$25,000 on offer via HomeBuilder scheme, but caution advised

The Federal Government’s Homebuilder program, announced today, will do much to support the construction sector over the next six months.

The scheme will provide $25,000 to Australians to build or substantially renovate their homes but there are a number of criteria that must be met to be eligible.

What’s quite unusual about this type of construction stimulus scheme is that it will be available to all home buyers and owners who meet the means tested income levels of $125,000 for singles and $200,000 for couples, which is quite low.

It is also only available until the end of the year, has a maximum purchase price limit of $750,000, and requires projects to start within three months of contract dates.

These timeframes make the HomeBuilder grant different to other similar schemes and will help to prevent substandard dwellings being constructed by fly by night operators.

While investors are not eligible for the scheme this is not a bad thing in my opinion.

That’s because the program is designed to stimulate the construction sector for the next six months via the creation of new building or renovation projects.

There will be some property buyers who will be motivated by the offer of $25,000 to purchase a new home to live in.

However, like I’ve written about previously, the purchase of new properties is rarely a sound investment decision.

Research shows that it is established homes in strategically selected locations that achieve superior capital growth over time, while the upfront construction costs of new houses slows down equity creation.

Over-capitalisation risk

The Homebuilder scheme also provides $25,000 for substantial renovations to be started before the end of the year.

When I say “substantial” I mean renovations that are priced above $150,000, which is a significant sum to spend on refurbishments in anyone’s language.

Updating a property via renovation can help to create equity, however, it is vital to not over-capitalise.

This element of the scheme does seem more in-line with sound property investment strategies.

However, I am worried that the offer of $25,000 will persuade some people to undertake significant renovations that will ultimately mean their property becomes the price outlier for the suburb.

For example, it would be unwise to spend $150,000 on a renovation on a property that only created $50,000 or even $100,000 of additional value on it.

Fundamentally that would mean that the renovation cost them money and if they had to sell anytime soon, they would be worse off than they were before they began.

Like any property investment professional, I support any scheme that supports the construction industry and the overall real estate sector, especially following the recent uncertain times we have all experienced.

However, the offer of $25,000 to buy a new home or renovate an existing one should not be the only motivation to do so.

Like any property investment decision, thorough research and independent expert advice is non-negotiable – even when there is a cash carrot dangling in front of you.