It seems as if homeowners haven't shaken the renovation bug just yet. Since 2000, the renovation market has nearly doubled relative to the general economy and is expected to reach almost four per cent of the GDP, according to the Ontario Housing Market Insight report released on Tuesday by the Canadian Mortgage and Housing Corporation (CMHC).
Before the global financial crisis, renovation spending had reached previously unheard-of heights thanks to, among other things, an upturn in the Ontario economy that generated the jobs needed to support spending on housing as well as a collapse in interest rates, which led to a growth in mortgage credit that helped finance renovations. Since 2008, the factors have been more due to renovation tax credits and wealth.
“Although the average growth rate of home renovations is not likely to match that of the last couple of decades, the province is still set to see an increase," said Ted Tsiakopoulos, CHMC's regional economist for Ontario. "Ontarians are aging, the housing stock is aging, home prices are on the rise and more homebuyers are turning to the resale market — all these factors support renovation spending.”
The renovation has overtaken the new construction market in terms of investment dollars. A cycle has formed, that benefits all sides: a growing economy drives the increased renovation spending, and growth in the renovation market is a boost to the economy.
“For example, an additional billion dollars of new value added investment in the Ontario renovation market, generates over 5,000 additional direct jobs across the province, according to the latest Statistics Canada data. In addition, suppliers/ building material retailers are also positively impacted by the additional spending by households on renovation projects and this creates more spinoff jobs know as indirect jobs. Indirect jobs amount to an additional 4,000 jobs from this shock to renovation spending,” the report states.
If you’ve been keeping an eye on hot housing markets, then you may know that these housing markets also have boosted renovation spending, simply because people no longer can afford to “move up” from their starter home or into their dream home, so they’re chosen to stay put and renovate their current home. Even when they do move into a place, home buyers have an eye on what they can change in order to personalize their new space. The report mentions that Ontario households often undertake renovations within 12 months of an existing home purchase, according to a CMHC analysis.
While Millennials are growing their families, they also tend to be the most strapped for cash and therefore unable to spend much on renovations – not to mention the affordability issues taking place in some areas that prevent first-time home buyers from even buying a home. Households aged 55 to 74 will be contributing most to the growth in Ontario household formation within the next several years – in fact, CMHC projects that households aged 55-64 will comprise nearly 1.1 million Ontario households by 2017, according to the report. This could mean that almost 400,000 households in the province could be looking to renovate their homes. This is in line with data from Statistics Canada’s Survey of Household Spending, which found that renovations were more likely to be undertaken in households with residents who were more than 40 years old.
At the older end of the spectrum, census data indicates that as much as 80 per cent of households over the age of 55 age would prefer to age in their homes as opposed to moving out and/or downsizing, and would only prefer to do so if they had to, such in the cases of declining health and/or mobility, or if they needed to sell their home in order to finance the remainder of their retirement. Similarly to people who can’t afford to move up from their starter homes, fees associated with selling a home, such as realtor fees and rising transaction costs aren’t attractive to older homeowners. Instead, they choose to renovate to accommodate their changing lifestyle.
The housing market also has had an effect on renovations in that the type of renovations that homeowners are choosing to undertake – about 75 per cent of all projects – are those that have a direct impact on the resale value of their homes, including everything from painting and removing dated wallpaper to revamping heating and air conditioning units. Throughout 2015 and into 2016, we’ve seen recorded high prices in resale housing markets across the country, and although it’s anyone’s guess as to how long these prices will remain high, the trend suggests that there is additional growth potential for renovation spending. According to the report, Ontario’s renovation market was estimated at about 25 billion dollars in 2015.
We tend to think of renovations in terms of cosmetic updates and people changing what they want their homes to look like, but in many cases, renovations are needed in order to make homes healthier and more efficient. More than 50 per cent of housing in Ontario – that figure goes up above 80 per cent if we’re talking about apartments – was built before 1980. Not only do homes deteriorate over time, but building codes change, meaning that current structures aren’t as safe as they could be.
In tight housing markets, homeowners or landlords looking to sell or rent their units are competing with new builds, and renovating those spaces can give owners a leg up on the competition. “Landlords in Ontario are able to pass on increases in rent exceeding guideline amounts when capital improvements and upgrades have been made to rental units. In addition, new money announced in the 2016 budget geared to repairing and upgrading the existing social housing stock will provide additional support to the renovation market,” the report states.
Before 2008, lines of credit, borrowing against home equity, and personal loans were the major sources of financing for renovations, and they continue to be popular. Taking too much out of your home equity can be risky, but with the value of homes rising so quickly in recent years, it’s still a viable option and has still resulted in improving home equity for many Ontario households.
As anyone knows, the housing markets across Canada vary greatly, and the same holds true for those in Ontario specifically.
“There is reason to believe that growth rates in renovation spending should vary by urban centre given different demographic, economic and local housing conditions more generally,” the CMHC report states. “While representing a smaller share of the provincial economy and housing market, southwestern Ontario centers such as Windsor offer the greatest growth potential. A combination of relatively higher than average employment, higher housing affordability levels, higher than average median age and continued pent-up demand based on a historically low sales to population ratio indicates high potential for growth in home sales and renovation spending.”
The GTA housing market, on the other hand, which has made news for being so hot, shows less growth potential for renovation spending.
“More modest job growth expected ahead, low affordability levels, a below provincial average median age and less pent-up demand due to a historically high sales to population ratio will translate to more modest growth in renovation spending. Indeed, Toronto remains vulnerable to a housing adjustment owing to rising imbalances which could dampen home price increases and in turn the incentive and confidence to invest in upgrades.”
