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Canadian households are getting a lot wealthier thanks to high-flying home prices in a number of local markets, but they aren’t spendthrifts when it comes to home renovations, suggests a recent Scotiabank report.
“Rising home prices have generated $200 billion in new household wealth over the past year alone,” writes Adrienne Warren, a Scotiabank senior economist, in the latest weekly Global Real Estate Trends report.
Normally, this would spur more reno activity, Warren noted. “Historically low borrowing costs and sizeable wealth creation generated by rising home prices are conducive to renovation demand,” she explains in the report, which zeros in on slumping residential renovation spending in Canada.
Warren notes how renovation spending usually grows in line with home sales (last month, Canadian home sales activity climbed 5.2 per cent year-over-year) as recent buyers fix up their new abodes to meet their needs or wants and those looking to sell spend on upgrades before listing.
However, “weak labour market conditions” and stagnating wages are making consumers act more cautiously, says Warren. One way this is playing out is in holding off on home improvements.
“High household debt burdens also are likely contributing to the scaling back in renovation plans, particularly large projects that are more likely to be financed,” she adds.
From 2000 to 2007, spending on home renovations grew by an average of 9 per cent annually. Yet for the period from 2008 to 2015, that average falls to 2.5 per cent, according to the report.
Data suggests homeowners are taking on more DIY projects. “Retail sales of building materials and garden supplies have jumped 10 per cent over the past year, double the increase in overall retail receipts,” says Warren.
For wholesale building materials — the kind contractors would be looking to purchase, for example — sales are flat year-over-year, compared to the first quarter of 2015.
Though renovation activity has been slowing of late, Warren focuses on several factors that could be catalysts for increased spending in the rest of the year.
As other observers have mentioned (brokerages Royal LePage and RE/MAX among them), global economic uncertainty further elevated by Brexit may keep interest rates at their current low rates for longer, which Warren explains is a positive for reno activity.
Further, the Scotiabank economist expects reconstruction efforts in Northern Alberta following the wildfires that charred Fort McMurray to support higher reno demand.
“Meanwhile, tight housing supply, deteriorating affordability, and high resale transaction costs could encourage more potential move-up buyers to instead upgrade and/or expand their current home,” says Warren. With that view, Warren echoes a recent report from TD Economics about “buyer gridlock.”
“This is likely especially the case in and around Vancouver and Toronto, where home prices are rising rapidly and competition for homes is fierce,” says Warren.