The home renovations market represents a major segment of the overall
residential building industry. There are several factors that drive different
types of renovations – this note from Housing Industry Association discusses
the impact of changing economic conditions, demography and housing preferences
on renovations.
Alterations and additions to residential dwellings can range from minor
repairs through to major reconstructions. Consequently, it is difficult to
explain fluctuations in activity levels across the entire sector. While there
are sources of demand for renovations that are relatively stable over time and
can therefore be easily anticipated, other sources of demand depend on economic
conditions or demographic developments. Dissecting the various sub-components
of demand provides useful insight and reveals that each segment of demand has a
distinctive set of factors that influence activity levels.
General Home Maintenance and
Upkeep
Probably the least glamorous part of the home renovations sector,
general maintenance and home upkeep account for the largest share of
expenditure on alterations and additions each year. While this type of work is
characterised by a very large number of relatively low value jobs, the quantum
of total work can be huge given that there are over nine million private
dwellings in Australia, which all require regular maintenance. Demand for
general maintenance is likely to be fairly stable and predictable over time
since households generally undertake routine upkeep of their homes irrespective
of the fluctuations in economic conditions.
Expecting the Unexpected
Unpredictable climatic events such as cyclones, flooding or bushfires
can result in extensive damage to the housing stock within the affected areas,
necessitating large scale reconstructions. The very unpredictability of these
types of events makes long range forecasting of building activity stemming from
such events impractical. In the wake of such events, affected areas typically
experience a substantial uplift in building activity due to repair and
reconstruction work. Demand in these situations is not likely to be highly
dependent on economic conditions as most of the cost of reconstructive and
repair work will be met by insurers.
Rejuvenation and Modernisation
Renovation in the natural course of time is typically undertaken to
modernise an ageing home. While the major structural elements of the home
generally have a long life, fixtures and fittings don’t last as long. Modernising
a home will typically involve bringing the living space up to speed with
contemporary trends and technologies. This can range from relatively minor
cosmetic updates through to major structural works. HIA’s research shows that
kitchens and bathrooms are typically replaced or updated around every fifteen
years. Changes in the way households utilise living spaces has resulted in the
homes built today having vastly different floor plans. For new homes, a floor
plan with close integration of the kitchen, internal living spaces and outdoor
living spaces has emerged as a desirable layout. The greater divergence between
the way households utilised living spaces in the past and the way they do now
is likely to be a factor that drives demand for renovations.
Housing Densification
Detached homes previously would typically have a large yard; however, over
time it has become more common for the footprint of new dwellings to cover a
larger share of the lot with a gradual decline in lot sizes. While households
in older areas, where there are relatively small homes on large lots are
inclined to expand the footprint of the home over a greater area with single
storey additions, homes on smaller lot sizes may not find it viable to expand
laterally and will have to make second storey additions to get more living
space. The higher costs associated with second storey additions may mean it is
more cost effective to move house than undertake major renovations in these
areas.
The composition of Australia’s new housing stock has changed over the
last decade with a greater proportion of new homes being built in multi-unit
developments. There is far more limited capacity for households to make major
alterations or additions to these types of dwellings when compared to
freestanding homes. However, as these homes age they too will require updating
and will therefore generate demand for renovations, especially in the kitchen
and bathrooms.
The DIY Market
There is an increasing trend to purchase homes to renovate with the
objective of reselling the property for a profit. The growth in this part of
the market has been aided by increasing aggregate home price levels during this
period and some aspects of the tax system, namely the tax free nature of capital
gains on the households’ principal place of residence. Changes in expectations
around future home price growth are likely to have a major influence on the
willingness of households to undertake renovation projects as profit making
ventures. Factors that have an impact on transaction costs, such as changes to
stamp duty rates, are also likely to have an impact on this type of activity.
Baby boomers
The baby boomer generation is either retired today or close to retirement.
There is some evidence to suggest that many households undertake home
renovations relatively soon after retirement, especially with access to their superannuation
savings. Given that households in this group are typically well capitalised,
they are likely to generate greater demand for larger renovations. They will
also most likely continue to reside independently in their own home longer than
previous generations thanks to longer life expectancy. Insufficient capacity in
the residential aged care sector as well as changing housing preferences of
this segment are also additional reasons for the baby boomers to continue
living in their own homes. Enabling older people to live independently in their
own homes is likely to require alterations, which include incorporating
‘universal design’ principles.
First Home Buyers
Low levels of housing affordability among first home buyers lead to compromises
at the time of purchase. Though they will eventually make alterations and
additions over time to make it more appropriate for their needs, the financial
constraints they face immediately after the purchase of a home will initially restrict
demand for major renovations. Demand for renovations from this segment of the
market should move in line with real income growth over the long term; however,
in the short term demand is likely to be highly susceptible to fluctuations in
line with movements in consumer confidence.
Economic Conditions
In most cases home renovations represent substantive discretionary
expenditure for households; therefore, demand will be heavily influenced by
factors that affect a household’s financial position and willingness to commit
to major capital outlays. A number of factors will influence decisions,
including job security; income and home price expectations; borrowing costs;
and perceptions about the broader economic and political landscape. Many home
buyers make modifications to their homes relatively soon after purchasing an
established dwelling to adapt their home to their specific needs.
Expenditure on ownership transfer costs is a reliable indicator of
changes in the volume of property transactions. Ownership transfer costs comprise
of professional charges incurred when acquiring property, including fees paid
to lawyers, architects, surveyors, engineers and valuers, and commissions paid
to estate agents. There is a very strong correlation between expenditure on
alterations and additions and expenditure on ownership transfer costs.
Current Market Conditions
Despite shaky consumer sentiment, leading indicators of demand for
larger renovation jobs (requiring council approval and valued over $10,000)
suggest contemporary market conditions are improving. There was an 8.2 per cent
increase in the aggregate value of renovation jobs approved during the March
2014 quarter. From a strictly statistical perspective, this takes the value of
approvals to a level that is only 1.2 per cent above the level recorded in the
corresponding quarter a year earlier. Seasonal factors mean the value of
lending for renovations jobs in the March quarter is generally always lower
than the preceding December quarter and this year was no exception. The value
of lending in the March 2014 quarter was 5.3 per cent lower than the December
quarter. However, more importantly, the value of lending in the March 2014
quarter was 5.2 per cent higher than the in March quarter a year earlier.
After dropping to decade lows in 2013 there is huge upside potential for
renovations activity. While consumer confidence has been relatively subdued,
low interest rates and home price appreciation are two important factors in
favour of a recovery. The official statistics covering the March 2014 quarter
finally provides confirmation that some of the potential has been realised. After
a slow start to the 2013/14 fiscal year, renovations investment has now posted
two consecutive quarters of growth through to the March 2014 quarter. This
provides some confidence for HIA’s forecast of 1.0 per cent growth in the total
value of renovations investment in 2013/14 to around $28.6 billion. Momentum is
expected to build over the following years with growth of 1.2 per cent, 2.3 per
cent and 2.5 per cent in each of the three years through to 2016/17. This
profile would see renovations investment once again exceed $30 billion.