As economic activity in Canada slows over the next year, what will be the outlook for home renovation spending? The short answer is that it will be pulled in two directions. The long answer is that the determinants will be more heavily weighted towards the negative than the positive.

Renovation spending comprises up to 50% of total residential investment in any given year. The outlook for new residential construction as a whole is set to decline. Housing starts are on the wane across much of the country. The only regions where there are large positive increases in starts to date this year are Newfoundland and Ontario. The strength in Ontario is entirely in multiple units (i.e., condos). New condos account for only a small amount of renovation work. The main driver of renovation activity is existing home sales.

There is a close tie-in between the new home market and existing home sales. On the selling side, a resale is often the first step for someone wishing to move up to a better and/or bigger new home. In a resale transaction, both sides of the deal hold potential for renovation activity. The seller wants to spruce up his and/or her asset to make it more attractive to a buyer. Once the home has been sold, the new owner often wishes to make changes, sometimes minor but sometimes of a more significant nature. This fact has often been taken into account by the buyer when lining up the overall mortgage financing.

The largest-dollar spending on renovation projects takes place within two years of an existing home changing hands. Of course, there can be renovation projects outside that time frame, but often these are of a less-ambitious and less-costly nature. Existing home sales in Canada are now finally on the decline after several years of setting record levels.

At the present time, many of the influences that are curbing existing home sales and new home construction are also impacting on family budgets and thereby reducing the prospects for large-dollar renovation spending. Canadians are aware of what has been happening in the economies of the United States, Europe and elsewhere (i.e., Canada’s export markets). The outlook for jobs and incomes has turned much more precarious.

Home prices are falling and this is creating a negative wealth effect. In other words, most of us don’t feel as prosperous as we did a year ago. Furthermore, lower house prices reduce the prospects for home equity loans. The credit squeeze earlier this year has also made credit card debt harder to carry, should one miss a payment or two. Most Canadians have also taken a hit from the stock market collapse that began in late September. Mutual and pension fund holdings have been directly affected with severe corrections downward.

The prime objective of many families at this time is to clean up their balance sheets. That means paying down credit card balances and foregoing some spending projects that might otherwise have proceeded. This will take precedence over discretionary reno projects.

Year-over-year current-dollar sales by home centers and hardware stores in Canada have been trending downward for several years, from a high of +15% to a current level of about +5%. In the United States, the year-over-year percentage change in building material and supply sales was likewise +15.0% earlier in the cycle, but has been negative since January 2007. The U.S. figure fell as low as -8.5% − which would be even steeper after factoring in inflation − but has since recovered to about -2.0%. This demonstrates that renovation work remains appealing even when consumers are under duress.

This leads into some comments of a more favourable nature. If people are staying put and not buying new homes, then they may opt to fix up their present accommodations through renovating. And there will be some breaks in terms of pricing. Weaker overall residential markets will free up some contractors to take on jobs. Also, the cost of many construction materials will be sliding along with the general weakness in overall commodity prices. Commodities form the backbone of many building products (e.g., copper in plumbing and wiring fixtures; oil and natural gas in insulation material and plastics; etc.). Now is a time for bargains, if you have the cash on hand.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

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