John McGrath – Renovated homes in demand as new builds and renovations delayed
Renovating or building a new home has become a challenging process, with a shortage of raw materials and tradie labour along with rising costs making life very difficult for property owners.
We’re hearing many stories of lengthy delays and increasing costs on home projects, and this is translating into a change in buyer behaviour in the residential sales market.
More owner-occupiers and investors are looking for renovated homes because they don’t want to go through the same issues that renovators and new homeowners are enduring now.
This is an interesting change because at the end of market booms, we typically see more demand for cheaper original or run-down homes as buyers’ budgets become squeezed by runaway price growth.
Valuers at the national valuations company, Herron Todd White (HTW), note the rising demand for new or renovated homes in a report in May.
Their CEO Gary Brinkworth said: “What we see now is a shift among owners who had been planning a renovation or construction. Many are weighing up whether buying an established home might be more prudent given the cost and time blowouts. Our teams have certainly spotted this trend across the country. We’ve observed that homeowners and investors alike are being drawn to completed homes rather than those with renovation potential.
“Given costs are predicted to be elevated over the coming one-to-two years, I’d venture that finished homes will not only retain their price premium for some time, but the value spread between renovated and unrenovated properties will, in all likelihood, get wider.”
Gary says sellers “should be able to get a premium for a property that’s new or renovated” in the residential market today.
There’s a couple of factors pushing up the cost of construction and renovations.
Firstly, inflation is rising, which means the cost of most goods and services in the economy are going up. The latest data from the Australian Bureau of Statistics shows inflation running at 5.1% per year. This is well above the Reserve Bank’s target of 2-3%.
Secondly, COVID-19 disruptions in global supply chains means importing enough building materials to meet demand has become near impossible.
Demand is high because most countries are stimulating their economies through new infrastructure projects, so lots of countries want to buy raw materials like timber and steel.
In addition, Australians amassed record savings during the pandemic, and the increased time they spent at home – including working – has made many people want to renovate and upgrade their living environments.
Then there’s the effect of HomeBuilder, with latest available government data showing 137,755 applications were lodged and 84,000 grants have been paid so far. Grant recipients were all required to commence building or renovating within 18 months of applications closing in April 2021. Thus, thousands of HomeBuilder projects are underway on top of normal new home building activity.
All of this has led to a spike in demand for materials and labour, and this is pushing construction costs up at a faster rate than inflation.
CoreLogic’s Cordell Construction Cost Index for Q1 2022 shows national residential construction costs increased by 9% over the 12 months to March. That’s the second highest annual growth rate on record behind the introduction of the GST, when costs increased by 10.2%.
The good news is that affording a renovated property in Sydney and Melbourne has become a bit easier as both of these mega markets begin to cool off.
Generally speaking, if you buy this year, you can be confident of getting a 5-10% discount on last year’s prices.