Is the Reno Binge Good or Bad for the Housing Market?

Canadians are sprucing up their existing homes instead of trading up, according to a recent report from Scotiabank Economics.

According to the report by Scotiabank economist Adrienne Warren, renovation spending increased at an annual rate of 6 percent between 2000 and 2012, double that of new builds. It is now the fastest-growing segment of the real estate investment market.

However, there are downsides to this rapid growth, not the least of which is the sophisticated buyer who will pay for some renos and not others: Upgraded bathrooms and kitchens, the creation of additional living space, and improved outdoor living areas are valued by buyers. But selling a home with expensive renovations that put it out-of-line with the neighbourhood may not have the desired result; few buyers will want to pay $650,000 for an over-renovated home in an area where neighbouring properties average $500,000.

As well, the home-renovation boom may be at the root of structural problems occurring in many (mainly urban) markets. The growth in renovation activities may be one reason why potential move-up buyers are becoming discouraged.

It works this way: Good-quality renovations can improve a home’s value, and sellers, naturally, will expect to recoup their renovation costs in the selling price. In many cases, they do.

However, these flush sellers-turned-buyers are unable to find new properties to move into that they can afford, particularly when inventories of detached homes are at a record low in many markets. It’s a catch 22, and many housing experts are concerned.