Should home owners cancel renovations?
With interest rate hikes, high inflation, and supply chain concerns not going away any time soon, is it wise for home owners to consider a renovation at this time?
There are headwinds bringing uncertainty to the building sector as October approaches, despite this usually being a time when remodeling, construction, and sales are at their peak.
According to CoreLogic's Cordell Construction Cost Index (CCCI) for Quarter 2, 2022, national residential construction costs climbed by 10 per cent over the previous 12 months to June 2022.
The latest data from ABS shows the steep rise in material costs in Sydney has been severe, with some of the most significant increases being a 42.1 per cent increase for steel, a 20.6 per cent increase for wood, and a 16.2 per cent increase for aluminium.
Drew Hendrey, the executive director of valuation and advisory at Herron Todd White, said that all of this is putting pressure on both builders and home owners who want to do renovations.
According to recent reports, more construction companies are closing as a result of declining profits caused by increased material costs and a persistent labour shortage.
In addition, there is difficulty in securing builders and subcontractors, which makes projects take much longer and cost a lot more than many owners expect.
A comparison revealed a 45 per cent decrease in construction financing report volume between the first quarters of 2021 and 2022. A similar comparison between Q2 2021 and Q2 2022 showed a 25 per cent decline in employment.
Sydney’s falling property market has made the risk worse. It fell 2.2 per cent month over month and 4.7 per cent over the three months to July 2022, which was the biggest monthly drop since the global financial crisis of 2008. This is because the RBA is trying to stop inflation from rising.
Mr Hendrey said, “In many instances, it just makes more financial sense to buy an existing home, or build a new one, than do a renovation.”
Experts say there are few signs the price of building materials will retreat anytime soon, and while the Jobs and Skills Summit appears promising, Australia is yet to have a detailed solution to labour shortages. So, construction delays could be the norm for a while yet.
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