Home renovations can be unpredictable and anxiety-laden at the best of times. But soaring costs, rising interest rates, cooling home prices and uncertainty about Canada’s economic outlook are increasing the financial risks associated with a major property uplift, some real estate experts warn.
Homeowners with large mortgage balances should “be careful with renovations right now,” said Nasma Ali, broker and founder of One Group Toronto Real Estate.
On top of sky-high materials and labour expenses driven by supply chain snarls and worker shortages, another squeeze on some home renovators’ budgets is coming from rising borrowing costs. Home equity lines of credit (HELOCs), which homeowners often rely upon to finance major improvements, generally come with variable interest rates, which have been climbing as the Bank of Canada has raised its benchmark rate to help fight inflation.
Those changing real estate and economic trends have caught some Canadians by surprise, mid-reno.
In Toronto’s east end, Hillary Strack-Cheng and her husband embarked on a sweeping home makeover September. They wanted to add two bedrooms and a bathroom to their small two-storey home to make room for their growing family. The couple had decided to renovate after calculating that a home extension would cost them less than selling the house and buying a bigger property in what was then a red-hot market.
But some nine months later, the project, which was temporarily derailed by a dispute with a contractor, is continuing. Delays and unexpected costs forced the couple to refinance their mortgage, which has a variable rate, and max out their HELOC.
While the family expects to move back home in August, Ms. Strack-Cheng said rising interest rates are adding a layer of stress to an already stressful construction process.
“The variable interest rate is tick-tick-tick climbing up a tiny bit, and that makes a difference when you’re maxed out,” she said.
The Bank of Canada has raised its key rate by 1.25 percentage points so far this year, and economists expect several more rate hikes in coming months.
Recent homebuyers and real estate investors with significant mortgage debt are typically among the homeowners who are most exposed to the financial dangers of an ambitious renovation in a cooling housing market, Ms. Ali warned.
With home prices in several markets stagnating or declining, one risk is that a home remodel won’t increase a property’s value by as much as the project cost.
“I’m seeing these flips flopping everywhere right now,” Ms. Ali said, speaking about real estate investors hoping to flip homes at a gain after renovating the properties.
Another risk is that costly projects – such as upper-storey additions, gutting and remodelling, or back extensions – could leave heavily indebted homeowners owing more on their houses than the properties are worth, Ms. Ali said.
A hazy economic outlook means homeowners may want to put unnecessary kitchen and bathroom redos on hold, unless their jobs are very secure, according to Rona Birenbaum, founder of the financial planning company Caring for Clients.
“If their job is secure but money is tight it may be worth waiting until prices for renos soften,” Ms. Birenbaum said in an e-mail. She added that renovations “almost always” cost 30 per cent more than budgeted and take 50 per cent longer than expected.
Those planning on borrowing to finance a renovation should also keep in mind that HELOCs are callable, which means their terms can change, said Toronto mortgage broker David Larock.
HELOCs allow homeowners to borrow only what they need, as they would with credit cards, which makes the lines of credit a convenient and flexible way to finance renovations.
But lenders have the power to trim back the unused portion of a HELOC, leaving a homeowner unable to borrow additional amounts, Mr. Larock said. Or they could demand that the outstanding balance on the line of credit be folded into the mortgage, among other potential changes, he added.
While such instances are rare, lenders are more likely to trim back credit extended through HELOCs during periods of economic turmoil, he said.
“When property values start decreasing, lenders want to lower their level of risk.”
For now it’s unclear whether the combination of high costs, expensive credit and uncertain economic outlook is already putting a damper on the home-renovation boom instigated by the pandemic.
Retail sales of building materials were down in April, something CIBC economist Andrew Grantham linked to higher borrowing costs weighing on construction and renovation activity.
But a recent survey conducted by HomeStars, an online home-improvement marketplace, found that only 20 per cent of people renovating their homes planned to rely on credit to finance the upgrades. The rest said they were paying with cash on hand or savings, instead. (The survey, conducted through the Angus Reid Forum, did not include Quebec.)
In Vancouver, residential designer Jamie Banfield hasn’t seen client demand slow down yet, but he expects that to happen soon.
“People are maxed out,” he said, adding that many who bought larger homes during the pandemic have stretched their finances and now have limited resources left for renovations.
But there’s also an element of fatigue, Mr. Banfield said. While interior designers are used to hearing from clients who say they have fallen in love with particular designs, looks or layouts, the dominant emotion right now seems to have become “just get it done,” he said.
That’s the stage Angela Dawn is at. The Toronto librarian said she’s currently storing a brand-new toilet in her living room and a bathtub on her front porch, after the contractor she’d hired for a bathroom overhaul unceremoniously bowed out of the job, citing “labour shortages.”
Ms. Dawn, who lives in a two-floor semi-detached home with her husband and two kids, added that she had been waiting for the contractor, who came highly recommended, to take on the project for nearly two years.
Now, she said, she’s back to square one.
“I have no concept of how much more it’s going to cost us, or how we’re going to handle that or how we’re going to find a contractor,” she said.
Published June 24, 2022
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Photo by Nolan Issac on Unsplash