Open for inspections are now once again permitted. It’s great news for Melbourne’s resurgent property market, as it continues to gather momentum into 2021 and rebound from COVID-19. It's also a timely moment to pay tribute to property industry workers and customers alike, and their ability to successfully overcome what’s been a very challenging year for Victorians.
How HomeBuilder grant might build equity to increase property value
Are you weighing up the merits of starting a $150,000-to-$750,000 renovation on your home to obtain a $25,000 gift from the federal government via the HomeBuilder scheme? Perhaps you’re one of the few people who meet the criteria, namely a family annual income under $200,000 (or if single, an income under $125,000), a home currently worth less than $1.5 million and have the time, wherewithal and drive to sign a works contract by year’s end and ensure works proceed within three months of the contract date.
Most applicants will be homeowners whose plans for a renovation were already in train. Not believing their luck, they’ll take the $25,000, so few genuinely new tradie jobs will be created. At the margins, the grant may encourage some renovators to expand their ambitions so as to increase their formerly sub-$150,000 budgets to a level that qualifies for the grant, whilst some conceptual renovation ideas may spring off the drawing board sooner than originally intended. Incidentally, I suspect the HomeBuilder scheme’s other channel, devoted to encouraging new home builds by providing a $25,000 grant for a home worth up to $750,000, may be more successful in bringing forward construction demand, especially among first home buyers and upgraders in CBD outer suburbs and other comparatively low land value areas.
Most of the HomeBuilder-assisted renovations will be underpinned by lifestyle motivations: a desire to modernise and enhance the living space and/or add extra accommodation.
But the HomeBuilder renovation channel may yet tempt a swathe of economic opportunists who are more interested in increasing equity and wealth rather than improving amenity in their home. Some will be ‘flippers’, who seek to unlock their gains swiftly by selling the asset soon after the renovation. They’ll tend to craft projects with a price tag towards the bottom of the scheme’s $150,000 budget floor, where the government will effectively bankroll every sixth dollar spent on the project.
Once the motivation becomes mainly economic, a protagonist should demand a solid return on their renovating investment to make some money as well as compensating for effort, inconvenience, capital committed and risk. For a $150,000 spend you’d want to be aiming for a minimum of a $250,000 uplift in value - which, after receipt of the grant, equates to a 100 per cent pre-tax return on renovation investment.
Unfortunately, there are a limited number of scenarios where that magnitude of uplift is achievable. Most renovation ‘bang for buck’ lies in smaller scale or cosmetic work – be it basic re-painting, re-carpeting or polishing boards or more ambitious kitchen and bathroom overhauls. Do all the above and you might spend $80,000. A campaign involving a clutch of significant structural improvements such as rewiring, re-roofing and re-pinning could expand the budget by a further $50,000. But as these improvements are effectively ‘invisible’ to the future buyer, the uplift in value will be modest.
The renovator who completes those works and is looking for more to do to reach the $150,000 grant threshold will likely turn their mind to undertaking an extension, be it out or up. Unfortunately, one can’t do an extension on the cheap – though people try – as the outcome is generally poor and certainly not value-enhancing. For instance, a quality ground floor extension at the back of a single fronted cottage in one of our CBDs often includes shifting and upgrading of the kitchen, associated rerouting of water and electrical services plus outlook and access to a remodeled garden, so can comfortably cost $300,000 plus.
Occasionally, the outcome is so transformative of an ugly duckling that the emerged swan of a house is suddenly several hundred thousand dollars more valuable, vindicating the investment. More often, the net uplift in value is either modest or is negative, and dreaded over-capitalisation has occurred.
There has been significant criticism that the HomeBuilder grant is inequitable given the recipients will generally be those who can afford to renovate their homes. That may be true, but it is also not likely to build much equity for those people either. Richard Wakelin