One of Australia’s leading property economists says the RBA’s recent interest rate cut is likely to see a substantial uptick in property renovation activity, as borrowing costs decrease and homeowner confidence grows.
However, the analysis by Ray White’s Nerida Conisbee warns that, with increasing building costs for both materials and trades, it’s not always possible to recoup the cost of a renovation when you decide to sell.
The analysis is relevant for both owner-occupiers and investors.
The background
Renovating homes is something of a national pastime in Australia.
Television shows like “The Block”, “Renovation Rescue”, “House Rules”, “Country Home Rescue” and even imported shows like the BBC’s “Grand Designs” and “Restoration Home” remain wildly popular.
These shows also help reinforce the idea that reimagining an old home to create something new is a worthwhile pursuit.
While I have no doubt that spending every evening and weekend for a year or two transforming your humble home into a designer showpiece brings a great sense of achievement, I’m not convinced this is a guaranteed strategy for wealth creation.
Property “flippers” will happily tell you about their efficiency at organising tradies, the weekends they’ve spent at Bunnings or Domayne looking at building materials or choosing fittings, and the huge profit they’ve made on the bargain-basement “ugly duckling” property they purchased a couple of years ago, before moving on to their current project.
What they won’t tell you about is the huge stamp duty and “upfront” buying and selling costs they’ve had to pay every time they’ve bought or sold a property.
They also won’t have considered the profit they would have made simply by hanging onto that “ugly duckling” property for a couple of years, as often established properties in the suburb around them will have increased in value as well, simply due to Australia’s continuing chronic housing shortage.
The analysis
To try to answer the question "How much value will my renovation add to the price of my property?”, Ray White’s Chief Economist Nerida Conisbee says you have to consider each renovation on its merits.
“Projects vary enormously - adding a second floor costs more than updating a bathroom, and each will add different amounts of value,” she says.
“A swimming pool might cost anywhere from $30,000 to $100,000 depending on size and features, while landscaping prices range dramatically based on scope.”
A good place to start is with this simple formula:
Your home's new value = Current value + Cost of renovation
In basic terms, she says this means if you spend $200,000 renovating a $1 million home, you should expect your home to be worth at least $1.2 million afterwards, or a minimum 20% increase in value.
The problem, as Ms Consibee points out, is that “real estate isn't always that simple”.
She points to no less than 8 reasons why:
“If you bought a house anywhere in Australia in the last two years, its value went up without you doing anything,” Nerida Conisbee says.
This is the point I made earlier about property “flippers” often being reluctant to consider what was happening to housing values in the suburb around them during the time (often years) they spent renovating.
“When the market is rising, it's hard to tell how much of your home's increased value came from your renovation versus general market growth,” she says.
“Spending $500,000 on renovations in a street where homes typically sell for $500,000 is unlikely to double your home's value,” Ms Conisbee points out.
No matter how nice or extensive your renovation is, each area has a limit on what buyers will pay.
This goes without saying.
“Renovations that most people like will add more value than those with limited appeal,” the Ray White Chief Economist states.
Homes with clean, modern lines tend to attract more buyers than “theme” homes.
Not everyone likes the “Spanish mission” or faux “French chateau” look or wants columns or statues of roaring lions out the front of their “forever home”.
“Finding builders is difficult right now, and construction costs have jumped more than 30% in many places,” Ms Conisbee says.
This is often the unspoken truth about renovating - it takes time and creates disruption; often considerable disruption.
This can be an upside for sellers, Nerida Conisbee says.
“People who hate the renovation process may pay more for an already-renovated home than someone who enjoys the project.”
It’s the oldest rule in real estate - "location, location, location".
It’s always better to own the worst house in the best street than the best house in the worst street, or as Ms Conisbee puts it, “even the most impressive renovation can't overcome a challenging location.”
The Ray White Chief Economist indicates that if you really want to emerge from a renovate-to-sell project with a profit, “understanding who typically buys in your area helps predict which renovations will add the most value for that specific market.”
“Young families might pay a premium for an additional bedroom, while downsizers might value single-level living and low-maintenance features,” she says.
How many times have you gone to an “Open for Inspection” and walked through an older house where just a couple of rooms or spaces have been renovated - often decades apart?
It looks inconsistent and can often give an older home a bit of a “Dr Jekyll and Mr Hyde” look.
“Mixing old and new elements sometimes highlights what hasn't been renovated,” Nerida Conisbee says.
“A brand new kitchen alongside a severely dated bathroom can make the unrenovated spaces look worse by comparison, potentially detracting from the home's overall perceived value.”
The take-out
“If you renovate your home in a way most people would like, you should get back at least what you spent on the renovation,” Ray White’s Nerida Conisbee says.
“However, with rising construction costs and limited builder availability, well-renovated properties are often selling at a premium, so this may lead to a significant premium to the total cost of the renovation,” she concludes.
This is one of the reasons embarking on a renovation project simply to try to increase the value of your home in preparation for a sale, can often be, at best, a zero-sum game.