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Home improvement market faltering despite bullish outlook

Words:
Brian Green

Energy efficiency measures and working from home mitigate a slowing home improvement market, as industry questions official statistics

In terms of home improvements, renewables are witnessing the biggest growth.
In terms of home improvements, renewables are witnessing the biggest growth. Credit: Istock | sturti

Where next for the home improvement sector now the pandemic-prompted surge has faded? That’s a much-asked question with no simple answer. But the release of Barbour ABI’s home improvement report gets us a little closer to understanding.

The spread of Covid 19 in early 2020 created a combination of factors that contributed to a massive spike in household spending on alterations and improvements to Britain’s homes. People were stuck at home under lockdown rules. Unable to spend on holidays and eating, many well-to-do households accumulated an unexpected pile of savings. Many, again mainly the well-to-do, saw their working habits change radically with far more working from home. And many families re-evaluated their life choices. Chart 1 shows the huge spike in spending by households in the year to March 2022, and the consequent rise it created in private housing RMI output.

But with the passing of the pandemic, the future of the home improvement market has become far trickier to read. Multiple factors are at play and most of them nare egative. The hike in energy prices and the wider cost-of-living crisis is squeezing household resources. Ever more home owners face hefty hike in their mortgage costs as their fixed rates come to an end. Real wages are down, and the economy is spluttering despite a growing working population. Chart 2 shows how consumer confidence has taken a hard bashing as real earnings began falling last year.

But added to this cluster of real-world confusions are deepening concerns over the veracity of the official data that tells us how the market is doing. A growing number of industry economists and analysts are challenging whether recent Office for National Statistics output estimates for private housing RMI is a reasonable reflection of reality. Among those concerned is the Construction Products Association. It forecasts a 9% fall in the volume of private housing RMI this year, while the ONS figures have continued to show strong growth in the sector into the first quarter of 2023, which hint at continued growth in year.

Chart 2.
Chart 2.

There is a strong sense among analysts and economists that ONS is not adjusting the cash figures it collects through its surveys sufficiently to take account for the prevailing high inflation. Underplaying the scale of inflation would lead to an overstatement in the level of activity in volume terms. How much the ONS estimates for contracted-out home improvement activity are at odds with other data is clear in Chart 3.

It shows the ONS figures continuing to rise strongly into the first quarter of 2023. Meanwhile, the data from the Federation of Master Builders trade survey suggest that significant steam is leaving the market as a large amount of FMB members’ work comes from home improvement. Furthermore, Barbour ABI data for home improvement planning applications suggests a sharp drop in numbers, albeit to a level still above 2019. These planning applications statistics have tended to be good predictors for the future direction of the home improvement market. There is an obvious lag between planning applications and activity happening on site, but some slowdown would have been expected from the more than 17% drop in applications seen in 2022.

Chart 3.
Chart 3.

The FMB and Barbour ABI data do not provide conclusive proof that the home improvement sector is weakening, rather than the growth suggested by the ONS estimates. But if we consider recent data from builders’ merchants the case becomes stronger. Home improvement is a major slice of the merchanting market. In the first quarter figures from the Builders Merchant Building Index (BMBI) suggest a fall of 16.4% in volume terms.

Leaving aside the abstract confusions within the data, the likelihood is of the market declining from where we were at the height of global home improvement frenzy. From the perspective of architects, particularly those local architects that rely heavily on housing work, the fall in planning applications is a hard knock after a fruitful year or two.

But the notion of a straightforward decline would be misleading. We are witnessing a major shift in the work being done and adjustments in where it is taking place. Some of this was evident a year ago, but the 2022 data from Barbour ABI, and indeed other data, provide more evidence of a trend towards energy efficiency. Chart 4 shows the rocketing of planning applications for solar panels and for insulation work within home improvement schemes.

Chart 4.
Chart 4.

This suggests that home owners are investing to save money on energy, prompted in part by the surging and unpredictable cost of fuel. For some who may have umm-d and ahh-ed over installing solar panels, or improving the insulation on their homes, are likely to have been pushed into action when energy prices spiked with the reopening of economies after the pandemic, and the shock caused by the Ukraine war. As we see from the BMBI data in Chart 5, renewables are witnessing the biggest growth, as landscaping work retreats after the pandemic spike.

Chart 5.
Chart 5.

Meanwhile, the trend towards more working from home saw a hike in applications for home offices. The surge has eased but the level of applications remains very high compared with pre-pandemic levels, as Chart 6 shows.

Perhaps in line with the growing appetite for home offices, there was a shift in the balance of home improvement activity towards rural areas even before the Covid 19 hit. Initially this was down to the weakening market in London. However, the pandemic appeared to project the shift further in keeping with a ‘race for space’ experienced in the housing market as households responded to lockdown. This flagged in 2021. But, as we can see in Chart 7, it appears to have regained momentum in 2022. Again, this tends to reflect the shift in the market away from London.

Chart 6.
Chart 6.

And Chart 8 shows how London has experienced the biggest fall since 2019 in home improvement planning applications, compared with the regions and nations of Great Britain. The areas seeing growth have been the West Midlands, East of England and the South West.

One factor that should be noted, and is expressed strongly within the Barbour ABI report, is the link between house prices and home improvement. The logic may be obvious, but it is often underappreciated. Creating an extra room through an extension or loft conversion inflated the price of a home more in a high-priced area than in a low-priced area far more than the differences in the build costs.

With house prices increasingly under pressure we should expect to see a sluggishness appearing in some types of applications. But, on the upside, the growing pressure to improve energy efficiency in our homes will help support the market, as is clear in the 2022 data. How this will play out in the overall market is hard to predict, but forecasters point to big falls this year, with the possibility of a slight bounce back in 2024 and 2025.

Homes and housing including extensions

Chart 8.
Chart 8.

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