House Prices: Impact on Renovations

For several years, economists have been warning of a housing price bubble, and forecasting a modest decrease in house prices.  But for every forecast of a decrease, another economist has forecast an increase in prices, and as we have seen, house prices have steadily increased over the past few years.

Again this week we have a forecast of declining house prices, but this time it’s different.  There is a consensus from several sources that prices will decrease, and nobody suggesting the steady growth will continue.  Much has and will be written as to what lower house prices will mean for current and potential homeowners, but little is said about what this may mean for those planning a home renovation.

Who is renovating?

Home purchasers are buying older homes, and many are immediately investing in renovations – replacing flooring, and updating kitchens and bathrooms.  A decrease in house prices will allow more homebuyers to spend more on renovations.  Simply, less money spent on buying the house means more money is available to renovate.

Existing homeowners who purchased several years ago with the specific intention of someday renovating or adding an addition to the house will feel the impact of declining prices.  These homeowners have been waiting for the equity in their home to increase so they can finance a renovation or a house addition.  A decrease in home prices will reduce their equity, and prevent many of these homeowners from realizing their renovation or house addition dreams.

Existing homeowners with cash and equity will continue to undertake home renovation and house addition project.  For this group, the goal is to improve the look and comfort of their home and stagnating or decreasing house prices will do little to keep them from renovating.

Past Experience

We can look at past experience, specifically the Toronto house market crash which started in 1989 for clues as to what may happen now.  Condos declined in price an average 39%, while all other housing, which includes detached, semi-detached and townhomes fell in price by an average 27%.  In Vancouver, the housing price decline which started in 1994 saw condos and upper end homes with the largest price decreases, with more moderate decreases in moderately priced homes.

The Toronto housing crash was also made worse with increasing mortgage rates, and increasing unemployment, neither or which are in the forecast now.

With current forecasts suggesting an average price decrease of 10% to 15%, past experience would suggest expensive homes and condos will be the ones that see the double digit drop in price, while the single family detached home that is priced in the $300s and $400s in the suburbs, or $500s and $600s closer to the core of the city will see only slight declines.

The financial crisis and recession that started in September 2008 led to a short downturn in renovation work, as homeowners put their renovation projects on hold.  But in a matter of months, homeowners were back to renovating.

Financing the Renovation

With declining equity and tighter mortgage rules which recently came into effect, homeowners will not be able to get as much equity out of their home with a mortgage refinance or a home equity line of credit as they did in the past.

Construction mortgages, which we have seen little of in the past few years, will probably increase in popularity again with homeowners who are tight on their financing requirements.

Cost of Renovations

A drop in single family house prices of 5%, or even 10%, is unlikely to cause a significant decrease in the costs of renovations.  The underlying costs for builders and contractors will remain steady, and while some may choose temporarily to work for less profit or salary, any price decreases in renovations will not be sustained.  Homeowner hoping a softer housing market will translate to “deals” in the renovation industry will be unlikely to find them.

Conclusion

House prices may decrease, if the economists are correct.  Those buying homes and renovating will definitely benefit.  Existing homeowners looking to renovate may find themselves with a tighter budget, but most will still be able to achieve their dream renovation or house addition.