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14 May 2004

Sinking Renovations

How the property falls may create renovation falls.

These comments refer to the article: PROPERTY BUST IS GOOD FOR MOST HOMESELLERS.

Your article about the housing ‘bust” being good for homesellers must be qualified.

The housing bust is not good for people who have bought “renovators” or who are in the process of renovating.

Why? The net capital improvement gained by renovating is reducing because the market is falling. The longer these renovations take the less net capital gain will remain. The value of the overall property is sinking like a multistorey building being built on soft foundations.

The renovations already in the system will take a while to exhaust because so much work is still being carried out and there is a shortage of skilled labour.

It may be more beneficial to sell your renovator now than to proceed with the renovation.

Those in the process of renovating are caught out at the moment, until the renovations are finished.

Here is a quick and dirty example of the economics involved.

An existing house is worth say $500,000. Renovations worth $50,000 are planned in order to produce a present value capital gain of $100,000. Assume the renovations take six months to achieve.

The house would be presently worth $600,000 on the market, with the completed renovations. However in six months time when the renovations are complete, the house may only be worth $550,000.

The net capital gain is zero. Think about it.

It would appear that if this scenario is realistic, then not only will the housing market be falling, but so will the renovation market.

If you wish to send a question or comment to Neil Jenman you are most welcome. Neil tries to read every e-mail and respond personally. We have posted some of the common questions together with those we feel may help you. Thank you for your interest.
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