Renovation Spending Wanes But Remains Strong
For the first time in years, renovation spending eclipsed by spending on new home construction
By Frank O’Brien
In the first quarter of 2017, and based on the latest numbers available, residential renovation spending in Canada reached $12 billion, Statistics Canada reports. While this was down from $13.2 billion in the fourth quarter it was up from $11.4 billion in Q1 2016, yet analysts contend a red-hot five-year renovation curve could be starting to cool.
In the first three months of this year, spending on new residential construction reached $12.4 billion, eclipsing renovations for the first time in years.
While renovation spending is still expected to reach record levels in 2017 and next year, the Canadian home improvement craze is apparently slowing, confirms a new report from Toronto-based Altus Group.
Altus said renovation spending will total $72.7 billion in 2017, up from $71.2 billion in 2016, and climb to $74 billion next year.
The entire new home market was worth only $53 billion in 2016 and homeowners are now spending about $1.33 on renovations for every $1 spent on new home construction, the report said.
But Altus, a real estate consultant, said the growth in average spending per unit has also slowed since the heady peaks of the 2000s.
“We are often asked whether we see any evidence that homeowners are increasingly planning to stay put and renovate their home to meet their changing needs, rather than move to a new home,” Altus Group noted in its report on the sector. “Intentions to move versus intentions to undertake larger renovations [$10,000 plus] are very similar to last year and to adopt HGTV’s terminology, there has been no increase to love it rather than list it.”
Renovation spending had been tracking the overall growth in the economy, but while it is expected to grow in 2017 it will begin to lag economic growth.
Some of the renovation spending is just keeping a home up to date — $17 billion of the $71 billion spent in 2016 was chalked up to home repair. Most of the rest of the spending, $52.8 billion, was discretionary and used for alterations and improvements.
About $1.1 billion was spent on property conversions in 2016, but this number also tracked lower in the first quarter of this year, compared to Q1 2016.
The real sign of a slowing renovation market is the growth in spending per unit. This spend was approximately $5,000 over the past five years, not much more than the period from 2007-2011.
“This means that the recent growth in renovation spending has been more driven by growth in the housing stock – the total number of units renovated – than by increased spending per unit, than was the situation in the decade of the 2000s,” Altus Group said.
Residential renovation spending has increased every year since 1988, in both real and current dollar terms, Atlus noted.
Many homeowners have tapped into home equity lines of credit for their improvements or upkeep. Altus Group data showed one in 12 homeowners borrowed for home renovation in 2016. A home equity line of credit (HELOC) is the No. 1 method to borrow, followed by a refinanced mortgage.
Altus Group research shows that many people who initially use high-interest methods to borrow, such as credit cards or store charge cards, later consolidate that debt into their mortgage.
However, there are signals that, for homeowners who have insured mortgages, access to HELOCs and second mortgages is now more difficult.
Last October, the federal government banned the three main insurers in Canada, Canada Mortgage and Housing Corp (CMHC), Genworth, and Canada Guaranty, from backing any kind of residential refinance transaction.
“As a result of Department of Finance changes, government-backed mortgage default insurance is no longer available for refinancing properties of any type,” explained Jonathan Rotundo, a senior media relations officer with CMHC.
Rotundo noted that “ lenders may continue to refinance on a conventional [uninsured] basis”, but Dustan Woodhouse with Dominion Lending Centres and other mortgage brokers say the interest rate on such loans is much higher than what is available with insured mortgages.
A parallel slowdown in the housing market – and price increases – in markets such as Greater Toronto and Metro Vancouver may also be affecting renovation spending, contractors say.
According to CMHC, households undertake renovations typically within 12 months of buying a home.
The recent Altus study also tracked renovation intentions among Canadian homeowners. The survey revealed that three per cent of consumers plan to buy a home and do a large renovation; 15 per cent plan a large renovation and don’t plan on buying a home; and 77 per cent do not plan either a renovation or to buy home over the next year, up from 75 per cent in the spring of 2016.