicron variant, hardware retails sales, while remaining at a historically high level, did begin to decline slightly. As the Omicron variant took hold, retail sales began show an increase over 2020.

There are so many secondary factors at work currently - such as supply chain issues - that it is difficult to draw any firm conclusion. But this could indicate that if Australia returns to a period of prolonged stability, hardware retail sales may begin to trend back to 2019 levels.

Analysis

At the beginning of the pandemic, when the current federal government was confidently predicting a "V"-shaped recovery, HNN suggested that what was more likely was what we termed a "K"-shaped recovery.

The suggestion in this was both that there was not going to be some rapid "snap-back" in GDP growth in less than a year, and also that the recovery would be split, with some sectors faring much worse than others.

Viewed from today's perspective, this is, we would suggest, close to being just common sense. However, that original forecast by the government continues to haunt much of the policy around the COVID-19 pandemic. It's not just that the only "acceptable" outcome is V-shaped, it's that it perpetuates the core myth of the pandemic, that we have some measure of control over what happens in the near-term.

The major challenge that will face the hardware retail industry is what is going to happen as the forward shadow of 2023, and thus the likely increase in interest rates by the Reserve Bank of Australia (RBA), looms every closer. The Australian bank Westpac has recently moved its forecast for that interest rate rise forward to August of 2022. There is little doubt that such a rise will lead to a softening of the real estate market, and a potential decline in the price of housing.

The thing about the K-shape is, it's not possible to control what the pandemic does, or even what the secondary effects of the pandemic create. But there is a chance to ensure that your business is more likely to end up on the positive prong of the K than the negative prong. That's probably going to involve less a standard set of actions, and more a good dose of adaptability and persistence.

The Australian Bureau of Statistics (ABS) has released stats for business exits and entries through to June 2021. This provides an opportunity to review the number and type of businesses that have managed to continue over the course of the COVID-19 pandemic.

FY2020 vs FY2021 entry/exit rates

Chart 1 shows the percentage change in the entry and exit rates for FY2020/21.

The entry rate is shown as a positive percentage, and the exit rate as a negative percentage. With the exception of Victoria (VIC) and Tasmania (TAS), the entry rate for FY2021 exceeds that for FY2020. As we'll see in subsequent charts, in the case of VIC this is due to a high entry rate during FY2020.

Western Australia (WA) shows the same rates across the two years, and the Australian Capital Territory (ACT) shows something of an exorbitant increase in its FY2021 entry rate. The net total for the year across Australia shows only a mild increase in the entry rate for FY2021 overall.

The exit rate shows the same positive trend, with a reduced exit rate for FY2021 over FY2020 overall. Only South Australia (SA) and the Northern Territory (NT) show a higher exit rate for the more recent year. TAS shows a clear improvement in the exit rate, which is interesting when combined with the high entry rate for FY2020. Looking at the total for all Australia, there is an improvement from -9.1% to just -8.5%.

Net gains/losses July 2019 to June 2021

Chart 2 shows the change in the number of businesses in different number of employees categories over the two-year period from the start of FY2019/20 to the end of FY2021.

The most striking element of the chart is that there are increased numbers of hardware retailers for the states that suffered the most during the COVID-19 pandemic lockdowns, while for those that were less affected, retailer numbers decreased.

In terms of those gains it's interesting that for NSW, VIC, QLD and TAS, there is a reduction in the number of non-employing (family-run) businesses, and an increase in the number of businesses with 1 to 19 employees. That is most likely because businesses that were family-run have seen demand increase to the point where they need to formally employ some people to help run their stores.

It's also notable that, with the exception of VIC, there was a reduction in stores with larger numbers of employees, in the 20 to 199 range. It's also possible that those retailers, rather than going out of business, reduced their employee numbers and helped to further boost the 1 to 19 stats higher.

That position is illustrated in the numbers for the total across Australia, with the steep falls in the non-employing and 20 to 199 range counterbalancing the strong growth in the 1 to 19 range, so that the net total gain was really only 21 retailers across that two-year period.

One reason for that low number is likely that while the market conditions did help a number of retailers flourish, problems with supply chains and hiring employees made it not a great time to start a new hardware retailing business.

Chart 3 is a different look at these same numbers, this time representing them in terms of percentage gains and losses.

This has the overall effect of reframing the extent of the moves in the marketplace, with the larger states seeing their numbers contextualised as being less significant, while the numbers for the smaller states and territories seem more significant.

The standout statistic is the reduction in the retailer numbers for the 20 to 199 segment. This went from 41 to 29, a loss of 12 or 30%, which is certainly statistically significant. That same category is also highlighted for the totals across Australia, which show the loss in this category is the most significant.

Analysis

It's possible to identify two trends from these statistics. The first is a positive trend, where it seems retailers moved from the non-employing to the employing category, which would indicate growth. The second is less positive, in that it indicates some retailers moved from the over-20 employees category to the under-20 employees category.

