During the year we estimate that new home building activity totalled just over $51 billion. During the same period renovations activity came just shy of $30 billion, and accounted for 36.4 per cent of total residential dwelling investment. Interestingly, new home constructions and home renovations have diverged considerably over the past two or three years, with the renovations market failing to match the stellar performance of new home building.

In fact – renovations activity saw a painful downturn between 2011 and 2013 which saw activity shrink by 17 per cent. Since then an unconvincing recovery has been underway, but the level of activity remains depressed. What could this mean for businesses in the timber industry who rely strongly on the renovations market?

The failure of the renovations market to shine is puzzling in the context of such healthy new home building numbers. How can the two components of residential building differ so much? Renovations activity is influenced by a mix of factors, and the balance of these has been unfavourable over recent years. The “˜big ticket’ nature of renovations activity means that it is very sensitive to consumer sentiment. The rough ride for consumers in the years after the Global Financial Crisis (GFC) and the tightness of household credit conditions over this period has meant that renovations have been disproportionately affected.

The stagnation of dwelling prices in key markets between 2010 to 2013 also meant bad news for renovations. This is for two reasons. Firstly, households feel wealthier when home prices are increasing and feel more comfortable about treating themselves to a renovation. Secondly, growth in dwelling prices deepens the scope for home equity loans, and these are the central vehicle through which renovations work is financed.

In recent times we have experienced an acceleration of dwelling price growth in key markets, like Sydney and Melbourne, and a prolonged period of extremely low interest rates. The existence of record low interest rates has encouraged homeowners to empty out their savings accounts and add value to their homes through renovations work. Which means good news for timber merchants, manufacturers and, potentially, frame and truss fabricators.

Our research also shows how renovations activity tends to be concentrated in detached houses aged between 10 to 20 years. Currently the size of the housing stock in this age group is quite low by historic standards due to the relatively weak level of new home building numbers in the decade between the mid-1990s to mid-2000s. This is a contributing reasons behind the slump in renovations activity post-2011.

With new home building activity set to decline from record levels during 2016 (the first calendar year decline since 2012), the prospects for renovations activity are looking up and will help to steady the boat over the next few years. Renovations activity is already benefiting from the strength of dwelling price developments in Sydney and Melbourne, and many households in both cities are finding it considerably cheaper to undertake a large-scale renovations job instead of moving into a bigger home.

Over the coming years the number of detached houses in the key renovations age group will gradually increase and provide underlying demand for renovations work. However, due to Australia’s economy being set to grow at a below-trend rate this year, there may be some softness in terms of the demand for renovations over the short-term period.

We estimate that renovations activity increased by 3.9 per cent during 2015, and we forecast growth of just 0.4 per cent during 2016, and 0.6 per cent in 2017. However, the renovations market is expected to gather pace during 2018 (plus 3.0 per cent) and 2019 (plus 3.2 per cent) which takes the total value of the market to $31.62 billion by the end of the current decade. This would represent the strongest yearly performance since the renovations market peaked in 2011.