Renovations Activity The Recent Deterioration and Outlook

May 2013 Four years after the first round of the GFC and two years after the most volatile times of the crisiss second iteration, the full effect on renovations activity in Australia has become clearer over the course of 2012 evidenced by the chart below. Total renovations investment in Australia, throughout the most uncertain times of the GFC, parts I and II, managed to uphold historically high levels. Only in the past year, as households started to settle into this post-GFC era, has total renovations investment shown a sharp deterioration, which contrasts with pre-GFC times. Specifically, notwithstanding the slip following the introduction of the GST, the decade between the mid-90s and the mid-2000s was characterised by rapid growth in total renovations investment to unprecedented levels, which were largely maintained up until the end of 2011. The most recent deterioration has occurred against a post-GFC environment where there have been major shifts in the economy and housing market, which we seek to explore in this note.

Renovations Investment in Australia - Moving Annual Total

Source: ABS 5206 33,000
31,000

$ million (moving annual total)

29,000 27,000 25,000 23,000 21,000 19,000 17,000 15,000

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Dec-2011

Housing Industry Association Ltd 79 Constitution Ave Campbell ACT 2612 p 02 6245 1393 f 02 6257 5658 hia.com.au

One of the major shifts experienced in Australias economic environment since the GFC has been heightened consumer caution. This is demonstrated by the protracted weak consumer confidence measures and also the increased household savings rate now at around 11 per cent, compared with a negative rate just prior to the GFC. Since the GFC, cautious households have sought to pay down debt more quickly than previously, and it appears that renovations have been a casualty of this deleveraging process. A second (and intimately related) key shift in the backdrop to the current situation is weak dwelling price developments. Many large renovations are financed by borrowing against home equity. In the years prior to the GFC, households were accustomed to renovating in a rising dwelling price market where they could borrow against rising equity. In the first instance, soft prices affect a households confidence to make

Dec-2012

HIA Economics Group Research Note May 2013 Renovations Activity The Recent Deterioration and Outlook

significant capital investments into their homes. However, when combined with banks now reduced appetite to lend, home valuations have been low, therefore restricting the ability of households (those that actually do want to renovate) to borrow. As weve stated before, our view is that households are acclimatising to the changed world. Part of the adaptation to this post-GFC environment may be that the higher savings rate is here to stay. However, it is less clear to what extent deleveraging has run its course, and also how deep and prolonged will be concerns over employment. When these issues ease, this will certainly bode well for total renovations activity. Nonetheless, the extent of the most recent deterioration can t be ignored: Total investment into renovations (both large and small jobs) has experienced a sharp decline over the past two years; Following an initial, quarterly decline in the September quarter of 2011, there were subsequently five consecutive (and non-trivial) reductions in the value of investment into renovations; The latest data, covering up to the December quarter of 2012, shows that the quarterly volume of renovations activity was basically flat up by 0.3 per cent to $7.0 billion; Over the calendar year 2012, renovations investment summed to $28.5 billion, which makes that year the lowest for investment since 2003.

We believe the flat December result in total renovations investment represents a stabilisation to lower levels of activity that will be continued into the medium term. We expect that following the sharp decline suffered in 2012 (down by 8.4 per cent to $28.5 billion), total investment into renovations will rise by a modest 1.9 per cent to $29.0 billion in 2013 and remain around this level into 2015.

Major Alterations and Additions Market - Australia

Monthly Lending and Monthly Council Approvals ($000)
800,000

700,000

600,000

500,000

400,000

300,000

200,000

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Lending for Alts and Adds

Value of Council Approved Alts and Adds

Looking specifically at the value of major alterations and additions (jobs with an approval value of $10,000 or more), the value of these council-approved jobs has been quite volatile in recent months. The month of February 2013 saw the value of approvals reach a decade high following two weak months. As a result,
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HIA Economics Group Research Note May 2013 Renovations Activity The Recent Deterioration and Outlook

the value of approvals over the three months to February 2013 was a marginal, 0.5 per cent higher than in the previous three months. This level represents a 5.7 per cent increase on the value of approvals in the three months to February 2012. While lending for alterations and additions is a less reliable indicator as not all major jobs will be financed by borrowing it is showing a clear downward trend that has persisted since mid-2009. The latest update shows a continuation of this trend, with the value of lending down by 11.6 per cent to a level that is 5.4 per cent lower compared with the same period a year earlier. The chart below highlights the movement of the Cash Rate and lending for renovations. The decline in renovations activity reflects broad economic weaknesses, to which the RBA has responded with rate reductions. Over time, lower interest rates will support the bottoming out and eventual uplift in renovations lending.

Australia: Lending for Renovations and Interest Rates

Source: ABS Housing Finance; RBA; HIA
5.00 4,500,000 4,400,000 4.50 4,300,000 4.00 4,200,000 3.50 4,100,000 4,000,000 3.00 3,900,000 2.50 3,800,000 2.00 3,700,000

Jun-11

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RBA Cash Rate LHS

Lending for renovations (moving annual total) RHS

*This is an amended extract from the autumn edition of the National Outlook publication.

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