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Home owners to use reno tax credit for ‘practical projects’

Homeowners will likely spend more money to improve energy efficiency and less on high-design esthetic renovations under the new federal home-renovation tax credit, says a new report.

Scotia Economics’ latest Real Estate Trends report also forecasts further slowing of sales and price declines through 2009.

“The economic environment, the financial market environment is generally not conducive, I would say, to increased renovation spending,” Adrienne Warren, a senior economist at Scotia Economics, said in an interview.

“That's why I come to the conclusion that the tax credit will probably have a marginal positive impact, but I would say it would be somewhat limited, probably less so than Ottawa is hoping for.”

The federal tax credit offers homeowners a 15-per-cent credit on qualified home improvements on spending between $1,000 and $10,000 for work done before February 2010.

Warren said she expects some people will make use of it.

That will mitigate a slowing she expects in the home-renovation sector, which has boomed in recent years. But it won’t be enough to halt an overall decline in the category, which saw an estimated $40 billion in spending in 2008.

Renovation spending in B.C., Warren said, will “probably lag, be weaker than the national average.

“Just because sales are weaker, price declines we expect to be a little larger than the national average and housing construction is slower.”

Warren said she hasn’t forecast how much home-renovation spending may contract, but “I wouldn’t expect it to be as large a decline as the 20-per-cent decline in construction and sales [nationally].”

For B.C., Warren is forecasting a 42-per-cent drop in housing starts. And the province’s average home price, as of February, hit $412,916, a nine-per-cent drop from a year earlier.

With prices falling, Warren said homeowners would be more likely to spend money on improving energy efficiency, which may have a prospect of paying off. However, with natural gas and oil prices at low points, she suspects the impetus for those may slow.

Home improvements that improve salability in what has become a tough seller’s market, on the other hand, might be a more attractive option for homeowners using the tax credit.

“A lot of those expensive, purely esthetic improvements people are quite happy to do when house values are going up 10 per cent over a number of years are not going to be as attractive right now,” Warren said, especially if the home equity they might tap to finance such improvements is evaporating.

The report noted that inflation-adjusted spending on home renovations slowed in 2008, with the estimated $40 billion in spending representing a four-per-cent increase from 2007 compared with an average of 8.5-per-cent per year growth rate for most of the decade.

Warren said she doubts the number of people taking advantage of the credit will be in the order of the 4.6 million households that Ottawa has predicted.

“That seems quite optimistic, in my view, given that in good times that would be a lot of households embarking on a renovation of that magnitude.”