Home Improvement Reasons (The Bugle)

Did you know that the strongest growth component of overall retail sales in South Africa, as measured and published by Stats SA, is the Hardware, Paint and Glass Products category. Having recovered from a huge slump in 2008/9 the 11% real growth rate for the 3 months to February 2014 for this category far exceeds the 3,6% growth in overall retail sales. Owners of a Build-It, Mica, Builders Warehouse or similar store should have nothing to complain about and should be doing better business now than experienced over the past few years. The obvious next question is why do people spend money on home improvement type products and what does this tell us about the expected trend in the property market cycle? On the reasons of why, FNB actually measure this accurately in their quarterly Estate Agent Survey conducted nationally. The overwhelming majority of people, 76% of all to be exact, do it for their own use. They enjoy the benefits of the upgrade for the future period that they remain in residence. This is always the best reason to undertake any upgrade and it is therefore not surprising that three quarters of this upgrading activity in our economy is driven by this motivation. A far lesser component, 16,5% of up-graders, do it because they can’t afford to buy elsewhere. A sensible reason in many cases as the transaction costs with buying and selling properties can be high enough to encourage a percentage of home-owners to rather add value to their existing homes. This can be a good idea but has a limit depending on the extent of the upgrade and the expected level of capitalisation of the property. A typical mistake made by many home-owners, is to over-capitalise a property for the given average pricing achievable in the suburb. Every owner eventually becomes a seller and it can then be a challenge to be able to recoup the capital invested in the home. The best gauge as to whether you are fully or over-capitalised with your suburb is the ask your local professional estate agent to provide you with a deeds office report on your property and on the suburb so as to understand what the last 20 homes geographically closest to your home have traded at and to get a handle on what the average price achieved in your suburb is. This type of data is readily available and in the public domain – you just need to know what you are looking for and how to interpret it.

A small percentage of people are currently undertaking home improvements as a speculative undertaking – measured at 6,5% of total home improvements. This is significantly down from the 24,5% measured for the same reason in early-2006, when the market was booming.

Improving confidence always precedes sales activity. We saw the FNB Home Investment Confidence Indicator shoot up from the third quarter of 2013. The home improvement activity followed soon after and the significant improvement in residential property sales, which we are currently experiencing, is a direct result of people feeling more confident about the future. The last measured quarter has seen a flattening of this confidence indicator and it will now be interesting to see what the interest rate hiking cycle does to retail sales of home improvement products and property sales in general.

Published in The Bugle, 30 April 2014, Author: Andreas Wassenaar