Canadian homeowners remain enthusiastic renovators, Scotiabank’s Adrian Warren reports in Global Real Estate Trends.
Expenditures on home additions, alterations, new installations and replacement of equipment rose 6% year over year through the first half of 2015 (3½% in inflation-adjusted terms). Outlays are on track to total a record $53 billion this year, rivalling spending on new construction. Retailers of building materials and garden equipment supplies are likewise reporting brisk sales, though sales among wholesalers have been slower Renovation spending is up in all provinces with the notable exception of Alberta.
The ongoing buoyancy in renovation activity mirrors the still elevated level of national home sales and new construction. Home sales this year are running about 5% above last year’s pace, while housing starts are on track to match the 2014 total of 190,000 units. A large share of home renovations are made by recent buyers, and by sellers preparing to list.
The industry’s overall momentum falls well short of the 2000-07 renovation boom, which was supported by more broad-based strength in home sales and price appreciation, and relatively stronger employment and income gains. Over the first eight years of the new millennium, growth in real renovation outlays averaged a stellar 9% annually. Growth has slowed to a more modest, though still healthy, 3% average yearly gain over the post-recession period.
Looking ahead, the industry faces a few headwinds. Canadian households are expected to be relatively cautious spenders in the face of lacklustre job and income gains. Consumer confidence and major purchase intentions have softened. There is also the potential for a bigger pullback in home sales and residential construction if the economy is unable to regain increased traction.
Even so, several factors should sustain moderate growth in renovation expenditures, which are typically less volatile than home sales or new construction. Borrowing costs are expected to remain highly attractive, with the Bank of Canada likely on hold through 2016 and longer-term borrowing costs expected to drift only moderately higher. Low gasoline prices are providing a boost to household purchasing power.
A record high homeownership rate of close to 70% is supportive, with owners more likely to undertake upgrades than landlords or renters. The steady increase in average renovation expenditures per household over the past two decades mirrors Canada’s rising homeownership rate. Canada’s housing stock (ownership plus rental units) is expanding by roughly 1-1½% a year, with household formation boosted by immigration and young millennials. An aging population should lift demand for accessibility-related retrofits and upgrades.
From a regional perspective, relatively firmer economic conditions point to stronger renovation demand in Ontario and British Columbia. In Toronto and Vancouver in particular, the combination of strong home sales and price appreciation, increasingly strained affordability and tough competition for single-family homes makes renovating an attractive option for current owners looking to upgrade, as well as for first-time buyers trying to get a foothold into these high-priced markets via fixer-uppers. Conversely, softer employment and housing market conditions will likely continue to restrain renovation demand in Alberta and Saskatchewan. Margin pressure on the industry could build as moderate revenue growth runs up against rising input costs. Industrial price inflation for many renovation related construction materials, equipment and household goods — including heating & cooling systems, windows & doors, kitchen cabinets, carpets, furniture and appliances — so far remains contained. However, contractors, wholesalers and retailers could face increased cost pressures if the weaker Canadian dollar feeds through to a higher import bill.