The level of renovation activity has slowed a little bit since the start of the year, driven by rising interest rates and difficulties in finding builders. However, it remains a popular activity for homeowners, keen to improve their living conditions and add value to the price of their homes. While spending money on your home will almost always lead to a better home, the question of how much a renovation adds to the value of your home is a far more difficult question to answer.
The first challenge is that it depends on how much you are spending. Renovating a bathroom will add less value than adding a second-floor extension. Swimming pool prices vary considerably and the range in pricing for landscaping can be significant. It is too simplistic to say that a renovation will add 10 per cent to the value of the property because no two renovations are the same.
The second challenge is that it is difficult to untangle the value add from the renovation from market conditions. If you bought a house anywhere in Australia over the past two years, you would have seen its value increase without doing anything to it at all. A renovation would likely have added value but it is hard to work out how much of the increase would be the renovation.
The third reason is that there is potential for over-capitalisation. Spending $500,000 on a renovation in a street where the median house price is $500,000 is unlikely to lead to a doubling of the house price as there is a cap as to how much people are prepared to pay for that street.
The value add also depends on how well the renovation is perceived by others. When renovating, it generally pays to stick to what is on trend but not so fashionable that it either dates too quickly or has narrow appeal. Similarly, adding a pool in a warm climate would generally be better received than in a location that is cool for most of the year. Furthermore, more people are likely to see a swimming pool as a better backyard option than a similarly priced tennis court.
Right now, there is a fifth challenge in that finding a builder is difficult and renovation costs are becoming a lot more expensive. A renovation that was done last year would have cost 10 per cent on average less than what it would cost now. This is likely to make a recent renovation more valuable than it otherwise would have been if we hadn’t seen such a surge in building prices. This is certainly showing up in property demand where renovated properties are frequently still seeing rising prices despite prices softening overall.
Finally, people value their time differently. Renovating a home takes time and while some people enjoy it, others don’t. If you are someone who shudders at the disruption that a renovation generally entails then you may value a renovated property more highly than someone who sees it as an enjoyable endeavour.
Having said all that, provided you have renovated your home in a way that most people would find desirable, the value add from doing a renovation would be at least the amount you spent doing the renovation. So if you spend $200,000 renovating a $1 million home, you would get as a minimum a 20 per cent increase in value. Ideally, however, it will be a lot more.