Australia’s major capital cities are currently recording high auction clearance rates as a record number of properties go under the hammer. The vigorous competition for some listed properties is prompting many homeowners to think they will be better off if they stay put and renovate their existing property.

But opting to renovate can prove costly, both in terms of financial loss and the negative impact on your lifestyle.

In fact, for most homeowners who crave a larger property, purchasing a new home that meets their space and other requirements, instead of living through a drawn-out renovation, is a relatively hassle-free experience.

In addition, by trading up to a new home these property owners may save 20 per cent or more on what they could have spent on renovating to achieve the same result.

Renovations are spiking up as record low interest rates, government cash incentives and an unwillingness to buy and sell in a rising property market has a large group of homeowners choosing to upgrade existing homes.

Data from the Australian Bureau of Statistics released in March revealed the value of home renovation-related lending in January was up 47.4 per cent compared with the same time last year.

But at the same time building costs are rising and it’s becoming much harder to find builders and get them to commit to projects.

Nelson Alexander Sales Director Arch Staver believes too few people think through the true costs of renovating before embarking on a makeover project.

“Renovation costs almost always blow out 30 per cent above budget,” he says.

“Very often people have to lease another property and move out for the period of the renovation. Although upgrading to a new home involves paying for selling costs and stamp duty, the reality is that if you stay put and renovate those costs may be just as extreme or higher.

“So there is a good opportunity for people to upgrade their home by purchasing a new one. They can find that property that gives them the extra space they need, rather than go through a tiresome renovation.”

The total renovation expenditure in Australia in 2019 – including more minor renovations – has been put by the Australian Bureau of Statistics at $36.3 billion. This is an increase from $33.2 billion in 2017.

According to the Renovations Roundup report from the Housing Industry Association, half of all renovations in Australia are valued between $40,000 and $300,000.

But $800,000-plus renovations are becoming increasingly common in inner-city areas where site access and the amount of finicky, highly complex work involved in makeover projects can both be challenging. 

Given these costs, property owners need to carefully weigh up the pros and cons of renovating and try to put emotion to one side.

“There is this whole romantic notion about renovating a house and getting exactly what you want,” Mr Staver notes. “But getting exactly what you want through a renovation often means spending substantially more than you may need to.

“That’s because it is highly likely you will find what you want in another property. It’s a lot simpler to move from one house to another rather than go down the route of hiring the architect, dealing with town planning, which takes time, and then putting a renovation project out to tender.”

The market for building services is exceptionally strong today thanks to the popularity of such TV shows as The Block and the interest in renovating that was sparked by Melbourne’s COVID-related lockdowns. All of this indicates that renovation costs will continue to shimmy up.

“If you are thinking about undergoing a major structural renovation, you need to anticipate that the building tenders will come in much higher than the figures that were perhaps indicated during the initial discussions with the architect,” Mr Staver says.

“The blowout – or the variations, as they are referred to – almost always come in at 30 per cent above the original planned cost. There is a real risk of paying more than you might need to in order to achieve the outcome you want.”

Prospective home buyers are starting to see an improvement in stock levels, with more large family properties being listed for auction.

In late March, more than 1000 properties went under the hammer in both Sydney and Melbourne on the one weekend — the biggest auction day for both capitals in three years.

There were 1180 auctions in for Sydney and 1560 in Melbourne on the “Super Saturday” of March 27, according to the Domain Group.

Melbourne cleared 81 per cent of its auction properties on March 27, as the market continued to defy expectations. Sydney notched up an 88 per cent clearance rate.

The strong results suggest the market is on track to perform strongly for some time unless there is an increase in listings or interest rates.

Mr Staver says trade-up or upgrading buyers will need to compete strongly if they are to secure a quality large home.

He believes that stock levels, particularly for larger properties, are likely to remain tight for the foreseeable future. However, many upsizing families are likely to be better off if they pay a strong price for another property rather than renovate.

“Going forward, our pipeline of stock does not look as strong as we would like it to be,” Mr Staver says. “That might mean a little pressure on prices for the rest of 2021.

“There are a handful of generational-type, big homes that pop up from time to time – and the only thing holding prospective buyers back is the fear that buying this type of property might be a little too expensive.

“I have almost always paid more than market value when buying my own real estate. I have never sat back five years after the fact and thought, ‘Gee I wish I hadn’t paid that much.’

“People need to be mindful that with less supply there will be more competition, particularly for some larger homes. The conditions for buying those larger homes have never been better because of buyers’ borrowing capacity and today’s historically low interest rates.”

If you would like more information on buying and selling in the current market, please contact any Nelson Alexander office.