Soaring construction costs dent reno demand
Aussies spent more on home renovations last year than in any other period since records began in the 1970s, but soaring costs are beginning to dent DIY dreams.
According to Australian Bureau of Statistics building approvals data, the value of alterations and additions approved hit a staggering $12.49 billion in 2021, surging 35% compared to the year before.
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Renovations requiring approval typically include changes to the structure of the building. Usually, a simple kitchen or bathroom uplift doesn’t include those types of changes so wouldn’t be included in the building approvals data.
That means the actual value of all renovations is likely to have well surpassed even the record levels shown.
Renovation activity surged last year to record highs. Picture: Getty
Home renovations boomed nationwide as people spent more time at home during Covid, combined with government grants, ultra-low loan rates, and improved household savings.
Many of these projects were supported by the Federal Government’s HomeBuilder program, which rolled out in June 2020 to support the construction industry through the pandemic.
The scheme provided cash grants for those eligible to encourage new builds and renos.
For some, the constrained supply of properties for sale in 2021 would also have added to the impetus to renovate and upgrade their current home, over selling and looking for a new property.
And others may also have unlocked substantial equity gains accumulated through the pandemic as property prices surged, in order to fund renovations.
The value of residential alterations and additions approved reached an all-time high in August 2021, with the value of work done hitting a record in the September quarter of 2021.
Across the states, the largest uptick in 2021 was seen in New South Wales, where the value approved rose 40%. This was closely followed by Victoria, up 37%, then South Australia and Queensland, up 34% and 32% respectively.
Residential works drove a huge amount of construction activity in Australia last year, supported by record-low interest rates, alongside the government support. According to the ABS, the total value of residential building work done Australia-wide rose by 4.8% in 2021, after slipping 6.7% in 2020 and 7.5% the year before.
But the picture has now shifted and rising inflation and construction costs, along with increasing interest rates and a moderation in demand to buy, is seeing activity pullback off high levels.
A shortage of building materials, supply chain disruptions and soaring costs have hit the construction industry. And as much higher construction costs bite, renovation activity has slowed and approvals have declined.
In June 2022, the value of alterations and additions approved was 14% lower than the record level seen in August last year.
The value of total building approved fell 4.7% in June to now sit 8.2% lower year-on-year, in seasonally adjusted terms. The value of non-residential building drove the decrease, falling 6.1% after a strong May result.
The value of total residential building approved fell 3.7%, comprising a 3.9% drop in new residential building and a 2.2% decrease in alterations and additions.
In cumulative terms, the value of residential building approvals has fallen 9% in the first six months of this year compared to last.
According to the ABS, input prices to construction continue to rise, increasing 17.3% over the past 12 months.
That’s as commodity prices have boomed, global freight costs have soared, and a surge in demand coupled with supply chain disruptions have seen the cost of raw materials like timber and metal products skyrocket amidst shortages.
Rising costs are putting pressure on reno ambitions. Picture: Getty
Labour shortages have even further driven up building construction costs, with the data showing house construction prices rose 6% in the June quarter – the strongest rise since the start of the series in 1996.
The effect of rising interest rates, cost inflation, and uncertainty is evident across home builders, with a drop in enquiries on realestate.com. The new order sub index of the AiG Construction PMI has also deteriorated with weaker demand.
And overall, the Australia AiG Construction PMI, which measures activity in the sector, fell to 45.3 in July 2022 from 46.2 in June. This was the second consecutive month of contraction.
Consumer confidence has slipped with rates rising and inflationary pressures rising. Coupled with industry challenges and significant increases in construction costs, there will be fewer people looking to renovate and less demand for new builds.
Access to trades has also become a hurdle. There are long lead times for workers.
These factors are likely to continue to weigh on the residential construction sector.
At the same time, there is some respite on the horizon, in that manufacturing and logistics strains have begun to normalise. Construction cost increases are likely to ease, though off a high base, as demand moderates.
Price rises could peak this year and moderate in 2023, but prices would still be elevated without a significant pullback.
Analysis of the top LGA regions for renovation spend in the 12 months to June 2022 shows the most dollars were poured into renos in Queensland LGAs, and largely inner city or affluent areas with high housing values.
Most of the more affluent urban areas also have a high percentage share of renovations relative to total building activity.
This makes sense even in the context of the HomeBuilder subsidy being in play given it wasn’t targeted at lower-income households, but rather was a broad-based support for the industry.
In contrast, the lowest value renovations are in thinly populated LGAs with expanses of uninhabited land, like parts of Western Australia, Far North Queensland, and the Northern Territory.
Are you looking to buy an investment property to renovate? Talk with the team at Hicks Real Estate about what you need to know and where the best opportunities are in the local market place.
Stafford, Stafford Heights, Chermside West and Everton Park are all among the list of suburbs where there is a lot of renovation work going on. This does create opportunities for good investment returns. If you are in a street that is having a lot of renovations done, will drive the price of all the houses in the street upwards.
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