If you’re getting your house ready to sell, chances are good that you’ll be spending some money to fix it up and make it more attractive to buyers. If you just bought a house, you’re likely going to spend some money to decorate it and change a few things that you don’t like. When the resale housing market is booming, so is Canada’s renovation industry.
Residential renovation in Canada employs 454,000 people making $24 billion in wages, says the Canadian Home Builders’ Association. Renovation provides $60.6 billion in investment value annually, the “largest single wealth-builder for a majority of families,” says the association.
Two recent reports suggest that while residential renovation is poised to slow down during the next few years due to higher interest rates and a more stable real estate market, spending will still continue to increase. Scotiabank economist Adrienne Warren says two per cent growth in inflation-adjusted expenditures is likely. TD Economics expects growth to be closer to three to five per cent this year and in 2014, followed by a “modest” dip in 2015.
“That said, the $45 billion in total renovation activity expected in that year will still be more than double its level of a decade ago,” says TD Economics.
The TD paper, written by economist Diana Petramala, says during the 1900s, home renovations accounted for about 25 per cent of total residential investment but now that share is almost 40 per cent.
These numbers do not include regular maintenance and repair. Renovation, as defined by Statistics Canada, includes structural additions to properties; alterations such as remodelling rooms, adding or replacing doors and windows, renovating exterior walls and upgrading insulation; and installation or replacement of equipment such as a heating system, roof or carpet.
The numbers also do not include work done in the “underground economy”, where jobs are paid for in cash to avoid paying taxes.
“Over the last 10 years, a number of economic factors have contributed to the strength in renovation spending, including a robust labour market, strong income gains and an aging housing stock,” says Petramala. “The average home in Canada was built in the 1970 to 1980 period and was likely due for some upgrading. Still, the most important factors have been the availability and the falling costs of credit as well as a record-setting decade in the resale housing market.”
She says the “wealth effect associated with robust home price gains” has also become an important driver in renovation growth. “Increases in home valuations makes households feel wealthier and more willing to go out and spend. Studies show that for every $1 increase in wealth due to home price appreciation, households go out and spend an additional nickel – some of which ends in renovations.”
But Warren’s report says Canadians are now being more careful about increasing debt, despite continuing low borrowing costs. While large renovation jobs are often financed through mortgage financing or consumer lending, both of those credit categories are now growing at the slowest pace in more than a decade, she says.
“Canada’s housing stock has expanded by more than 15 per cent (or about two million units) over the past decade, mirroring strong growth in household formation,” says Warren. “A record high homeownership rate of almost 70 per cent is supportive of renovation spending, with owners more likely to undertake upgrades compared with renters and landlords. An aging population and government rebates should continue to support demand for accessibility and energy efficiency related upgrades and retrofits.”
Another Scotiabank study found that two-thirds of homeowners say they are likely to consider making their home more energy efficient by incorporating “green” home renovations. Fifty-two per cent of those surveyed say that green renovation choices will lower the operating cost of their home in the long run.
The TD report says that retail spending at building material and supply stores has stagnated since 2007, while renovation-oriented wholesalers have enjoyed above-average growth of three to four per cent. “This trend would suggest that more and more households have been turning to contractors for work rather than doing it themselves,” says Petramala.
In the Toronto area, a massive new home improvement mall is under construction that will bring together 400 home improvement retailers under one roof, on more than 320,000 square feet of space spanning 21 acres. The developers of the Improve Canada site say they are bringing together three key concepts – using a mall as a traffic magnet; grouping competitive suppliers together and concentrating only on home improvement retailers; and offering a permanent home show environment. The developers say the retail space is 90 per cent sold. The building is scheduled to open in 2014.
Looking ahead, Petramala says that although all the spending on renovation has left Canada’s housing stock “in the best condition in decades,” the sector is “likely to remain a bright spot amid a slowing housing sector and declining new home construction.”
Written by Jim Adair