The party is probably over for property investors looking to make big bucks renovating homes to flip, as the surging house prices and steep rise in construction costs have made it difficult to turn a profit, real estate insiders say.
In the past year, the pandemic has attracted house flippers into the market with some raking in millions in less than a year, helped by the ultra-low mortgage interest rates and rising prices.
For example, the vendor of the home at 98 Malcolm Street, Hawthorne, Brisbane bagged $375,000 capital gains in 12 months after selling the renovated home for $2.265 million.
But the market has become too hot for some investors looking to make decent renovation gains.
In just three months, house prices have surged 7.1 per cent in Sydney and by 5 per cent in Melbourne. Across the combined capitals, it rose by 5.2 per cent.
On top of that, high demand for tradies and materials from owners renovating their homes have pushed construction costs higher.
CoreLogic’s CHIP report, which measures the change in building costs, shows residential construction costs have gone up by 1.4 per cent over the three months to June – the largest quarterly rise since the third quarter of 2014.
“It’s getting very hard to make a profit. The margins I expect as a renovator are much harder to find, because of higher house prices and renovation costs,” said Catherine Lezer, serial renovator and investor based in Perth.
“I made some money on my recent renovation, but my profit was eaten up by holding costs which had doubled and the actual costs of labour and materials which went up by 50 per cent by the time I settled.”
Property valuer David Notley, Herron Todd White Brisbane director, said it was becoming evident that the delay on delivery and shortage of materials were causing significant upward pressure on prices of materials and tradies.
“In some instances, we are starting to see some renovation projects becoming unviable and are considered somewhat of an overcapitalisation, where the outlaid cost of construction or renovation is not considered to reflect added value in comparison to established housing that has recently sold,” he said.
Tradie listing site Service Seeking’s chief executive, Oliver Pennington, said hourly rates for tradies had risen by 5 per cent across the board in the past three months amid strong demand.
‘Makes no sense’
As such, renovating for profit was not as lucrative as it once was, particularly in the current market, said Victor Kumar, founding director of Right Property Group and an active investor.
“It’s very difficult to find properties that you can renovate and get a good return on your cash because there are very few stocks and there are so many buyers out there looking for the same thing,” he said.
“So you risk overpaying for the property, and you also face higher renovation costs because of tradie and material shortages. It could be a fool’s gold.”
Mr Kumar said renovating to flip has lost its potency as homes were selling fast, whether they were renovated or not.
“Buyers are so desperate, they’re buying anything, even sight-unseen. That’s why we’re seeing prices rising rapidly,” he said.
“So it makes no sense to spend that money and time renovating to add value, when the market can do all that heavy lifting for you.”
Select Residential Property head of Research Jeremy Sheppard said it was easier to find a high-growth market nowadays than a good renovation opportunity.
“Renovating for profit was not a bad strategy for flat markets, but in markets where prices were moving up on a weekly basis, it was not worth the trouble,” he said.
Sydney investor Eddie Dilleen, of Dilleen Property, said there were better ways to make money in a booming market.
“For me, renovating in today’s market is a waste of time and money. I’d rather use that $50,000 or so as a deposit on another property and expand my portfolio.”
But there are also still cases when renovations are profitable for investors, said Shaun Thomas, Herron Todd White director of prestige residential based in Sydney.
“In the current market, we are seeing a lack of supply leading to very strong results for homes with a high-quality renovation,” he said.
“For example, the Blue Mountains is experiencing high demand with a noticeable premium being paid for renovated homes over houses in original condition.”
Renovation also makes sense if investors have access to friendly tradies or builders, and when renovating in highly sought-after inner-city areas close to the CBD, said Mr Notley.
“Areas within school catchment areas where supply is in shortage and demand is high with growing families could make renovation profitable,” he said.
“Vacant land is becoming increasingly scarce in the inner city and accordingly renovating is the only option to add value and create the desired ‘family home’ due to heritage and traditional character overlays.”
This article is from Australian Financial Review, please click the following link for the original article: https://www.afr.com/property/residential/housing-market-too-hot-for-renovators-20210916-p58s57