Home renovations can be unpredictable and nerve-wracking at the best of times. But soaring costs, rising interest rates, falling house prices and uncertainty about Canada’s economic outlook are increasing the financial risks associated with a major run-up in the housing market, some real estate experts warn.
Homeowners with large mortgage balances should “watch out for renovations right now,” said Nasma Ali, broker and founder of One Group Toronto Real Estate.
In addition to exorbitant expenditures on materials and labor driven by supply chain issues and labor shortages, another squeeze on the budgets of some home remodelers comes from rising costs. of borrowing. Home equity lines of credit (HELOCs), which homeowners often rely on to finance major improvements, typically come with variable interest rates, which rose as the Bank of Canada raised its benchmark rate to help to fight inflation.
These changing real estate and economic trends surprised some Canadians mid-renovation.
In Toronto’s east end, Hillary Strack-Cheng and her husband undertook a sweeping renovation of their home in September. They wanted to add two bedrooms and a bathroom to their small two-story home to make room for their growing family. The couple had decided to renovate after calculating that a house extension would cost them less than selling the house and buying a larger property in what was then a hot market.
But some nine months later, the project, momentarily derailed by a dispute with a contractor, continues. Unforeseen delays and costs forced the couple to refinance their mortgage, which has a variable rate, and max out their HELOC.
As the family plan to return home in August, Ms Strack-Cheng said rising interest rates added a layer of stress to an already stressful construction process.
“The variable interest rate goes up a 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 the coming months.
Recent buyers and real estate investors with significant mortgage debt are generally among homeowners most at risk from the financial dangers of an ambitious renovation in a declining housing market, Ms Ali warned.
As home prices stagnate or decline in many markets, one risk is that a home renovation may not increase the value of a property as much as the cost of the project.
“I see these flips falling all over the place right now,” Ms Ali said, speaking of property investors hoping to flip homes with a gain after properties are renovated.
Another risk is that expensive projects — such as upper-floor additions, gutting and remodeling, or rear extensions — could leave heavily indebted homeowners owing more on their homes than the properties are worth, Ms. Ali.
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 for renovation prices to soften,” Ms. Birenbaum said in an email. She added that renovations “almost always” cost 30% more than expected and took 50% more than expected.
Those considering borrowing to finance a renovation should also keep in mind that HELOCs are redeemable, which means their terms can change, said Toronto mortgage broker David Larock.
HELOCs allow homeowners to borrow only what they need, just as they would with credit cards, making lines of credit a convenient and flexible way to finance renovations.
But lenders have the power to reduce the unused portion of a HELOC, leaving a homeowner unable to borrow additional amounts, Larock said. Or they could require the outstanding line of credit balance to be rolled into the mortgage, among other potential changes, he added.
While such cases are rare, lenders are more likely to cut credit extended through HELOCs during times of economic turbulence, he said.
“When property values start to drop, lenders want to lower their level of risk.”
For now, it’s unclear whether the combination of high costs, expensive credit and an uncertain economic outlook is already putting a damper on the pandemic-driven home improvement boom.
Retail sales of building materials fell in April, which CIBC economist Andrew Grantham linked to higher borrowing costs weighing on construction and renovation activity.
But a recent survey by HomeStars, an online home improvement marketplace, found that only 20% of people renovating their homes plan to use credit to finance the improvements. The others said they paid with cash or savings instead. (The poll, conducted through the Angus Reid Forum, did not include Quebec.)
In Vancouver, residential designer Jamie Banfield has yet to see customer demand slow down, but he expects that to happen soon.
“People are maxed out,” he said, adding that many of those who bought bigger homes during the pandemic have stretched their finances and now have limited resources for renovations.
But there is also an element of fatigue, Mr. Banfield said. While interior designers are used to hearing clients say they’ve fallen in love with particular designs, looks or layouts, the prevailing emotion right now seems to have become “just do it”. , did he declare.
This is where Angela Dawn is. The Toronto librarian said she is currently stocking a brand new toilet in her living room and a tub on her porch, after the contractor she hired for a bathroom renovation pulled out unceremoniously, citing “labour shortages”.
Ms Dawn, who lives in a two-storey semi-detached house with her husband and two children, added that she had been waiting nearly two years for the highly recommended contractor to take on the project.
Now, she says, she’s back to square one.
“I have no idea how much more it’s going to cost us, or how we’re going to handle this or how we’re going to find a contractor,” she said.
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