Wealthy suburbs splurge on renovations as new home building suffers

The renovation boom is crowding out spending on new homes and potentially worsening the housing crisis, with new data revealing Australians are spending more altering existing properties while expenditure on new homes is at its lowest level per person in decades.

Spending on renovations has boomed across Australia in the past five years. But new home building has flatlined since the international border was closed in 2020 during the pandemic – and is yet to bounce back, despite record migration.

Spending on renovations has risen 6.5 per cent in five years, while new home building has fallen 14 per cent.Credit: Getty Images

Adjusted for inflation, spending on new private residential construction fell 14 per cent in the five years to 2023-24, while renovations outlays went up 6.5 per cent, according to analysis by KPMG.

Australia’s home improvement boom helped renovation spending climb from 34.2 per cent of total residential construction expenditure in 2018-19 to 40 per cent in 2023-24.

Victoria marginally exceeded the national average, with 41 per cent of construction spending going to renovations or rebuilds last financial year. Victorians also spent proportionally more than any other state on knocking down and rebuilding a home, a sign that building apartments is less financially viable in Melbourne’s suburbs than in Sydney’s, according to the analysis.

In Melbourne, the renovation trend is strongest in sought-after inner eastern suburbs, where subdivision is often restricted by heritage controls and planning covenants.

Fifty per cent of the state’s total spend on renovations occurred within just 10 council areas, mostly in suburban and coastal suburbs with high property values.

Home owners in Boroondara in Melbourne’s inner east spent more on renovations – $311.1 million – last financial year than any other municipality, followed by Mornington Peninsula ($288.1 million), Stonnington in the inner south ($286.6 million), Yarra ($185.3 million) in the inner east and Bayside in the inner south-east ($153.9 million).

KPMG urban economist Terry Rawnsley said the renovation boom was arguably diverting resources away from building new homes during a severe housing shortage.

This was in part because renovating is simpler and less risky than building new homes, he said.

“More straight-forward planning processes and lower risks for builders make renovating existing homes a favoured option over adding multiple homes on the same block,” he said.

“There is a limited number of builders, a limited number of bits of wood and nails, and we need to try and shift more of these resources to building new houses rather than knocking down and rebuilding our existing ones.”

Melburnians also went on a demolition frenzy during the pandemic: approved knockdowns of old homes peaked at 1974 properties in the September quarter of 2021-22. One-for-one home replacements account for 12 per cent of total expenditure on housing in Victoria – the highest proportion in the country.

Rawnsley said this was a feature of the difficulty of subdividing in many Melbourne suburbs.

“In some parts of the city, planning gets in the way,” he said.

“If you look at a suburb like Balwyn, there are a lot of planning covenants that prevent townhouses being built. If you look at places like Reservoir or even Coburg, the planning controls are relatively sympathetic, so knocking down a ’50s house and putting up two or three townhouses is no problem.”

As part of a raft of new housing policies, the Victorian government last month vowed to make it easier to build two homes on one lot by streamlining the subdivision process.

The cost of building a home in Melbourne has also risen about 25 per cent since the pandemic. Building material costs have risen 35 per cent.

According to KPMG’s analysis, per capita investment in new housing surged last decade, but has since fallen to its lowest level since 1987-88.

Master Builders Australia chief economist Shane Garrett said construction costs were just one factor contributing to the slowdown in new homes.

“Renovations activity has performed relatively well compared to other parts of the market,” he said.

“There’s a few reasons for that: there’s been a big increase in house prices since the pandemic broke out.

“That’s topped up people’s home equity, and it’s allowed them to borrow more money to undertake work like that. We also had for a period very low interest rates, and that’s obviously no longer the case, but that was one of the things that lifted home renovation activity up as well.”

Rising property prices have also driven up stamp duty costs, which could persuade many home owners to renovate rather than selling their old home and buying a new one, Garrett said.

“For people who are thinking of upsizing, the choice sometimes comes down to handing over $70,000 or $80,000 for a bill which is money thrown in the bin, basically, or else putting that money towards a home renovation instead.”

A state government spokesperson said Victoria continues to build and approve more homes than any other state.

“Our bold reforms will deliver more homes near train stations, more land for family homes and backyards, off-the-plan tax concessions and more townhouses in the suburbs – exactly what industry needs to get on and build,” the spokesperson said.

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