Overcapitalization and cost escalation in housing renovation

Abstract

This paper aims to show how housing renovation projects, for example such infamous projects as the Sydney Opera House or Euro Tunnel, may take considerably more time and money than budgeted. The author presents empirical results based on the primary data collected from 280 survey-recruited renovators in 2006 and 2007, in Brisbane, Australia. The paper examines what makes renovators end up with overcapitalization (i.e. spending more than what can be recouped via the value of property) and cost escalation (i.e. keeping spending beyond the estimated expenditure) in a pluralistic approach combining the theories of mainstream economics and behavioural economics.

Keywords:

• housing renovation
• overcapitalization
• cost escalation
• behavioural economics
• psychological factors

Acknowledgements

I am grateful to Tim Lawless of RPData for giving me access to the data of median house prices in Brisbane and to Simon Kemp, Peter Earl and anonymous referees for helpful comments on an earlier version of this paper.