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.

Melbourne

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

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

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

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

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

The response

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

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

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

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

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

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

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

Finally, I would like to address the question of housing prices, as some analysts have suggested we might lift the cash rate to cool the property market. I want to be clear that this is not on our agenda. While it is true that higher interest rates would, all else equal, see lower housing prices, they would also mean fewer jobs and lower wages growth. This is a poor trade-off in the current circumstances.

That is not to say that there aren't public policy issues to be addressed here. On the financial side, the issue is the sustainability of trends in household borrowing. We are continuing to watch this closely, with the Council of Financial Regulators discussing possible regulatory steps if lending standards deteriorate or credit growth accelerates too much.

More broadly, society-wide concerns about the level of housing prices are not best addressed through increasing interest rates and curbs on lending. While monetary policy is contributing to higher housing prices at the moment, the way to address these concerns is through the structural factors that influence the value of the land upon which our dwellings are built. The factors include: the design of our taxation and social security systems; planning and zoning restrictions; the type of dwellings that are built; and the nature of our transportation networks. These are all obviously areas outside the domain of monetary policy and the central bank.

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

Analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Analysis

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

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

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

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

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

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

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

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

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

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

Analysis

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

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

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

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

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

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

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

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

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

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

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

Analysis

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

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

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

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

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

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

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

National accounts

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

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

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

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

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

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

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

Building work done

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

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

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

Analysis

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

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

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

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

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

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

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

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

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

Approaches and consequences

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

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

The three factors

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

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

The paper suggests four different levels of PHSM:

TTIQ is presented by the DMRNC as either being "optimally" or "partially effective", a factor that is based largely on the peak case-load created by other conditions.

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

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

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

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

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

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

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

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

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

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

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

Analysis

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

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

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

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

Planned expenditure

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

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

Zooming in on the Brisbane area, Chart 2 offers an expanded view.

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

Growth in planned expenditure for renovations

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

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

The big surprise is that in sixth place there is Rockhampton, with $104,735,000 in expenditure.

Chart 4 shows the situation for the areas around Brisbane.

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

Ipswich, for example, went from an average of $28,699,000 to $203,218,000 for FY2020/21, while Rockhampton went from an average of $15,506,000 to $104,735,000.

Number of houses approved

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

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

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

It's interesting that Rockhampton, which saw increased renovation activity, saw a decline in house approvals, going from 140 in FY2019/2020 to 135 in FY2020/21, a loss of 4%.

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

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

Number of multi-unit dwellings percentage change

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

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

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

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

Analysis

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

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

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

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

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

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

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

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

Analysis

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

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

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

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

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

Alterations & additions

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

Total expenditure

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

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

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

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

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

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

Percentage growth

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

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

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

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

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

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

Detached houses

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

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

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

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

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

Other residential, including multi-unit dwellings

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

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

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

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

Analysis

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

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

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

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

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

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

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

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

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

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

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

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

Analysis

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

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

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

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

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

LGA total value of houses

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

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

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

LGA total value of other residential

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

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

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

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

Overview of all residential

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

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

Analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

Analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Potential work

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

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

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

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

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

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

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

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

Analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Against this background, the economy is now recovering from the pandemic and some firms are finding themselves facing labour shortages. At least some of these business face a choice: do they increase wages in an effort to attract new employees and put up their prices or do they pursue another strategy?

Many firms are choosing this second option, relying on non-wage strategies to retain and attract staff. Some are also adopting a "wait and ration" approach: wait until labour market conditions ease, perhaps when the borders reopen, and until then, ration output. For some, this is a better option than paying higher wages and driving up their own cost base. This is especially so if: increases in the cost base are difficult to reverse later on; there is a reluctance to increase prices; and the business expects labour market conditions to ease before too long. By waiting and rationing, firms can avoid entrenching a higher cost structure in response to a problem that might be only temporary.

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

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

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

This pick-up in business investment is welcome, but we have a fair way to go to reverse the decline in investment over the past decade. If we are to build the capital stock that is needed for a more productive economy and a durable expansion, a further lift in business investment is required.

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

Analysis

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

Many international investors are very focused on this issue and it's particularly important for the agricultural sector because up to 70% of agricultural output in Australia gets exported - so you are relying on overseas markets, and increasingly overseas investors are asking about the carbon content of production, and that is a trend that is only going to continue.

So agriculture has tremendous opportunities here, but we need to find ways to disclose to global investors and global customers the decarbonisation strategy and how successfully we are doing that.

It is a really important issue and it's going to become more important.

Ms Murphy commented on what Mr Lowe said:

Lowe inhabits a universe where climate change is real, the science is settled, and global capital has already made its choice.

If you inhabit that world, there's very little grey area. You can see that transformation is coming. You can see countries are now in a race to prosper in what Scott Morrison now likes to call the "new energy economy".

That race is only intensifying.

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

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

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

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

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

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

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

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

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

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

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

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

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

Analysis

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

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

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

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

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

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

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

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

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

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

Analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Building work done

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

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

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

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

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

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

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

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

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

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

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

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

Analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

Analysis

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

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

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

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

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

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

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

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

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

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

Analysis

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

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

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

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

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

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

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

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

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

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

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

Analysis

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

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

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

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

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

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

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

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

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

Yolla Co-Op

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

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

We have been looking for the past six to 12 months for opportunities to grow the Yolla brand. We are currently in the due diligence phase. The location is amazing. You couldn't pick a better spot with highway frontage and easy access for members and the public.

