Statistics have become a regular feature of the news as we track the progress of moves to limit the COVID-19 pandemic. While these stats are often immediate and shocking, looking at the effect the pandemic has had and will have on the building industry - and thus on the hardware and home improvement industry - is a different task.
It's not just that there is a considerable lag in obtaining these numbers - as it will not be until August and September that we see the stats reflecting the true initial impact of the pandemic. It is also that the numbers we do have and will have reflect a more complex picture. They really relate to three possible influences:
The underlying pre-pandemic economy, especially as it developed under the government's decision to preference an economic surplus ("back in the black" as the election slogan would have it) over stimulus spending
The effect that the bushfires of December 2019 to January 2020 had on the economy
The direct and secondary effects of the early stages of the pandemic on the economy
Just about all the statistics we currently have, for the March quarter as well as the months of March and April, indicate that the pre-pandemic conditions shaped building industry performance during those periods.
Alterations & additions
To begin with, we have the numbers from the Australian Bureau of Statistics (ABS) for Australia's national accounts. These include statistics for "alterations and additions", which include renovations and maintenance work. As these are survey-based, rather than permit-based, they reflect a wider range of this work than those statistics provided in the standard building statistics.
Chart 1 shows that, basically, the figures for the March 2020 quarter followed in line with developments over the preceding three to five years for each of the three major states: NSW, VIC and QLD. While the March quarter number for NSW was the lowest it has been for 10 years, it is nearly equal to the number for the March quarter of 2019.
Likewise, for VIC, the most recent quarter was the second highest for any March quarter over the past 10 years. That is in keeping with a growth trend that peaked in 2017, but has only declined mildly since then.
QLD, meanwhile, recorded its best quarter for alterations and additions in its history. That follows on from a steady pattern of growth since its brief decline in 2012 and 2013. QLD is, in fact, beginning to come very close to the numbers that VIC generates.
Chart 2, however, reveals some more fundamental, structural problems in the alterations and additions market. This chart graphs the percentage change in growth between corresponding quarters for every state.
Its most marked feature is the strong coalescence of growth factors for the December 2019 quarter. Similar clustering occurred for the December 2014 and June 2015 quarters. Both these cases happened in proximity to decisions by the Reserve Bank of Australia (RBA) to lower interest rates (down by 0.25% to 2.25% in February 2015, and then down to 2.00% in May 2015).
At the start of the December quarter, in October 2019, the RBA cut interest rates from 1.00% to 0.75%. The minutes for the review meeting in that month had this to say about the housing market:
The residential construction sector had contracted further and this was expected to continue for some time. The decline in dwelling investment in the June quarter was greater than had been expected a few months earlier. Higher-density approvals had declined in July, to be at their lowest level in seven years; detached approvals had also declined in July. The Bank's liaison program had continued to report weak pre-sales for higher-density developments. Taken together, this information implied that dwelling investment would decline further over coming quarters.
During March 2020, the RBA cut interest rates twice, by 0.25% each time, bringing the rate down to 0.25%, in response to concerns about the pandemic. In response to a range of factors, the cluster of the December 2019 quarter broke apart, with TAS, VIC and QLD moving into growth, NSW going neutral, and both SA and WA continuing to decline.
What we can say about this is that this part of the building industry showed contraction during the December 2019 quarter in response to an economy that was declining. In response to a range of stimuli, different states then responded in different ways. So, the economic woes of Australia, pre-pandemic (low business investment, low wage growth and a falling housing market) were national in nature, but the effects of the pandemic itself (as well as the bushfires) varied regionally.
When it comes to building approvals, the numbers indicate that regional factors dominate.
Chart 3 shows the stats for the greater Sydney area. During the peak in approvals, from 2015 through to 2017, most of the growth is in multi-unit dwellings, though detached houses also show growth. That house approval growth continues through until 2018, then begins to decline in 2019. Approvals for non-house projects decline more sharply.
In Chart 4, Melbourne shows a similar pattern, though the share of approvals is more evenly divided between house and non-house. What is always surprising about the Melbourne market is that non-house approvals account for far less proportionately than they do for Sydney. While that proportion increases from 2014 to 2017, in 2018 and 2019 it returns to close to the levels of 2010 and 2011.
As far as the numbers show, the two "pandemic months" of March and April 2020 are simply continuing the same trends seen in 2019: an overall reduction, with non-house approvals falling more than house approvals.
Chart 5 shows approvals for Brisbane. This indicates that much of the "boom" in approvals took place for non-house dwellings from 2014 to 2016, though approvals for houses also increased. Once again, when we look at activity for 2019, what we see are numbers close to those for 2010. House approvals exceed non-house approvals, and there is an overall reduction in activity. The first three months of 2020 seem to be largely following the same trends as 2019.
