A new survey shows renovation spending reached $68 billion in 2014, $20 billion more than was spent on new homes last year.
Some of it is the so-called “HGTV effect,” according to Altus Group, but Peter Norman, chief economist with the real estate research company, said it’s also because the housing stock in Canada just keeps getting older.
“There are a number of homes out there that are more 50 years old and they require a lot of work all the time,” he said, adding that low interest rates have probably helped the renovation sector more than the new home sector. “Every person who renews their mortgage from five years ago renews it at a lower rate. To a lot of people that frees up cash they’ll put back into their house.”
Altus expects the spending on renovations to continue to grow by three per cent annually in 2015 and 2016, which would leave renovation outperforming the general economy.
Renovation spending is now such an important part of the overall Canadian economy that it accounted for 3.4 per cent of gross domestic product in 2014. Most of the spending, three out of every four dollars, is going toward alterations or improvements. The rest of the spending is primarily going towards repairs. Gregory Klump, chief economist for the Canadian Real Estate Association, said strong real estate sales ultimately lead to renovation spending. The average amount of money spent on renovations following a real estate sale was $9,535 in 2013.
“Often it can make a lot of economic sense to renovate instead of moving,” Klump said.
From the 2000s up to the recession, renovation spending grew by 8.7 per cent annually. Post-recession it grew by 2.6 per cent annually. Phil Soper, chief economist with Royal LePage Real Estate, said the biggest reason for the uptick in renovation spending might be the cost of homes.
“In our biggest cities in every province the homes have become more expensive and the gap between entry level and luxury homes has grown,” Soper said. “Many people look at that and say rather than stretching to buy an entire new home, maybe I can upgrade my existing property.”
Contrary to conventional wisdom, not all the spending is being done with debt. Only about 20 per cent of all dollars borrowed under home equity lines of credit are earmarked for renovations.
One concern for the government might be the percentage of home renovation conducted in cash, and therefore part of the underground economy. About 40 per cent of respondents in the Altus survey believe small renovation jobs under $5,000 are done with cash.
Another worrisome issue for consumers might be that many of these renovations are being conducted without proper insurance coverage. TD Insurance warned Tuesday that not telling your insurance company about what you plan to do in your home could result in the denial of a claim.
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