Biggest lift in home renovations in 21 years

Construction work done

What happened? The value of construction work done rose by 0.8 per cent in the June quarter to be up by 0.4 per cent on a year ago. Construction activity was 0.5 per cent above pre-Covid levels in March 2020. Residential building rose 8.9 per cent over the year to June – the strongest annual pace in 5 years. The value of alterations and additions (renovations) were up by 24.5 per cent over the year to June – the strongest growth rate in 21 years. But dwelling investment is unlikely to make a positive contribution to June quarter economic growth (GDP).

Investment implications: Share prices of ASX-listed building materials companies have lifted during the pandemic. Today construction materials company Adbri reported strong first half-year 2021 earnings results. The company said that sales volumes in July and August have been in-line with or ahead of expectations across all markets, except NSW and South Australia due to lockdowns. But Brickworks recently reported that brick sales are down 50 per cent from pre-lockdown levels due to tighter Covid-19 building restrictions. And plumbing supplies company Reece said sales are down 40 per cent in Sydney and 30 per cent in Melbourne due to lockdowns.

The data on construction work is important for builders, building material companies and developers.

What does it mean?

• The construction boom continued in the June quarter, supported by record low interest rates, HomeBuilder stimulus and state-based housing grants and stamp duty exemptions for first home buyers. The pandemic has also seen demand for detached houses increase alongside a surge in renovation activity. Aussies have busily upgraded their abodes, while others have sought more space during lockdowns. And with international borders closed indefinitely, discretionary spending has been diverted away from international travel towards housing. But slower population growth, with fewer overseas arrivals, has constrained underlying demand for homes.

• Home building activity was buoyant in the first half of 2021, but activity moderated in the June quarter after the HomeBuilder-induced frenzy at the beginning of the year. Total residential building fell by 0.1 per cent in the June quarter, but was up 8.9 per cent over the year – the strongest annual growth rate in 5 years. And new home building work was flat in the quarter, but jumped by 6.5 per cent over the year – the strongest pace in 3 years.

• Like the detached housing market, renovations are mid-way through a record year, supported by increased household savings and increased time spent at home during lockdowns. Alterations & additions fell by 0.5 per cent in the June quarter but lifted 24.5 per cent on a year – the strongest annual growth rate in 21 years. The value of renovation work was $2.87 billion – just below record highs of $2.88 billion in the March quarter.

• Public construction work (up 3.2 per cent) and engineering construction (up 1.8 per cent) both lifted in the June quarter as governments swung into action during the pandemic, committing to new transport-related infrastructure projects.

• Commercial (non-residential) building rose by 0.3 per cent in the June quarter to be down 6.0 per cent on the year. An excess of CBD office space capacity due to lockdowns and working-from-home arrangements have reduced demand for new office building and upgrades.

• The near-term outlook for the construction sector is challenging with activity expected to contract in the September quarter due to prolonged lockdowns in NSW and Victoria. Construction work was paused in Greater Sydney between July 19 and July 31. And leading indicator of construction activity – the Australian Industry Group (AiGroup) and HIA Australian Performance of Construction Index – contracted in July with on-site building activity interrupted and supplier deliveries disrupted by government restrictions.

• Nevertheless, home construction activity – especially for detached houses – is expected to remain elevated over the next 12 months as builders work through a backlog of HomeBuilder-related projects. Council approvals to build houses are still-supportive of the home building pipeline, but have eased off record highs in recent months, reflecting the previous pull-forward of policy stimulus.

• Dwelling commencements could be near a peak as the HomeBuilder grant is pared back, and property prices and building costs surge. In fact, economists at Macromonitor expect housing construction to peak at around $44 billion in financial year 2022 as homes initiated by HomeBuilder reach completion. Similarly, Commonwealth (CBA) Group economists estimate that the number of dwelling commencements will ease from 181,400 in 2020 to 178,600 by the end of 2021, before falling to 159,000 in 2022 due to slower population growth and some overbuild supply.

• But while residential building is expected to slow in 2022, Macromonitor’s latest construction outlook report sees transport infrastructure construction and engineering surging by 32 per cent in financial year 2022, before peaking at $49 billion in 2023/24. The pipeline of major projects include Sydney’s Metro-West rail line and Melbourne’s North-East Link road, and regional works including Inland Rail and upgrades on the Bruce, Pacific, and Princes highways.

• Construction businesses continue to report ongoing supply delays and price hikes for building materials and inputs. Builders are reporting shortages for key materials, such as steel, timber, PVC pipes, electrical equipment, concrete, bricks and tiles – driving up costs. Tradie shortages are emerging with sub-contractor rates lifting, causing some construction delays. In fact, the CoreLogic CHIP Index, which measures the relative cost of building stand-alone houses, shows construction costs rose 1.4 per cent in the three months to June, making an annual increase of about 4.0 per cent.

• And today’s ABS data showed that over the year to June, construction costs grew by 1.3 per cent with building costs up 1.1 per cent – the most in 2 years – and engineering costs climbed 1.6 per cent.

What do you need to know?

Construction work done – June quarter, 2021

• Construction work done rose by 0.8 per cent in the June quarter with the value of construction work done up by 0.4 per cent on a year ago to $52.88 billion. It was the strongest annual growth rate in 3 years.

• Private sector construction activity was flat in the June quarter and was down 0.2 per cent on a year ago.

• Public sector construction work lifted 3.2 per cent in the June quarter to be up 2.1 per cent on a year ago.

• Construction work rose in seven states/territories in the June quarter: NSW (+0.3 per cent); Victoria (+2.7 per cent); Queensland (+2.7 per cent – the most in 3½ years); South Australia (+4.2 per cent); Western Australia (-1.9 per cent); Tasmania (+10.6 per cent); Northern Territory (+36.6 per cent – the most in 8½ years); and the ACT (+0.4 per cent).

• Engineering work lifted 1.8 per cent in the June quarter to be down 2.7 per cent over the year.

• Commercial (non-residential) building rose by 0.3 per cent in the quarter to be down 6.0 per cent on the year.

• Total residential building fell by 0.1 per cent in the quarter, but was up 8.9 per cent over the year – the strongest annual growth rate in 5 years.

• New home building work was flat in the quarter to be up 6.5 per cent over the year – the strongest pace in 3 years.

• Alterations & additions fell by 0.5 per cent in the June quarter to be up 24.5 per cent on a year – the strongest annual growth rate in 21 years. The value of renovation work was $2.87 billion – just below record highs of $2.88 billion in the March quarter, 2021.

• Construction costs rose by 0.9 per cent in the June quarter, Building costs were up 0.5 per cent and Engineering costs lifted 1.5 per cent – all lifting by the most in 2½ years. Over the year, construction costs grew 1.3 per cent with building costs up 1.1 per cent – the most in 2 years – and engineering costs climbed 1.6 per cent.

Published by Ryan Felsman, Senior Economist, CommSec