Many Canadians love tackling home improvements. Research has shown that in the past 15 years, spending on home improvement projects has increased. The factors that have contributed to this are: a growing stock for aging homes; changing consumer preferences; and a significant increase in media exposure of home renovations and the industry. Another important contributing factor, especially for the GTA, is the lack of land supply, which has been driving up the prices for ground-related housing. This has led homeowners and renters to stay in their homes longer and renovate. Reports have said that the increase in renovation spending will continue and is expected to increase another 3% throughout 2015, both in Ontario and nationally.
During the past 5 years, the average annual renovation cost per occupied housing unit (rental and owned homes) was roughly $4,600 a year, up from $2,500 between 1994 and 1998. Roughly $63.4 billion was spent nationally in residential renovation industry last year. That’s more than what was spent across Canada on new residential construction. That represents about 3.7% of the total gross domestic product. This almost has nothing to do with a growing population or increase in the number of houses over that time. Three-quarters of the gains can be attributed to Canadians’ willingness to open their wallets even wider, if it means getting a cathedral ceiling in the master bedroom or heated floors all throughout the bathrooms in the house.
How did we as Canadian homeowners get to be so indulgent and inward-focused? Our white-hot housing market has a lot to do with it. Most new homebuyers or downsizing baby boomers contemplate a few updates before moving in, while sellers now routinely spruce up their properties before listing them, in hopes of getting a higher price. And since money is cheap, thanks to record low interest rates, it has never been easier for Canadians to borrow to get that new breakfast-nook addition or backyard patio. Mostly it has been driven by the premise that spending thousands on new floors and fixtures is an ‘investment’ as opposed to conspicuous consumption. A survey conducted by the popular home remodeling website Houzz found that 60% of Canadians feel that ‘increasing the value’ in their home as a key motivation to renovate. This can be seen on popular renovation shows such as ‘Love It or List It’ or ‘The Property Brothers’, when the homeowners learns that $90,000 worth of renovations to their tired home or bungalow just increased its ‘expected value’ by $120,000.
While all that flying saw dust and drywall dust has contributed to Canada’s economy, some fear that this resilient sector could prove to be a house of cards. A increase in interest rates or slump in home prices, or both together promises to affect renovation spending, since homeowners would no longer be able to convince themselves that splurging on unique hardwood floors will, magically, net them a huge return. It has to do with the age old story of wanting to keep up with the Joneses—except that now, the Jones family is a couple with a pile of cash and a pair of grinning TV hosts. Canadians’ love affair with home renovations is second only to the seemingly insatiable lust for owning real estate—and the two are linked. An economics report found that renovation spending has increased, on average, at a rate of 7% a year since 2003, and that can be attributed to rising numbers of home sales and soring prices. The reason is simple: in a hot housing market, shelling out $2,000 for a new granite countertop could add another $10,000 or more to the value of the house, providing the buyers fall in love with the kitchen. In recent years, the idea of staging a house and doing reasonably substantial changes to a house prior to listing has become more the norm in the resale world. There’s a lot of revamping of kitchens and bathrooms and the other types of projects to get a $900,000 house up into the $1.2-million range.
It’s not only buying or selling their houses that encourage homeowners to spend money. Merely watching housing prices inch higher in a hot market is sufficient. Economists call it the ‘wealth effect’ and studies show that for every $1 increase in wealth due to home-price appreciation, households go out and spend additional money, which ends up being used on renovations. Though they may not be as noticeable to neighbours, most renovations are smaller jobs in the $3,000-$7,000 range—finished basement, knocking down a wall or two. Canada’s Baby Boomers have contributed to the reno boom because many are opting to stay in their homes, rather than downsize to a condo. A lot of renovations are aimed at adapting homes for those pre-retirement years.
It’s not only a risk to those renovating, but the economy as a whole. The debt-fuelled reno trend has played a major role in artificially inflating the price of houses in Canada, as eager buyers take advantage of cheap mortgage rates to compete in bidding wars for showpiece homes, each offering tens of thousands more than the next. Nor is it just people who plan on living in the homes who are responsible for soaring prices. In cities such as Toronto, buyers often find themselves competing head-to-head with contractors or other real estate professionals who want to buy cheaper properties that can be renovated and flipped at a huge profit. The concern is what happens to consumer spending and the economy it supports, if the housing bubble pops. Household spending on consumption and home renovation can become vulnerable to house-price shocks. The countries that had the biggest increases in home prices and debt-to-income ratios in the 2008 recession experienced the biggest hit to spending during the recession that followed. Canadians will suddenly feel poorer and more indebted, prompting them to close their wallets.
At least Canadians can comfortably wait out the storm in their McMansions, right? Maybe not. Though rarely talked about, there’s mounting evidence to suggest Canadians are mostly making cosmetic improvements to their homes and ignoring more important fixes that would make their homes more comfortable ands energy-efficient in the long term. Canadians also need to move away from the idea that renovations are an easy way to make money. Those who talk about borrowing thousands to bet on stocks think nothing of doing so to gamble on home improvements, reasoning they’ll recoup the cost or even earn a profit. But earning a return on your renovations only works if you undertake the right ones, then sell immediately in a rising market. (Those brand new floors will be a lot less valuable after being subjected to the family dog for a few years). Even then, there are no guarantees—other than laying the groundwork for some future TV-show makeover.
Source: Macleans Magazine