Rising construction costs, led by trade shortages, initially made buyers wary of unrenovated homes but lower prices are making them increasingly more appealing, according to the latest Herron Todd White (HTW) Month in Review.
In the September report, HTW Executive Director of Valuation and Advisory, Drew Hendrey said despite the renovating costs involved, some buyers were looking for homes to fix up, in the hope of lowering the initial purchase price.
“While increasing construction costs have been a common theme throughout the past three years or so, there is a new inflection point we’re observing now,” Mr Hendrey said.
“Supply lines and manufacturing have tracked back towards more normal levels, so materials are becoming more affordable.”
He said at the same time, there remains a high demand for certain types of contractors and trades.
“The net result is that the total cost of building and renovating remains high and is having a notable impact on the market,” he said.
“For those who like a silver lining, it does mean certain buyers can secure prime, unrenovated property at a reasonable price.
“This could include first homebuyers who can live with a home in less than-perfect-condition with a view to doing some upgrades in the years to come.”
HTW Director Janine Rockliff said in the short term, there was little relief in sight in terms of construction costs, which could make life challenging for renovators.
“The prediction is cost rises between eight and 15 per cent across the country and this is on top of the cumulative effect of the increases since the introduction of the home builder grants, other government incentives and supply shortages,” Ms Rockliff said.
“Purchasers are wary of signing new construction contracts with cost increase clauses and a high proportion of provisional sum and prime cost amounts.
“This continues to drive the market to seek new or recently constructed homes and pay a premium for not having to go through the stress of a new build. In some areas, renovated dwellings that have been upgraded to a high standard are attracting similar interest as new, albeit not as high a premium.”
HTW Director Shaun Thomas said with property prices falling in 2022 and unrenovated or dilapidated dwellings not performing as well as new or renovated dwellings, the cost to obtain a property suitable for a renovation project had become more affordable, while the resulting renovated property is drawing a better return.
“We are also seeing the growth in construction costs ease, up just one per cent in the June quarter compared to the 20.7 per cent annual growth experienced in the 12 months to the end of the September 2022 quarter,” Mr Thomas said.
“As a result, the demand for renovator’s delights and fixer-uppers is on the rise, as can be seen in a recent spate of media articles reporting strong auction results for properties in terms of both the number of registered bidders and prices being achieved above reserve prices.”
He said the most feasible renovate-for-profit scenarios within inner Sydney were often older-style units in areas popular with professional couples.
“With older style units needing renovation not typically appealing to this market, these can often be well bought before being renovated into a product that has broader appeal to the local demographic,” he said.
Mr Thomas said currently, those who renovate are doing so with the intention to live in the property, at least for a few years, rather than flip it straight away for a profit.
HTW Director, Perron King said with extreme uncertainty in the building industry at present, it is expected that this spring, renovated homes will perform particularly well with buyers seeking something fresh without the risk of building from scratch.
“Renovations are more favoured in the inner north suburbs compared to the outer north, primarily due to the historical significance and age of the properties,” Mr King said.
“Suburbs such as Brunswick, Moonee Ponds and Northcote boast a collection of older-style properties constructed after the 1910s.
“With the outer western suburbs being dominated by new developments and construction, the inner west is the area to look at when talking about renovations.”
“The other consideration is the extent of the renovation of course,” Mr Notley said.
“Rising construction costs mean that the more extensive the work that needs doing, the less appealing the home generally is.
“As such, sellers must accept a greater discount on really big reno projects.
“On the flip side, if the renovation is more cosmetic and some of the work can be easily and safely handled DIY, then there’s probably less of a discount on the buy-in price.”
He said the other consideration is that all these increased risks associated with completing a renovation have translated into making fully completed, ready-to move-into homes very attractive to buyers.
“In many cases, these purchasers are paying a premium for thoughtfully renovated homes,” he said.
HTW Valuer Nick Smerdon said renovated dwellings continue to achieve premiums in the current market given the difficulties being faced by owners to move through a home renovation project.
“It’s expected that premiums will continue in the short term for these dwellings,” Mr Smerdon said.
“For those jumping into a renovation, be mindful of having a budget and be prepared that there may be lag time in sourcing materials and trades.”
He said the market for renovated dwellings is fuelled by a mixture of upsizers and downsizers.
“Both these buyer types are looking for something else in a property that theirs doesn’t have,” he said.
“Historically these buyers may have gone to the construction market to improve their existing dwelling, however these buyers are now willing to enter the market to avoid carrying the risk of the strained construction industry.
“Properties undergoing renovation are typical of the metropolitan area’s more established suburbs which provide older homes in need of a facelift.”
HTW Director Chris Hinchliffe said conducting an extension or renovation is not cheap in the current market, so it’s often not a viable exercise for lower value properties where the added value of the renovation is far less than the cost.
“It is more viable in more affluent areas where you are likely to get closer to dollar for dollar increases in value,” Mr Hinchliffe said.
“This being said, the market for fully renovated homes is very good.
“People are looking for a property where they can walk in and all the work is done, so a fully completed product is very appealing.
“Larger older style dwellings where the dwelling still has some added value is where renovators are looking as their first port of call.”
Valuer Jeremy Callan said currently here in the Darwin market, unrenovated properties are quickly becoming less sought after as consecutive interest rate rises over the past year have taken hold.
“Over the past 12 months we have seen the emergence of a two-tier market, i.e. where the gap between unrenovated and renovated homes continues to widen,” Mr Callan said.
“Demand for unrenovated homes continues to reduce. Part of the reason behind this is the cost of renovations.
“As the overall cost to construct a home has risen locally by approximately 30 per cent overall since 2020, renovation costs have followed suit.
“With the lack of skilled trades and increase in the time to complete/construct, the appeal of a turn key ready product has only risen, with renovated homes in the popular northern suburbs always a target for buyers.”
HTW Assistant Valuer Michael Qu said homes that are ready to move into and don’t require further renovation works are proving very popular with buyers right now.
“Agents are finding that homes that buyers can move straight into sell faster and for higher prices,” Mr Qu said.
“They also described how properties that require work are in less demand as buyers are being pickier with their critique of the home.
“Whenever they sell homes that need work, they take longer to sell and buyers are far more cautious because of the increase in the cost of materials.
“Open homes are attracting a high number of buyers who are willing to pay a premium for these types of properties.”
HTW Valuer Mark Davies said in an uncertain property market, a renovated home completed in a professional manner is sure to retain value better than a neglected residence.
“Most selling agents agreed that an older home in a good location holds a lot of appeal for time poor buyers looking for a move-in-ready investment,” Mr Davies said.
“A quality renovated home saves time, money and energy for the new owner without any hassle and stress.”