Although renovation contractors are busy and expecting lots of work in the coming years, rising household debt has some homeowners scaling back on their renovation plans, according to a report by BMO Financial Group.
It says consumers are "becoming more strategic on spending" by choosing renovation projects that add value to their homes when it comes time to sell. Fifty-one per cent of Canadian homeowners plan to renovate their homes in the next year, compared with 62 per cent last year.
"The scaled-back plans for home renovations likely reflect increased caution on the part of households as they continue to reduce discretionary spending to rein in debt," says Sal Guatieri, senior economist for BMO Capital Markets. "After averaging nine per cent in the past decade, consumer loan growth has slowed to almost two per cent recently, suggesting Canadians are taking recent debt warnings to heart."
Canada Mortgage and Housing Corp. (CMHC) says this isn't a new trend, as 42 per cent of homeowners completed renovations in 2010 compared to 50 per cent in 2011. It its last renovation survey, CMHC found that 52 per cent of homeowners were planning to renovate to add value and/or prepare the home for sale.
Painting the home is the most popular (and easiest) way to update it and increase its value and marketability.
In terms of larger renovations, kitchens and bathrooms remain the most popular projects and provide the biggest payback at resale. BMO enlisted HGTV.ca to estimate the return on investment consumers can expect for major renovation projects. It says kitchens and bathroom renovations offer payback of 65 to 120 per cent. Other renovations that offer gains on your investment are window/door replacement, and the addition, expansion or repair of a deck.
The Appraisal Institute of Canada offers an interactive website called Renova where you can enter the amount you are planning to spend for your renovation and get an estimate of the return. You can enter individual projects or calculate an entire worksheet with several different jobs, and the site will add it all up for you.
In some neighbourhoods in Toronto, where new low-rise homes are scarce because of a limited supply of land, renovating bungalows into two-storey homes has become popular. For many years, "teardowns" of homes in popular neighbourhoods have been common, as properties are purchased for the land value and the old house is replaced by a new one.
But the Ontario Real Estate Association (OREA) warns that in some municipalities, teardowns and top-ups may not be allowed.
"Someone buying a 50-year-old home that's never been renovated will likely want to update it or demolish and build an entirely new house," says OREA president Ron Abraham. "There are many bylaws that deal specifically with home renovations and new builds, so homebuyers need to be aware of the ones that may affect their structural plans before starting on a project to avoid problems down the road."
Among the projects that may not be allowed are building a below-grade garage, dividing a mutual driveway, constructing a basement apartment or even adding a backyard deck, OREA says. There may also be bylaws restricting the number of windows allowed in the home, it says.
Many municipalities also have a tree conservation bylaw that doesn't allow the owner to remove trees from the property - even if they infringe on plans for a new home or addition.
Abraham says home buyers should discuss their future plans with their Realtor, who may be able to help.
Earlier this year, an RBC survey found that 78 per cent of home renovators planned to spend less than $10,000 on their project. Most people said they would pay for the renovations with cash or savings. Fifteen per cent planned to use a line of credit, while 13 per cent said they would use a home equity loan. BMO says a personal line of credit is good for smaller projects, since it allows homeowners flexibility to borrow what they need, when they need it. For larger projects, BMO recommends a home equity loan.
RBC says it's worthwhile to think about improving the energy efficiency of the home when renovating, to save on future energy costs. It also suggests leaving "wiggle room" in your budget, because renovations always seem to create unexpected costs or surprises. Renovators say most of these "surprises" are extra items that the homeowner decides to add to the job after it has already been started, which drives up costs.
Published: June 5, 2012