One of the great advantages of the ... site is its large yard which will make easy for the distribution of bulky goods.

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

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

The business has continued to go from strength to strength over the past eight to nine years. We have a large amount of support and we currently service a lot of that area already with our delivery service and this is a logical next step as a business. If we get through due diligence the objective is to run it as a third shop front for us.

I hope that people in the area see the benefits of having a rural supply store that is able to provide competitive pricing. As a business we continue to support local communities where we can and will be employing staff.

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

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

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

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

New South Wales

Figure 1 shows a summary of these statistics for NSW.

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

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

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

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

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

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

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

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

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

Victoria

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

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

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

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

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

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

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

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

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

Analysis

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

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

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

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

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

This analysis deals with Queensland (QLD).

Value

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

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

Number

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

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

Number percentage change

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

Loan purpose

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

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

Analysis

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

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

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

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

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

This analysis deals with Victoria (VIC).

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

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

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

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

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

Analysis

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

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

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

This analysis deals with New South Wales (NSW).

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

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

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

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

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

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

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

Analysis

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

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

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

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

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

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

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

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

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

Queensland performed well, with an increase of over $1 billion, or 25.07%. Victoria (VIC) had the lowest percentage increase, of just 18.51%, or $1.1 billion. South Australia (SA) and Western Australia both showed increases of over 20%.

Looking at the month-on-month percentage change numbers, there is a significant drop-off in terms of gains for some states, led by VIC. The growth between February 2020 and February 2021 was only 4.19%, with WA also showing only 7.19% growth. By contrast, NSW showed growth of over 20%.

Some of this is due to these months lapping the months at the start of the COVID-19 pandemic, which had started to show strong hardware retail gains. This is likely the result of the lockdown from 12 to 17 February 2021. It is interesting that just those five days of Stage 4 lockdown had so severe an effect on retail sales. WA was probably also impacted by its lockdown, which ended on 5 February 2021, but had some lasting restrictions as well.

The conditions in the housing market are such that hardware retailers - and many other business sectors - are looking at housing statistics to judge how stable the current surge in the market is, and how/when it might come to an end. Without the cushion of variable interest rates, and with the federal government having already spent widely to boost the market, it is evident that the housing market has unique vulnerabilities over the next 12 months.

This has brought renewed focus to the Australian Bureau of Statistics (ABS) release of stats for building approvals through to January 2021. In examining these numbers - which now include around 10 months of the COVID-19 pandemic - we need to look to see how the market has been restructured. That might not tell us, immediately, how long running the current surge will be, but we might find some indication of which factors we should take into consideration.

HNN has chosen to examine in-depth the two major markets, New South Wales (NSW) and Victoria (VIC), as these often work as a bellwether for other markets - though other markets, of course, also have their own unique state and territory economies. We also look at the numbers for Australia as a whole.

The statistics

The particular statistics we are looking at is the 8731 series, the tables which detail the number of approvals and the value of approvals for various types of constructions. From these statistics we can also derive the average value of the building types, by dividing the total value by the number of approvals.

Sticking to only new residential construction we've limited the types of construction to houses, terrace/attached houses, one and two storey apartments, three-storey apartments, and apartments of four or more storeys.

We are viewing these statistics in two ways, first by comparing the raw numbers for the 12 months trailing to January, and then by comparing the percentage change in these numbers.

New South Wales

Looking at the first graph, what is clear is that there was a substantial contraction in approvals for 2019 and 2020, followed by a slight gain for 2021. Most of those losses came in the sector for apartments with four or more storeys, though there was also a significant fall in house approvals in 2020. There has been a slight uptick in house approvals for 2021, but that has been somewhat negated by the continued decline in apartments with four or more storeys.

The second graph, showing the value of the approvals, follows very much the same pattern, though there is slightly more of an upward bounce in values, as both houses and terrace houses grew in value more than they did numbers.

The third graph indicates that the greatest volatility in the averages has affected the smaller apartment approvals, with three storey apartments surging and then falling, and one and two storey apartments showing an overall decline. The house, terrace house and four-storey plus categories show steadier values. One reason for that volatility is that the two smaller apartment categories make up only around 1% of the total market, so small changes in approval numbers are reflected in large percentage changes.

Moving to the charts reflecting the percentage changes, in the first chart for the number of approvals, what can be seen is how much the housing market has been in decline for 2019 and 2020. Approvals were flatline from 2018 to 2019, then fell by close to 20% for 2020, before retuning to around 10% growth in 2021. Terrace/attached houses have followed a similar pattern, but with steeper declines. Three storey apartments have also recovered.

However, perhaps the most significant feature of this chart is the ongoing decline in larger apartment projects: over these four years the average annual decline has been close to 21%.

The second chart shows an interesting convergence for 2020 in the decline of value, with every category except terrace/attached houses clustering in a negative 17% to 20% range. For 2021 there is then a broad divergence in response, with both houses and terrace/