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Overcapitalisation: Is it really a big deal? [Nov 2023 Update]

Renovations, Tips and Advice

Australians have always been house proud, but in 2021 that focus soared! Statistics from the Australian Bureau of Statistics showed that renovators poured a massive $12.3 billion into renovating their homes – a massive 33% jump from 2020, and almost double what we were spending 10 years ago!

Some of this was the result of Covid’s effect on how we spent money, but a lot of it is also caused by Australia’s continuing fascination with home improvements (and home improvement shows such as House Rules and The Block). Regardless of the reason, renovations were (and continue to be) a huge part of how we spend our money today – something that is unlikely to change in the future.

With that increased focus on renovations also comes the increased risk of overcapitalisation. Chances are you’ve heard the term ‘overcapitalisation’ before, and there’s also a chance that you’ve been told that it’s potentially a very bad thing – but is it really that bad? Is it really something that you should be worried about?

Well, if you’re developing a property with the plan of selling it quickly for a profit, then yes – overcapitalisation is a very bad thing. On the other hand, if you’re building a home to live in for a number of years – then you might not need to concern yourself with whether or not you have overcapitalised.

Overcapitalisation – Is it Really a Big Deal?

What Does Overcapitalisation Mean

To better understand overcapitalisation and whether or not it’s a big deal, stop and think for a moment what overcapitalisation really means. At its most basic level, overcapitalisation simply means that you’ve spent more money on your home than you would be likely to recuperate if you put your home on the market.

If you have no intention of selling your home in the near future, then there’s a very good chance that  the extra you invest now will be offset by the growth in property prices over the coming years. Historically, this has nearly always been the case – although we are not financial advisors, and past performance doesn’t always indicate future performance, so do your own research.

Of course, you always need to consider the market when deciding to make decisions involving finances. We’ve just experienced a few years of tremendously strong growth in Australia – and especially here in Queensland. Although some experts expect us to see a drop in prices in the future, others believe that Queensland prices will hold strong. What is most likely, is that over the long term prices will continue to gradually rise – evening out any dips and rises over that time. So, while you of course need to consider the market you’re buying and renovating in, the chances are it will not take many years before your property is worth more than you’ve invested.

Many people have become so hung up about overcapitalisation that they go without many of the things they ideally wanted, just to keep their property at somewhere near a “realistic sale price”. Whilst this is absolutely a smart move for a home flipper – someone who intends to make quick gains off market volatility – it makes MUCH more sense when the owner says they have no intention of selling it in the next 10, 15 or even 20 years! By that time the 20 years is over, the extra money they would’ve needed to spend to have everything they ever wanted might have been offset, or even exceeded, by the growth in property prices!

Not to mention, they would have had a much better lifestyle and more enjoyment in the home in the meantime.

When Overcapitalisation is a Good Thing

I have known people who have cut back on their home wish list despite never intending to sell the property. They have built or bought homes that they intend to live in until the day they die, and yet they cut back on elements that could really improve their lives because they worried they might be overcapitalising.

To give you an example of this, clients of mine purchased a property in Coorparoo for a little over $300,000 in 1999 and then invested a further $300,000 in renovations. Certainly, at the time the renovations were completed they had ‘overcapitalised’. When they put the property on the market only four short years later, it sold for just under $800,000. Not a bad return on investment in just four years!

The most interesting part of this example is that they invested in getting me to create a quality design for them. The beautiful design, coupled with the growth in property prices, meant that whilst they may have overcapitalised initially, it took very little time for the property to grow in worth well beyond their initial outlay.

How to Prevent Extreme Overcapitalisation

Of course, there are limits. If you buy a property for $700,000 in a street with homes all of similar value and then spend $3 to $4 million on renovating it, then chances are you might never recoup your investment. As long as your level of investment is within reason, then there is no reason to not create a home with everything you have ever wanted.

4 Tips to Avoid Overcapitalisation

If you are considering selling your home in the near future, then you should consider the amount you’re spending on renovations. In that case, you want to avoid overcapitalisation by following these three tips:

  1. Understand pricing disparity in your suburb.

Pricing disparity is simply the range of prices within the suburb where your property is located. If you have a home worth $600,000 and you want to do $300,000 worth of renovations consider first, whether the home will be worth $900,000 after the work is done. And second, whether houses in your suburb sell within that price range.

  1. Visit open homes in your suburb

Visiting open homes will let you see what elements buyers in that area are looking for. Do they want a home office or a media room? Are they looking for two living spaces, or a pool? What quality of fittings and craftsmanship do they want, and what amount of space. Work these elements into your design.

  1. Budget

Research the costs of the work, the potential value of the home and create a budget. Then stick to this budget (we can help you with that!). If you are planning on selling straight away then every dollar spent is important.

Speak to an Expert

Of course, if you are concerned then you should talk with your accountant and/or financial advisors, but if you intend to live in your property long term you might find that you have very little to worry about. Chances are the extra you invest in creating your ideal home will have little bearing on you in the long term.

Please note that this article is intended to provide an alternate opinion on something which is so often demonised and talked down on, however whether or not it is a good idea for YOU depends on your circumstances, your property, and your plans for the future.

If you want to make sure you don’t over capitalise on your new home project, get in touch.

Dion Seminara Architect

DION SEMINARA, DION SEMINARA ARCHITECTURE

We are experts at home design, renovations and new homes and ensure good value for money outcomes.

Hi, I am Dion Seminara, practicing architect and licensed general builder for 30 years as well as an environmental sustainable design (ESD) expert. I graduated from Queensland University of Technology (QUT) with honours, QLD in 1989. Registered as an architect in 1991 and registered as a builder in 1992, I am also a fellow member of the Australian Institute of Architects (AIA). Having received 12 ArCHdes Residential Architecture Awards, LJ Hooker Flood Free Home Design Award and the 2016 AIA Regional Commendation for Public Architecture, my expertise with both residential renovation (to all types of houses, especially Queenslanders, 50s/60s/80s), new contemporary homes and luxury residences has earned me a reputation as one of Brisbane's architectural specialists in lifestyle design architecture, interior design and landscape design.