Adelaide, represented in Chart 6, shows a different pattern. It is marked by a sharp decline in activity for 2012, with a decline in 2011 leading into that, a recovery in 2013 leading out. For the period form 2014 through to 2018, there is an almost steady-state rate of approvals for houses and non-houses, with the former dominating. Non-house approvals represent much of the growth during those years, though that begins to decline in 2019. The numbers for 2020 indicate the 2019 trend continues.
Chart 7 shows building approvals for Perth. This is the only set of building approval stats for a state capital that shows a persistent, ongoing decline in approval numbers over the past four years. Like the other cities, there is something of a "boom" from 2013 to 2015. Non-house approvals increase during those years as a proportion of all approvals, but house approvals continue to dominate. From 2016 through to 2019, overall activity declines, and 2020 seems to be continuation of that decline.
Hobart shows activity that is contradictory to the other capitals. Chart 8 indicates that it experienced a decline during 2012 and 2013, followed by ongoing growth in approvals from 2014 to 2019. Houses almost completely dominate these approvals, though it is noticeable that non-house approvals often increase during times of decline in house approvals. That happens at the end of 2019, but early 2020 indicates a steep rise in house approvals and a decline in non-house approvals.
Building work done
Chart 9 shows how the value of building work done for houses and non-house residential has developed over the past 10 years for NSW.
It's clear that non-house construction has contributed the bulk of growth, accelerating since the second calendar half of 2015, peaking in the first calendar half of 2018. Since that time, however, there has been a sharp decline, back to the initial 2015 level in March 2020.
Chart 10 breaks out the March quarter data from Chart 9, to illustrate the trend. While the decline in the value of building work done for houses is new, the non-house building work actually began to decline in the March quarter of 2019.
Chart 11 shows the value of building work done for VIC. While both work for houses and non-houses increased from mid-2014, the rate of growth for non-houses has been above that for houses. This growth became a decline in mid-2019.
Chart 12 shows the data for only the March quarter. Here there is a strong pattern of growth for both house and non-house construction value, which went into a decline for the March 2020 quarter.
The graph of building work done for QLD, Chart 13, shows a very significant pattern. Virtually all of the growth that has occurred since mid-2014 has been in the non-house sector, with this peaking early as compared to the other states, in the second half of 2016. At the same time, while growth has been strong in non-house, the house sector has accounted for more value. The decline form 2017 onwards becomes especially sharp in the second half of 2019.
Chart 14 shows that the March decline for non-house started in 2016, though it was shallow in 2019, and very steep for March 2020. For the house sector, 2019 saw a shallow decline, which became much steeper for 2020.
For SA, Chart 15 indicates the state experienced an earlier fall than the other states, at the end of 2012, and has experienced mild but persistent growth since then. While the house sector dominates, the non-house sector has been growing at an equal rate.
Chart 16 shows the house sector has experienced slow growth, with only a slight decline for March 2020. The non-house sector has fluctuated around shallow growth, and actually improved slightly for March 2020.
The WA situation is unique in Australia. As Chart 17 shows, residential building work done dipped sharply in mid-2012, then rose to a peak in mid-2015. It then fell steeply until mid-2017, and continued to decline through to 2020. While the non-house sector did grow at a higher rate than the house during the "boom" period, it also declined faster during the "bust" period.
Chart 18 compares the March quarters for WA, and shows the steep slide of the house sector, and the milder decline of the non-house sector.
The situation for TAS is somewhat choppier, as Chart 19 shows. There is a trough for 2013, followed by growth in 2014 and 2015, then a trough for 2016 and much of 2017, followed by more growth through to 2020. It is a market very much dominated by the house sector.
The stats for the March quarters in Chart 20 repeat that basic pattern, with the house sector growing since 2017, and the non-house sector representing a flat line, with some growth in 2018.
For context, it's worth taking a look at some of the charts the RBA makes available.
Chart 21 shows that private dwelling investment has been falling for the past year, despite, as Chart 22 shows, an ongoing increase in house prices, likely fuelled by the sharp decline in interest rates, as illustrated in Chart 23. Low interest rates have not encouraged business investment, as shown in Chart 24, and that is hardly going to get better, as the chart of business sentiment, using figures from NAB, indicate in Chart 25. This ongoing mixture of circumstances has led to record low wage growth, as shown in Chart 26.
As we said in the introduction, much of the task of working through the stats and getting some idea of what the future might hold comes down to sorting out the nature and impact of various factors. The policy adopted by the current federal government for FY2019/20 was to provide a surplus (put Australia "back in the black"), at, it would seem, almost any cost. That meant curtailing any kind of stimulus spending. That resulted - well before the bushfires or the pandemic came about - in lower and lower interest rates, which continued to have less and less impact on stimulating the economy.
For most economists, this did not seem a very rational approach, as there is little doubt that it created an increasingly weaker economy through calendar 2019. The conclusion has to be that this path was chosen not for rational economic reasons, but rather for socio-political ones.
