After a prolonged period of low interest rates, the residential property market has had to come to terms with a higher interest rate environment. Perth and Adelaide markets have proven resilient and price growth is still evident, while in Melbourne and Hobart, market resilience has been more variable. Inflation remains stubbornly higher than the RBA target rate and interest rates have remained higher for longer. At the time of writing there is speculation as to whether the RBA will increase the cash rate in August.
The cost of moving house can be quite substantial once you have paid your selling agent’s commission, legal fees, stamp duty, removal costs etc – the list of costs seems endless. In some markets, the supply of suitable properties is tight and searching for the right home can be a time-consuming and lengthy process. Little wonder that the costs and disruption associated with moving house are factors in the decision-making of at least some homeowners looking for a change in their living accommodation.
But is renovation a viable option? What are the issues that you need to take into account?
Will your renovations be reflected in the price that you can sell your house for (when the time comes)? The answer is a resounding “it depends”. Homeowners will need to consider the location of their property and what type of properties are in demand in the local market. Overcapitalisation can occur when a homeowner spends more improving their property than the value that is added by those improvements and can be due to a number of factors – idiosyncratic finishes that do not have a broad market appeal, a quality of finishes that significantly exceeds those typical for the market, or the layout functionality of an older property.
Once the price expectations for the renovated home exceed those of the local market, buyers will simply tend to seek out properties in better locations. Owner-occupier renovators in particular also need to remember that part of the cost is removing finishes that already contribute to the value of the un-renovated property, so the value decreases before it increases.
While some may be tempted to renovate in situ, the cost and uncertainty of undertaking extensive renovations can be off-putting to those looking to purchase a house and renovate. In some markets, demand for fixer upper properties has declined, but this creates an opportunity for the experienced renovator. One impact we can see is that recently renovated homes can attract buyers and achieve short marketing periods. A well renovated home can be very attractive to purchasers who are concerned about the cost and delays involved in undertaking the work themselves.
Before commencing any renovation, it is important to understand the local residential property market. This edition of the Month in Review has insights from our local experts around the country that will provide invaluable context for planning any large renovation project.
Kevin Brogan
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