Australians love renovating but research shows most don't make money doing it
As investors reconsider their property strategies, many are turning to improving their own homes, but research suggests most renovations actually reduce financial returns.
The Federal Budget has reignited debate about where Australians should invest their money.
With changes to capital gains tax concessions, negative gearing and the treatment of housing within self-managed superannuation funds, many property investors are reassessing their long-term strategies.
But the family home, one of Australia’s most tax-effective assets, has barely featured in the discussion.
Unlike investment properties, a principal place of residence remains largely exempt from capital gains tax. If owning an investment property becomes less attractive, many households may instead ask whether they’re better off investing in the home they already own.
The renovation folly
Renovating has long been seen as a reliable way to build wealth. Television is full of renovation shows, and conversations about kitchens, extensions and knock-down rebuilds are almost a national pastime.
The assumption is that spending money on your home will eventually pay for itself.
In upcoming research from Macquarie Business School, we studied one million repeat sales of Australian homes linked with local government development applications.
We examined what happened when homeowners undertook major improvements. Rather than relying on surveys or property valuations, we measured actual financial returns after accounting for construction costs and movements in the broader housing market.
On average, homeowners who carried out major renovations earned returns about 2.4 per cent lower than comparable households that simply bought, lived in and later sold their homes without substantial redevelopment.
In other words, many Australians overcapitalise on their homes.
Lifestyle or investment?
A home is more than an investment. It’s where people live, raise families and spend much of their lives. Many renovations are undertaken because they improve comfort, functionality or lifestyle, not because they maximise resale value. A larger kitchen or outdoor entertaining area may be worth every dollar to the people who enjoy it for years.
The problem arises when lifestyle spending is mistaken for financial investment. The type of renovation made a significant difference.
Knock-down rebuilds produced the weakest financial returns, with homeowners typically overcapitalising by around 10 per cent once construction costs were taken into account. Swimming pools broadly broke even, while pergolas, decks and garages generally failed to recover their costs, returning around 4 per cent and 2.5 per cent less than comparable unimproved homes. Extensions and alterations, on average, were financially neutral.
Duplex developments generated returns of around 10 per cent above comparable homes that were simply bought and held. Rather than improving an existing dwelling, a duplex creates another home. The market rewarded projects that increased housing supply rather than simply increasing housing consumption.
The outperformers
We also found that the homeowners earning the strongest returns weren’t typical owner-occupiers.
They were ‘flippers’.
Those who bought, renovated and sold within relatively short timeframes consistently outperformed the market. Flippers who completed extensions and alterations earned returns around 5.4 per cent higher than comparable unimproved homes.
Their decisions were guided by financial discipline rather than personal preference, typically purchasing smaller homes, adding value efficiently and selling at a premium.
The distinction matters because Australia’s housing challenge is about affordability and supply.
Recent Australian Bureau of Statistics figures show approvals for private-sector dwellings other than detached houses – including duplexes, townhouses and apartments – fell by more than 10 per cent in May and remain below where they were a year earlier. At a time when governments are trying to deliver 1.2 million new homes over five years, the pipeline of medium-density housing is moving in the wrong direction.
Notably, the only residential improvement in our research that consistently delivered above-average financial returns was also the only one that consistently increased the housing stock.
That finding aligns with recent planning reforms in New South Wales, where governments have sought to encourage small-scale infill housing through pattern-book designs, expanded complying development pathways and zoning changes that allow duplexes in more suburbs. This makes it easier for homeowners to contribute to new housing supply.
The broader policy question
If tax changes encourage Australians to direct more of their wealth into owner-occupied housing, should policy simply encourage people to spend more on their homes? Or should it reward the kinds of investment that also create additional housing?
One option would be to extend targeted tax incentives to developments that genuinely increase supply. For example, governments could consider a capital gains tax concession for homeowners who build a duplex and sell one of the dwellings to a first-home buyer.
Our research doesn’t suggest Australians should stop renovating. It suggests we should think more carefully about the kinds of investment we encourage.
