Home Insights Soaring construction costs dent reno demand as market cools

Soaring construction costs dent reno demand as market cools

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Australians spent more on home renovations last year than at any other time since records began in the 1970s, but skyrocketing costs are starting to undermine their DIY dreams.

The value of approved changes and additions will reach a staggering $12.49 billion in 2021, a 35% year-on-year surge, according to Australian Bureau of Statistics building approvals data.

Renovations that require approval typically involve structural changes to the building. Simple kitchen or bathroom protuberances typically do not include these types of modifications and are therefore not included in the building permit data.

That means the actual value of all the renovations is likely to be well above the record levels shown.

Renovation activity hit a record high last year.Photo: Getty

Home renovations surged across the country as people spent more time at home during the COVID-19 pandemic, coupled with government subsidies, ultra-low interest rates and improved household savings.

Many of these projects were supported by the federal government’s HomeBuilder program, which was rolled out in June 2020 to help the construction industry through the pandemic.

The scheme provided cash grants to eligible people to encourage new builds and renos.

For some, the limited supply of properties for sale in 2021 has likely increased the motivation to renovate and upgrade their current homes rather than sell and look for new properties.

And as real estate prices skyrocketed, some may have unleashed significant equity gains amassed through the pandemic to fund renovations.

The value of approved home renovations and additions reached a record high in August 2021, and the September 2021 quarter set a record for the value of work completed.

Across the states, the biggest rise in 2021 was in New South Wales, with a 40% rise in approved values. This was followed closely by Victoria, which rose 37%, followed by South Australia and Queensland, which rose 34% and 32% respectively.

Housing construction, aided by record low interest rates alongside government support, drove a huge amount of construction activity in Australia last year. According to ABS, the total value of residential building work done across Australia increased by 4.8% in 2021 after falling by 6.7% in 2020 and 7.5% the year before.

But now things are changing, with inflation and rising construction costs, rising interest rates and softening purchase demand causing activity to recede from high levels.

Construction material shortages, supply chain disruptions and rising costs are hitting the construction industry. Also, retrofitting activity has slowed and approvals are declining as they struggle with significantly higher construction costs.

The value of changes and additions approved in June 2022 is 14% lower than the record levels seen last August.

Total building approvals fell 4.7% in June, down 8.2% year-on-year on a seasonally adjusted basis. Prices of non-residential buildings led the decline, dropping 6.1% following May’s strong performance.

The total value of approved residential buildings fell by 3.7%. This included a 3.9% decline in new residential construction and a 2.2% decline in renovations and extensions.

Cumulatively, residential building approvals for the first six months of the year are down 9% compared to last year.

Construction input prices continue to rise, rising 17.3% over the past 12 months, according to ABS.

That’s because soaring commodity prices, skyrocketing global transportation costs, and surges in demand coupled with supply chain disruptions have pushed the cost of raw materials such as wood and metal products skyrocketing amid shortages.

Rising costs are putting pressure on Reno’s ambitions.Photo: Getty

Labor shortages are pushing building construction costs even higher, with data showing home construction prices rose 6% in the June quarter, the strongest rise since the series began in 1996.

The impact of rising interest rates, rising costs and uncertainty is evident across homebuilders, with fewer inquiries on realestate.com. The AiG Construction PMI new orders sub-index has also weakened due to weaker demand.

And overall, Australia’s AiG construction PMI, which measures activity in the sector, fell from 46.2 in June to 45.3 in July 2022. This was his second straight month of contraction.

Consumer confidence is declining amid rising interest rates and inflationary pressures. The combination of industry challenges and massive increases in construction costs will lead to fewer people considering retrofits and less demand for new buildings.

Access to transactions is also a hurdle. Worker lead times are long.

These factors may continue to weigh on the homebuilding sector.

At the same time, there is some respite on the horizon in that manufacturing and logistics tensions are beginning to normalize. I have.

Price increases are likely to peak this year and moderate in 2023, but barring a significant setback, prices will still rise.

An analysis of the top LGA regions for renovation spending over the 12 months to June 2022 reveals that Queensland’s LGAs will see the most capital invested in renovations, primarily in urban centers or affluent areas with high housing values. is shown.

Most wealthier urban areas also have a higher proportion of renovations to total building activity.

This also makes sense in the context in which it is implemented, given that the HomeBuilder grant is broad support for the industry rather than targeting low-income households.

In contrast, the least valued renovations are in sparsely populated LGAs with large stretches of uninhabited land, such as Western Australia, Far North Queensland and parts of the Northern Territory.

Looking at the LGAs with the highest percentage of building permits in the conversion/extension category, most are areas with little new development, residents renovating existing properties, or low building activity. .

However, it should be remembered that this data from ABS only shows changes and additional activities that require approval.

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