Building costs have gone up so much, wondering if an extension will still add value

peadar

Just before lockdown in early 2020 we had quotes for a house extension. We had delays due in large part to the need to survey public sewers over 4 metres down, and a 10 month wait (!) for planning permission. With dramatic increases in the price of materials, we now find that those quotes have effectively doubled in price, and are doubtful now that we would even get the cost back in terms of added value if we were to sell at some point in the future. Is anyone in the same position, and how might we ascertain whether it would still pay for itself in terms of added value?

rob7475

Material costs are really high at the minute. It all depends on how long you plan on staying in the house I guess. I'd never recommend building an extension with the sole aim of making money when selling though. If you need the extension to make the house more suitable for your needs, I'd get it done. If you are there long term, you'll probably recoup the money when you sell.

DRP

Even if costs hadn't gone up you can never guarantee added value , as that depends on the market.

However, seeing as you specifically state that you're planning on selling "some time in the future", then yes I can guarantee you will more than get your money back *


*as long as sufficient time has passed

westy22

I doubt that you would see a house value increase that fully covered the costs incurred.  A good chunk of what you are paying for the extension to be built are 'sunk' or hidden costs such as VAT, builder's profit, labour costs etc.

I have always worked on the presumption that a 50% return on expenditure is a reasonable estimate for major works on your own home.  The 'sunk' 50% is what you pay to enjoy the extra space, facilities etc.  That evens out over several years of ownership.

Of course, the sums need to be different for a doer-upper where the sole intention is to sell soon after the work is completed.

Doozergirl

You calculate the price per square metre of your house as it stands - so value divided by the number of square metres. 

Then calculate the price per square metre of your building quote.  So total price divided by the number of square metres of that. 

If the price of the build is distinctively less than the price of your house then you're pretty safe in terms of added value.  The closer they are or if the build is more expensive per square metre, you need to think very hard.  

GDB2222

peadar said:

Just before lockdown in early 2020 we had quotes for a house extension. We had delays due in large part to the need to survey public sewers over 4 metres down, and a 10 month wait (!) for planning permission. With dramatic increases in the price of materials, we now find that those quotes have effectively doubled in price, and are doubtful now that we would even get the cost back in terms of added value if we were to sell at some point in the future. Is anyone in the same position, and how might we ascertain whether it would still pay for itself in terms of added value?

I think that this is simple, at least in principle. 

To get a rough idea, what are similar properties going for, in £££ per sqm? (Divide the sale price by the floor area.)  Then, compare that to the cost per sqm of your extension. If there's a massive difference, either way, that answers your question.

You can follow that up by trying to work out how much extra your property would be worth with the improvement.

aoleks

it depends a lot really, but here are my thoughts:

1. prices have gone up massively and I can guarantee they will never go down again, so waiting for offers or a return to "normality" will leave you disappointed. no trader is stupid enough to lower prices knowing that people will buy them anyway. if you want an extension now, you build one. if not, prices will go up again and again and again...

2. you're building an extension, it's extra space in your home, it's somewhere you and your family live, create memories. an extension is not an investment or financial product, stop treating it as such.

3. while you can't control aspects of your quote, there are things you can do to dramatically lower the quote and add more value yourself, if that's what you're after. how about learning how to create technical drawings and save thousands in the process? how about project managing the build yourself? how about making some savings on materials without compromising on design (e.g. skylights vs velux)? how about laying the flooring yourself? how about painting yourself? how about assembling some DIY kitchen units yourself? this is how you add value, not by paying a premium for basic things that can be done relatively easily.

4. it depends how you want to materialise that value. if you're looking to sell, you will actually need someone who will pay your desired price for your house. if you're only interested in releasing equity, you would only need a theoretical valuation with your bank. value is a vague term...

5. an extension is not just the square meters. you either end up with a boring addition to the house, literally more of the same (small, cramped, dark, characterless etc.) or you can use your creativity to create something that has appeal to the masses. just adding a few square meters in an odd shape, decorated with the cheapest offers from the local DIY store and with no relationship whatsoever to the rest of the property won't add much. add a bit of taste, some smart features and invest in a few details and the same extension can be worth £10k more.

Section62

aoleks said:

1. prices have gone up massively and I can guarantee they will never go down again....

Wow.  Can you please tell me how I can claim on that guarantee when the value of my house goes down at some point in the future?

norsefox

aoleks said:

it depends a lot really, but here are my thoughts:

1. prices have gone up massively and I can guarantee they will never go down again, so waiting for offers or a return to "normality" will leave you disappointed. no trader is stupid enough to lower prices knowing that people will buy them anyway. if you want an extension now, you build one. if not, prices will go up again and again and again...

2. you're building an extension, it's extra space in your home, it's somewhere you and your family live, create memories. an extension is not an investment or financial product, stop treating it as such.

3. while you can't control aspects of your quote, there are things you can do to dramatically lower the quote and add more value yourself, if that's what you're after. how about learning how to create technical drawings and save thousands in the process? how about project managing the build yourself? how about making some savings on materials without compromising on design (e.g. skylights vs velux)? how about laying the flooring yourself? how about painting yourself? how about assembling some DIY kitchen units yourself? this is how you add value, not by paying a premium for basic things that can be done relatively easily.

4. it depends how you want to materialise that value. if you're looking to sell, you will actually need someone who will pay your desired price for your house. if you're only interested in releasing equity, you would only need a theoretical valuation with your bank. value is a vague term...

5. an extension is not just the square meters. you either end up with a boring addition to the house, literally more of the same (small, cramped, dark, characterless etc.) or you can use your creativity to create something that has appeal to the masses. just adding a few square meters in an odd shape, decorated with the cheapest offers from the local DIY store and with no relationship whatsoever to the rest of the property won't add much. add a bit of taste, some smart features and invest in a few details and the same extension can be worth £10k more.

I'm not really sure you can guarantee anything.  With a cost-of-living crisis, demand is going to drop.  That much is most definitely guaranteed.  What effect that might have?  Let's see.

Where demand will drop first, or drop most is to be seen, but it's not hard to imagine that expensive projects/purchases such as extensions may see significant reductions.  With interest rates also increasing, then it's only going to become less affordable in the near future.

Home builders, contractors and everyone else work in a competitive market.  If they want to make a specific margin, then they will do so on the cost of their labour and material input.  If those costs go down, which they likely will due to reduced energy costs (some day) and reduced demand, then the price will be adjusted accordingly.

I agree on all your other points, but anyone 'guaranteeing' the cost of anything into the future is someone I would not be basing my decisions on.

aoleks

I was talking about material prices... people are used to paying high prices, no one will lower them to what they used to be 2 years ago. current prices are the new baseline.

as for competitive market, the severe shortage of labour in this country won't be solved anytime soon. you can barely find a builder as it is.

rob7475

aoleks said:

I was talking about material prices... people are used to paying high prices, no one will lower them to what they used to be 2 years ago. current prices are the new baseline.

as for competitive market, the severe shortage of labour in this country won't be solved anytime soon. you can barely find a builder as it is.

Exactly this. There was uproar when fuel went over £1.70 a litre a couple of months back. Now we've just learned to accept it and the prices are increasing again.