Renovations to rise as house flippers start to emerge

Nearly half of Australian homeowners recently surveyed say they intend to renovate a property in the next 12 months, as owner-occupiers give their homes a fresh look and investors undertake remodelling jobs to cash in on rapidly rising house prices.

Research from Houzz showed 48 per cent of more than 2,000 homeowners surveyed said they were planning a renovation in the next 12 months, while the median spend on home renovations over the past year rose 5 per cent to $21,000.

Investment in kitchen revamps rose by 33 per cent, rising from $15,000 in 2020, to a median of $20,000 this year.

“While the pandemic caused initial concern for the residential renovation industry, many homeowners finally had the time and financial means to move forward with long awaited projects in the past year,” said Tony Been, managing director of ANZ at Houzz. 

“This pent up demand, along with long-standing market fundamentals empower homeowners to continue investing in their current homes.” 

For investors, many have been motivated to undertake a renovation to cash in on the nation’s rapidly rising house prices, according to Ray White Group chief economist Nerida Conisbee.

Ms Conisbee said boom markets historically had resulted in a rise in house flipping, which she defined as buying and selling a house within 12 months.

By buying, renovating and quickly selling, she said investors could maximise the available gains as Australian house prices continue to rise.

House flipping activity is currently highest in Sydney, an unsurprising result for Ms Conisbee.

“The city is seeing very strong price growth with the median up over 35 per cent since the start of the pandemic,” Ms Conisbee said.

“Anyone who bought in April last year and is selling now would have made a particularly strong capital gain, even with transaction costs.”

However, the top 10 suburbs with the highest proportion of houses bought and sold within a year was dominated by Adelaide, which accounted for eight locations on the list.

Heading the ranking was Kilkenny, which has a median house price of $545,000 and 40 per cent of the suburb’s properties have been flipped over the last year.

“Anyone who did this is likely to have made more than a $100,000 capital gain over that time,” Ms Conisbee said.

Adelaide’s McLaren Vale and Marden were the second and third most flipped suburbs, at 36.4 per cent and 32 per cent, respectively.

Burswood, located close to Perth CBD, was ranked fourth, with 29.2 per cent of properties bought and sold in the last year.

Queensland’s Point Lookout, located on the northeast tip of North Stradbroke Island, rounded out the top five with 25.6 per cent of its properties bought and then sold within 12 months.

Looking forward, however, Ms Conisbee said house flipping was not always a winning strategy, especially if house prices begin to fall.

“This is what makes it a risky strategy given we know how quickly property market conditions can change,” she said.

“For now though, house prices are continuing to rise, there is a shortage of stock and given that prices have risen across Australia by over 16 per cent since the start of the pandemic, this makes house flipping one way to take advantage of a strong price growth.”

Renovations expert Belinda Botzolis, a senior property advisor at Herron Todd White, said a key element of eliminating risk was to ensure that the end result of a renovation matched the level of amenity offered in other homes in the area.

“If you’re in a quite affluent area, you can push the envelope a bit on what you spend because your market expects something extra from those homes," Ms Botzolis said.

“But if you’re in a basic suburban family area and homes are relatively generic, you probably don’t have the same room to push the envelope. 

“In some areas you can spend $500,000 and gain $1 million in added value. 

“In others you’ll spend $50,000 and be lucky to add $30,000 in value. So, understanding your location is essential as well as what your property will be worth at the end of the project.”

Ms Botzolis said a common example of a renovation not producing a valuation uplift in line with its cost was the installation of an in-ground pool, where it is easy to spend $50,000 or more to achieve only a $30,000 lift in value.

To ensure renovators don’t overcapitalise, Ms Botzolis said projects needed to be evaluated through the lens of a valuer.

“As valuers, we’ve been trained to just step back and really look at a property for what it’s worth, not the romanticized idea of a renovation and what those works might add in value based on their cost,” she said.

“Often a valuer tells a bank, ‘This is what the home will be worth once the reno is completed.’ 

“The bank lends the owner $100,000 and that money gets eaten up pretty quickly. 

“The owner then starts asking the bank for more money to finish the job, but at some point, the bank has to say no. 

“Just because you need an extra $50,000 to finish the job, doesn’t mean the valuation will go up from $2 million to $2.2 million to justify the increase in funds. It simply means you didn’t budget properly.”