HNN's best guess as to what was going on is that the government more or less put the economy "in the freezer", in the hope that China would begin to grow, fuelling exports, and solving Australia's own growth prospects. Importantly, that growth would occur in "traditional" sectors, such as mining and agriculture. If instead Australia had engaged in stimulus spending, it would have made sense to spend in high growth areas, such as alternative energy, software and data services - sectors which would disrupt the "traditional" sectors.
Rather evidently, this plan did not work out. Somewhat ironically, in fact, the government has found itself in the role of having to provide massive amounts of stimulus spending. Rather than contributing to real growth, however, that spending now can, at best, help Australia to regain a functional economy - albeit still stuck in slow growth.
Looking at the current statistics, it seems that what we are seeing is most likely that the pandemic - at least up until May - had not really created outsize, independent effects on the building and construction industries. While there were significant declines in 2020, these declines are largely in line with declines already underway at the end of 2019.
If we look at building approvals, what we are really seeing is the best guess by property industries as to how the economy will look in 12 to 18 months. With overall declines in approvals, the answer is "not all that good", but it is very far from any kind of real collapse.
The market is pretty much guessing that the economy for property investment purposes will resemble that of the 2019 December quarter: very low growth, with little prospect for immediate improvement. Added to that will be a reduction in general population growth through to the end of 2021, but there is already a high enough level of general demand to support the industry through the next year.
The building activity numbers are, for most states, signalling a slowdown. The numbers for the March 2020 quarter are just far enough outside of statistical likelihood to signal they represent a change and not a fluctuation. However, the level of activity is high enough in most states that while a reduction will hurt, it won't reach levels low enough to see people leave the industry, and then generate future problems of shortages in both labour and expertise.
Outside of the immediate effects of the pandemic, there are also the ways in which efforts to help the economy recover will shape the housing industry. The government has already released its "HomeBuilder" scheme, which has bewildered more than a few industry commentators.
Offering grants of $25,000 to people spending $150,000 or more on a renovation or purchasing a house and land package for under $750,000, it's difficult to understand as a strictly stimulus package. With couples earning as much as $200,000 a year are able to apply for the grant, it's difficult to see how it will be truly additive to activity in the industry.
There are other, practical measures that could be employed. One proposal put forward by Master Builders Australia (MBA) is:
Support ongoing building of house and land packages through interest free loans for a component of the cost, for example 25 per cent for title-ready blocks. Housing developers, big and small, will be hit by a dramatic fall in sales for new homes due to anxiety over a potential recession but this will rebound meaning the risk of default on the loan would be minimal. This is needed to keep builders on the job, employing people and paying their tradies.
Effectively what the MBA is suggesting is a means to better securitise the building industry, on a range of levels, helping to ensure that in tough times it does not collapse through a lack of ongoing credit. That is a sophisticated and very useful approach - but it's not flashy. It's about addressing the needs of the construction industry through direct support, rather than by simply stimulating demand in very limited areas.
HNN has suggested in the past that we are living through a time when national governments - globally, not just in Australia - are not adept at helping out the business community, even when this is to society's benefit. There are increasing signals coming from the Australian government that support in recovering from the pandemic will be limited, and that businesses - in hardware and construction in particular - will need to rely on their own resources to succeed.
There are arguments to be made about whether this reflects a particular ethos, or even a lack of a capability. What is more certain, however, is that the way the effects of the pandemic play out on the economy are going to be more regional than national.
To go back to Chart 2, which shows the quarter-on-quarter growth rates for alterations and additions as recorded by the ABS for the national accounts, there is that very stark, tight cluster of low growth for the December 2019 quarter, followed by a scattering of different positive and negative growth rates for the March 2020 quarter.
The clustering was caused by overwhelming national concerns, brought about by a slow-growth economy. The scattering was caused by the effects of both the bushfires and the pandemic, which had widely varying regional results.
Not to over simplify, but the strategy going forward will be for regions to make sure that in that scattering of responses to the pandemic, they end up on the positive part of the graph rather than the negative.
How can regions do that? It is a feature of current government that state and local governments tend to have much less discretionary funds available than the national government. But what regional governments do possess is better knowledge about their polity, as well as the ability to ably foster connection and communication.
One area where HNN could see regional participation working well would be in the further development of exurban areas. We've seen the "work from home" (WFH) movement take off, as a consequence of many workers not being able to risk the office during the pandemic. This could mean that more people would find living at a distance of 100km or more from a city centre both possible and welcome.
State and local governments could find ways to encourage that kind of community building. Not only would that be a boost to the construction industry, but it would also see more funds flow into regional areas - which, HNN believes, could see very tough times later in 2020.
The pandemic has already taught many of us new lessons about community, whether that is about being grateful to others who obey social distancing to help keep us all safe, or the neighbour who checks in on your family. It may be that the best way out of the pandemic will be found in new ways of connecting and developing a resilience that is based on local links.