Overcapitalisation looms large as ‘newtech’ unfolds
Homeowners planning on renovating should be aware that overcapitalisation has always bitten hardest in a declining residential property market such as we are now confronting in South Africa.
Today, however, the overcapitalisation risk is compounded by a new phenomenon: the unprecedented pace of change in automation technology, style and design. So much so, that the shelf life of new fixtures and fittings has never been shorter.
At its worst, it is a phenomenon that could prevent a full redemption of the capital outlay on a home upgrade – particularly if it pushes the property beyond the ceiling price in its suburb.
Whereas in the past it took up to 10 years before homes became outdated technologically, it is happening in just two years in today’s ultra high-tech market environment.
My best advice to buyers is to avoid improving a house beyond its resale value – particularly when the economy is in decline, such as it is now.
Furthermore, make sure your renovation is tailored to suit the neighbourhood. Most residential suburbs have both average and top price thresholds beyond which sales are achievable only in exceptional circumstances.
Check area prices
Too much upgrade investment in the wrong suburb will be difficult, if not impossible, to recoup – so check average home prices in the area before you spend a cent.
The general rule is not to invest more than 25% of market value of a home on improvements and renovations.
Care should be taken about overly-costly use of the ‘3 Fs’ – fittings, fixtures and finishes – as well as buying too heavily into the fast-moving trends in technology and design.
The reality is that the long-standing process of expanding and modernising a home and then sitting back and waiting for the inevitable return on investment is itself becoming obsolete.
Author: Ronald Ennik