Both of those moves could actually be a result of the COVID-19 pandemic, with smaller retailers getting a good boost in revenue and volume of goods, while larger retailers might have found it difficult to retain all their staff.

The two other background effects we need to point to are the ever-present impact of Bunnings on larger independent hardware stores, and the growing influence of trade-only tool stores, such as the Bunnings-managed Tool Kit Depot, and Metcash's Total Tools.

The exact effect of the COVID-19 pandemic period on Australia's building industry and housing market have been surprisingly difficult to track. The great debate that continues is whether the changes we've seen have some semi-permanent features to them, or if they will fade away after the effects of the pandemic wear off.

In this set of stats from the Australian Bureau of Statistics (ABS), we're looking at a set of quite different views into the housing industry: house prices for established houses, the number of transactions in those established houses, and the value of loans taken out by owner/occupiers for house building.

House prices

The best chart to start with is Chart 1, which shows the percentage change in the ABS price index for established houses comparing each quarter with the same quarter in the prior year.

The surprise for many looking at the chart is the ongoing decline in house prices immediately prior to the pandemic, especially for the two major markets of Sydney and Melbourne. Sydney's price index declined from the March 2018 quarter, through to the September 2019 quarter - seven quarters in all. Melbourne declined from the September 2018 quarter to the September 2019 quarter - five quarters. That was followed by a mild peak at over 10% growth in the March 2020 quarter, then a decline to the December 2020 quarter, followed by a sprint to record high growth numbers in the September 2021 quarter.

What is very clear looking at this chart is just how unusual the market has been for calendar 2021, which is where all the major price index growth spurt has occurred. Over 30% quarter on quarter growth, which is what Sydney achieved, is not part of a normal market.

House transfers

Interpreting house transfers as it relates to house prices is always somewhat tricky. Chart 2 shows transfers for established houses comparing each quarter with the same quarter in the prior year.

For example, transfers reached a peak for the June 2021 quarter, then the rate of increase declined sharply for the September 2021 quarter, going negative for every state except South Australia (SA). Yet the house price index climbed steeply for the June 2021 quarter, and rose even higher for the September 2021 quarter.

What is clear is that where the pandemic had a generalised effect on house prices, in terms of transfers for established houses each state has produced a more individualised response. There was a shared reduction in transfers during the first real pandemic quarter, the June quarter of 2020. After that, however, for the September quarter of 2020, Victoria (VIC) dived still deeper while most states went into positive territory.

What is interesting about this chart is that the activity immediately prior to the pandemic was just as anomalous as the activity during the pandemic. Economically, the pre-pandemic period was defined by an effort of the federal government to deliver a very small budget surplus - the slightly bizarre "back in the black" campaign. This was taken by most economists to be largely politically motivated, and it resulted in a near freeze in fiscal policy stimulus, which meant the Reserve Bank of Australia was forced to use monetary policy through reduced interest rates.

Evidently that liquidity in the market contributed to the lower house price index during this period, just as the absence of that liquidity, rather than soaring demand, contributed to higher price index numbers in the first two quarters of the pandemic.

Value of loans for house construction

Chart 3 shows the value of loans to owner/occupiers for house construction comparing each quarter with the same quarter in the prior year.

This is perhaps the most surprising of the three charts. There is a very sharp peak in growth at a very high rate - over 260% growth - in the March 2021 quarter. What's unusual about this chart is it shows the less COVID afflicted states are benefitting the most.

That suggests a likely transfer of building intent away from, in particular, VIC and NSW - though those two states also do quite well. This is perhaps one reason why hardware retail numbers were boosted across Australia and not just in those states most deeply affected by the COVID-19 pandemic.

Analysis

The major element present in just about every chart of housing statistics we look at that covers the pandemic period is how much housing has changed over during 2020 and 2021. It does seem that such big shifts and high levels of activity simply cannot be sustained for a long period of time. At the same time, what we are also seeing is something of a "correction" in the housing market, as people shift their behaviours to deal with a unique circumstance that may be with us for some time.

That primary shift may simply be that homeowners now see their houses as a kind of required guarantee that they will be able to get through the next crisis, if that should turn up. While full lockdowns may not come back, it's likely we'll see people remain cautious in their social activities, making homes a more important focus than they have been in the past.

The primary delusion that still persists, however, is that the result of a "V-shaped" recovery will be a snap-back to 2019 or 2018 conditions. It's very evident that more permanent changes have taken place. It's also true, however, that current patterns in the housing market have more to do with adjusting to new realities, and we have yet to see what those new realities are really going to look like.

The alterations and additions (alts/adds, aka renovations) market has always been one of the most vital to the Australian hardware retail industry. The "rule of thumb" for the past 15 years or so has been that when housing prices stop rising or go seriously sideways, some of the slack in demand for new construction will be picked up by increases in demand for renovations.

In the current market situation, ever since the COVID-19 pandemic started in early 2020, the situation has become more complex than that. Not only are house prices rising, and demand for new dwelling construction increasing, but demand for alts/adds has increased to a new level as well.

