More Canadians Renovate Instead of Moving Up

Written By: Jim Adair

The residential renovation industry in Canada has been going strong for years and theres no end in sight for its growth. A recent report by Altus Group says renovation was a 63.4 billion industry in 2013 and predicts growth of 2.9 per cent in 2014 and another 3.2 per cent in 2015.

"To provide perspective, this represents around 3.7 per cent of total gross domestic product and is larger than the amount spent on new residential construction," says the report.

Altus says Canadians love of renovation is partly because of the "HGTV effect". The specialty channel launched in Canada in 1997 and today its most popular shows place an emphasis on home renovation and how it can increase the value of your property. Altus Group says that "many homeowners did not know how badly they really wanted new designer kitchens and bathrooms" until HGTV came along.

Low interest rates have also boosted renovation activity, as have various government programs that give tax credits for improvements that make a home more energy efficient or more accessible. There is also no shortage of people buying low-cost properties, renovating them to improve their resale value and then putting them back on the market for a profit.

A report by Benjamin Tal at CIBC World Markets says that many Canadians are renovating their current homes because the move-up market is getting too expensive for them.

He says the traditional home buying cycle is being disrupted because "a notable portion" of first-time buyers are being priced out of the market. "At the same time, an asymmetrical trajectory of price appreciation is starting to paralyze the move up market," Tal says. "The value of bigger and pricier properties is rising notably faster than less expensive properties -- widening the gap between starter home and dream house."

In the Toronto market, Tal says "the more expensive the property is, the faster its price rises." He says someone who owned a single-detached home valued at 600,000 would "have to pay extra not only for the jump in category say 900,000 but also for the fact that the price of the move-up property has risen faster than the price of their own property. In other words, regardless of what your starting point is, and by how much your property has appreciated, the desired move-up target is getting further and further out of reach."

This is also the case in cities such as Ottawa, Calgary and Edmonton, he says, where the "move-up category has risen notably faster than the start-up category." In Vancouver, "almost all of the increase in the average price of single-detached units since 2010 was due to a run-up in value of the properties over the 1.1-million mark."

He says, "With limited move-up options, its no surprise then that many Canadians choose to renovate their existing homes. Over the last five years, spending on home renovations as a share of total residential investment averaged close to 46 per cent -- by far the largest share on record."

The reason why these affordability issues have not had a larger impact on the market is because the condo market is providing a cheaper alternative for first-time and move-up or downsizing buyers.

Canada is a big country with a lot of different real estate markets. While the soaring house prices in Vancouver and Toronto get much attention, Tal says the five-per-cent increase in average annual house prices, pushed up by activity for higher-end properties in urban areas, is masking whats happening in many local markets. For example, prices have fallen in recent months in places like Victoria, Saint John and Quebec. Overall in most parts of the country, the market has been stable, but Tal says sales of units in the low- to mid-price range have declined.

"The picture of soft sales at the low-to-mid price range of the single-detached market has affordability written all over it," says Tal. "Tightening mortgage regulations in general, and the reduction in amortizations from 40 years to 25 years in particular, alongside rising prices worked to price out many first-time homebuyers that dominate activity in this price range."

Recently an article in Macleans magazine, entitled The Dark Side of the Renovation Boom warned that the renovation craze could be dangerous for homeowners if theres a housing downturn or a sharp rise in interest rates. The magazine, which is somewhat famous among housing analysts for its dramatic covers predicting housing crashes that didnt happen, says, "If theres a significant correction, or a crash, homeowners will not only be faced with both the declining value of their homes, but paying back tens of thousands to the bank on top of it -- potentially leaving them on the hook for more than their homes are worth."

Most analysts, including Tal, believe such a crash is unlikely and that when mortgage interest rates eventfully start to rise, it will happen slowly and homeowners will be able to adapt to the higher payments.

Tal says renovation activity will "remain robust and, in fact, might accelerate in the coming years."

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