Five factors to determine how much value a renovation could add to your home

The combination of rising construction costs and falling interest rates is likely to trigger an increase in renovations activity, according to a leading property economist.

“Over the past two years, we've seen the value of renovations undertaken remain high, largely driven by rising construction costs. With the cost of building expected to remain high but with the added boost of the recent interest rate cut, we're likely to see an increase in renovation activity as borrowing costs decrease and homeowner confidence grows,” Ray White Group Chief Economist Nerida Conisbee said.

But while more homeowners are expected to upgrade their home, that doesn't mean renovating is right for everyone, in part because the return on investment can be extremely variable.

Ms Conisbee said that spending $200,000 renovating a $1 million home would not automatically increase its value to $1.2 million, as some homeowners would generate a greater return on investment and others a lesser return.

Five factors that impact post-renovation values

1. Market conditions

It's harder to do a value-adding renovation in a downturn than an upswing. “When the market is rising, it's hard to tell how much of your home's increased value came from your renovation versus general market growth,” Ms Conisbee said.

2. Buyer preferences

“Renovations that most people like will add more value than those with limited appeal,” Ms Conisbee said. On a related note, it's important to appeal to the tastes of your local market. “Young families might pay a premium for an additional bedroom, while downsizers might value single-level living and low-maintenance features. Understanding who typically buys in your area helps predict which renovations will add the most value for that specific market.”

3. Affordability constraints

That said, even if your renovations are perfectly tailored to local buyers' preferences, there's a ceiling on what people will pay, according to Ms Conisbee. “Spending $500,000 on renovations in a street where homes typically sell for $500,000 is unlikely to double your home's value. Each neighborhood has a limit on what buyers will pay, no matter how nice your renovation is.”

4. The end result

Ms Conisbee said a partial renovation may deliver a lower return on investment (in percentage terms) than a full renovation, because the combination of old and new elements may highlight the deficiencies. “A brand new kitchen alongside a severely dated bathroom can make the unrenovated spaces look worse by comparison, potentially detracting from the home's overall perceived value,” she said.

5. The alternative options

Renovations can be disproportionately value-adding if they save buyers time, money and stress. “People who hate the renovation process may pay more for an already-renovated home than someone who enjoys the project,” Ms Conisbee said. She also noted that homeowners who do renovate may benefit from the significant increase in construction costs that has occurred in recent years. “This means recently renovated homes often hold their value better because they would cost more to replicate now.”

If you want to renovate your home, I can give you a range of options for funding the project.