When it comes to reporting on this area through statistics, however, several problems are encountered. The Australian Bureau of Statistics (ABS) not only does a good job in this area, it almost does too good a job. You can be researching just about any statistics related to the residential building and construction industry, and the alts/adds category will pop up as one of the options.

While we should be very thankful for that, it does bring up the problem of almost too much data. Choosing which data to present, and in what format, can be difficult.

That's further complicated by the fact that there really isn't any "perfect" alts/adds data out there. For example, building approvals stats are very accurate, but only measures activity above a certain value level, as lesser-value work does not require a permit (and there is always a certain amount of permit-less, "off the books" work going on as well).

Loans for alts/adds has similar problems. Not only does it miss out on work that is financed through saving and/or credit cards, but some loans made for alts/adds end up being used for other purposes.

Some of the best measures available are survey-based. The Housing Industry Association (HIA) has some good data based on surveying companies in the construction industry. The ABS also has access to surveys conducted to track expenditure for inclusion in Australia's national accounts (which are used to measure important stats such as gross domestic product).

In this statistical analysis HNN is relying on three of the sources of data listed above: the national accounts figures, building approvals, and lending for alts/adds. We're presenting these in two formats: as trailing 12 months to the data end date (which is October), and as period on corresponding period percentage change.

Also, as we are primarily interested in the effects of the pandemic on this area of construction, we're limiting the graphs to the three states most affected by the pandemic: New South Wales (NSW), Victoria (VIC) and Queensland (QLD).

Alterations & additions trailing 12 months

Looking at the three graphs in Chart 1 shows some expected results, and a little variance from those results.

It is best to start with the building approvals chart, which shows the type of activity most in the hardware industry would expect. Approvals for NSW and VIC are closely locked together, and QLD, while it follows a similar trajectory, is somewhat lower. Both NSW and VIC show a flattening from 2017 to 2020, while QLD continues to grow during this period. All three states end with a sharp increase for the 12 months to October 2021.

Comparing this with the graph immediately below, for lending, shows some similarities. There is a peak for the 12 months ending October 2017, followed by a steep decline for NSW and shallower declines for VIC and QLD. It's interesting to note that NSW shows the highest volatility, with very strong growth from 2013 to 2017, and that steep decline through to 2019. As expected, all three states show a steep increase for 2021.

The data from the national accounts does provide some surprises. While the QLD number track closely to building approvals, NSW shows less of a peak for 2017. Meanwhile VIC is most notably different because, unlike the other two states, it does not show a steep increase for the four quarters to the September quarter of 2021.

The most likely cause of that last difference is constraint on the market due to COVID-19 restrictions in place.

Alterations & additions period-on-period % change

Chart 2 shows data derived by determining the percentage change between corresponding periods - so October 2021 compared to October 2020, or 2020Q1 compared to 2019Q1.

Starting with the top graph, outlining household spending from the national accounts stats, we can see certain very clear points of inflection. The first is a convergence around zero right before the pandemic, for the December quarter of 2019. That's followed by a second point of convergence for the following quarter, with VIC and QLD hitting over 5% growth, while NSW hits 10%. Then in the next quarter for June 2020, there is a trend back to zero growth again.

From this point, the growth diverges, with both NSW and QLD seeing strong growth over the next year to June quarter of 2021. VIC has instead zero to negative growth over the subsequent three quarter, followed by growth in the June 2021 quarter. Both NSW and QLD show slower growth for the September 2021 quarter, while VIC continues to grow.

For building approvals, we've converted the monthly figures into quarterly numbers, as this tends to be a very jagged set of data without some smoothing. For both NSW and QLD, this mostly follows the national accounts graph. However, VIC is once again the exception, with growth in building approvals exceeding household expenditure on alts/adds from the June quarter of 2020 onwards.

Looking at the chart for lending, it's evident there is a considerable lag. The key convergence point happens in October 2020, at the start of the December quarter. After that point, growth in the amount borrowed for alts/adds takes off for both NSW and QLD. For VIC, however, there is an initial period of growth for November and December, then a fall back to zero for January 2021, with slow growth in February, then very strong growth for both February and March.

Analysis

Perhaps the primary message from these charts is just how unusual the times we currently live in are. While the first group of graphs outline exceptionally strong growth over the past year, the second group show that this growth is somewhat nuanced.

In particular it's noticeable that in that second group there is a decided downwards hook to the trendlines at the end of 2021. But even those drops illustrate amazing growth moderating to simply very good growth.

At the moment, the best approach is one of some vigilance. There's a great deal of apparent momentum behind these growth numbers, into that they display very little volatility - the upwards forces are overwhelming.

The difficulty is that the growth stimulus does not have its basis in a good, developing of growth and expansion, but is rather the reaction to a very unfortunate event. Paradoxically, as Australia recovers, one sign of that may be falling rates of alts/adds.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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 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.

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:

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:

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.

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:

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.

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.

[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.

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.