Alterations & additions – loans decline in value

Australia’s long run of growth in expenditure on Alterations & Additions peaked in the second quarter of 2017, when it reached an annualized AUD8.765 billion, since which it has declined to AUD8.396 billion for the year-ended March 2018. Compared with a year earlier, the value of construction work for these purposes was 3.9% lower.

After a long run of growth, a dip is to be expected of course, especially in a typically cyclical market. However, there are other features that should make us more than a little curious about the nation’s expenditure on dwelling improvements.

To get a grasp of this, the chart below shows expenditure on Alterations & Additions over the last thirty years. This is deflated by inflation and is thus the ‘real’ expenditure, where each period is, by spending power, comparable to the other periods. 


To go straight to the dashboard and take a closer look at the data, click here.

So, what does the chart tell us?

First, despite the record run of dwelling approvals over the last few years, expenditure on Alterations & Additions fell well short of records achieved in 2011. In the third quarter of 2011, finance for expenditure on renovations and extensions totalled AUD9.066 billion, some 3.3% higher than the peak of the most recent cycle in the second quarter of 2017. 

Second, since around 2004, successive peaks in expenditure have not been trending higher, with average annual expenditure more or less stable over the last fifteen years, which compares with stellar growth over the first fifteen years displayed in the chart. For the fifteen years from 1988 to 2003, annual growth in loans for Alterations & Additions grew an average 1.6%. From 2003 to 2018, average annual growth was just 0.3%, or less than one-fifth that of the earlier period.

Third, the growth in expenditure in the most recent cycle was the slowest of all of the growth periods over the generation since 1988. For the five years through to the recent peak in the second quarter of 2017, loans for Alterations & Additions grew an anaemic 0.2%. The next softest rate of growth over the five years leading to a peak was 2.0% per annum achieved in the third quarter of 2011. By any measure, the recent rate of growth has been slow.

We may consider this data to be counter to expectations. After all, new dwelling approvals have been so strong over this period. So why hasn’t expenditure on Alterations & Additions also been booming?

The answer probably lies in the fact that money spent on new dwellings, including investment loans that fuelled much of the growth in apartments over the last five years, can only be spent once. Households that committed themselves to an investment property could not also commit – or could not commit as much – to renovations and extensions of their other properties, including their primary family home.

This chart shows the value of new housing loans for owner occupiers (blue) and investors (red), with the role of first home-buyers being line scudding along the bottom. Unfortunately, this data goes back only to 2000, but it serves its purpose, noting this is net of refinancing, so is new dwelling and purchase loans only.


To go straight to the dashboard and take a closer look at the data, click here.

What is immediately clear from the chart is that over the last two decades (or thereabouts), loans to investors have grown very strongly as a proportion of total loans. For the year-ended April 2001, already on the rise, investors accounted for 35% of the total value of loans for new dwellings. Fast forward to the year-ended April 2017, and that proportion (down from half less than two years ago) is at 44% of total loan value.

To our mind, the only thing that makes sense in explaining this data is that instead of upgrading the family home, Australians opted increasingly to invest in the acquisition of new property assets. Its not a new phenomenon as the charts show, and it surely bears some relationship to public policy considerations like negative gearing.