Homeowners turn to renovations

Higher interest rates and the National Credit Act (NCA) may well have forced consumers to think twice before moving house or buying investment properties but it hasn't stopped them from upgrading existing homes. Latest building data from Stats SA show a hefty rise of 27,3% in the value of building plans passed for residential additions and alterations in the first two months of 2008 (y-o-y). That compares to a rise of only 2,7% in the value of all residential building plans passed for the same period.

Completions of additions and alterations were also up 25,3% in January and February this year compared to the same period last year. That is in stark contrast to a drop of 8% in all residential building plans completed over the same period. The fact that homeowners continue to spend money on renovations probably explains why the growth in mortgage advances have held up relatively well amid a sharp drop in housing sales. According to latest SA Reserve Bank figures growth in mortgage advances was still up 23,2% in March 2008.

Economists were expecting mortgage lending to slow significantly this year on the back of higher rates and the introduction of the NCA mid-2007. But that has yet to happen despite estate agents reporting a drop of around 30% in housing sales in first quarter 2008. Property analysts say that rising rates and rapid house price inflation over the past five years have made it increasingly expensive to upgrade from one property to another. So many homeowners are taking out second and third bonds to improve their existing homes instead.

Research done by FNB Home Loans appears to support this trend. A survey done by the bank in fourth quarter 2007 shows that approximately one in five homeowners were investing in their existing homes by making major improvements and renovations. Lynette Nicholson, head of research at FNB Home Loans, says about 36% of homeowners spending money on improvements are doing so because they cannot afford to buy elsewhere and want to upgrade the property that they currently live in. Nicholson says about 20% of homeowners make improvements in order to increase the value that they can sell their homes for in the short-term. This is more prevalent in the lower and middle house price segments than it is in the upper priced property market.
- Joan Muller - From Property24.com 12/5/2008