Home renovations to post modest recovery?

Advertisement

ScreenHunter_11 May. 22 18.49

By Leith van Onselen

The Housing Industry Association (HIA) has released a new report (below) examining the state of the home renovation market, where activity has declined sharply over the past 18 months (see next chart).

ScreenHunter_12 May. 22 18.56

The reasons for the declining renovation activity are as follows, according to the HIA:

One of the major shifts experienced in Australia’s 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 household’s confidence to make 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.

Advertisement

The HIA believes that renovation activity will remain relatively subdued, but should recover somewhat as lower interest rates eventually start to bite:

As we’ve 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…

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.

ScreenHunter_13 May. 22 19.04

Full report below.

Advertisement

[email protected]

www.twitter.com/Leithvo

HIA Renovations Activity Report (May 2013)

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.