For years I was under the impression that renovating a home was an investment. However, when I look up return on investment for typical home renovation projects, it appears that even the most high-value renovations (kitchens, bathrooms) seem to return only 80% at best of the investment. Is home renovation ever a good investment or is it simply consumption spending?
In general, no, not in a strict monetary sense. (As @MrChrister noted in a comment.)
The primary exception to this, for me, would be in the case of a DIY renovation and a house-flip.
Given an outdated house in a good neighbourhood, and spending a reasonable amount on a selected set of renovations could make the house saleable to a different target audience, which might be willing to pay more than the dollar cost (including your labour) of the renovations themselves.
The accepted answer here is astounding to me. Saying that renovation is generally a bad investment is insane.
Appropriate capital investments in a property add to the value of the property if done right, period. "Appropriate" is the key word -- high-end features in a starter home do not add monetary value.
While you don't get a dollar for dollar return for the money invested in a particular project, you also need to consider the opportunity cost of not doing the work. That aging kitchen, furnace or those ancient windows have a real, measurable impact on the cost of your home. You need to balance the cost of renovation against the loss of value due to the aging out of various parts of the house.
In a rising housing market it's possible to make real returns. I once rented a house to someone who bought houses in need of renovation, did them up, lived in them the required time to comply with UK tax laws and then sold them on. It was his sole occupation and he was doing very well; he never missed a rental payment to me and his children were at a very expensive private school.
He was part of a group that did the same. Although he never did quite as well himself, I recall him proudly telling me that one member made over £250,000 profit in a single transaction, that's after subtracting the renovation costs.
However, all that occured a good 8 years ago when the housing market was very boyant. I expect the story for this group to be different today but I still think that one can at least break even, if not make a small profit, by updating a kitchen that's really run down and putting off buyers.
Conventional wisdom seems to be that renovating homes generally doesn't improve the value more than the cost of doing so. On the other hand, clearly some are able to make a profit from purchasing, renovating, and flipping homes.
Remodeling magazine publishes an annual cost vs. value report for 101 US cities. I'm not sure how reliable this data is, especially given that this magazine is representing the remodeling industry, but at least it's a start.
The increase in value after renovations is likely a market-specific condition that can change over time and vary by market location. It seems apparent that if the cost of home renovation labor and materials is low vs. the price demanded by real estate, it would encourage renovation and new home building and indicate that renovation is likely a good investment.
Of course, then there are the usual obvious caveats: don't add a $100k kitchen to a $200k home, yada yada yada.
There's a good brochure by the Appraisal Institute that gives some good general hints for homeowners considering renovations. Probably the most reliable way you can get an estimate of the expected increase in home value prior to actually performing renovations is to either apply for a home renovation loan, or hire a certified appraiser yourself. He or she can appraise the present value of your home and then look at plans as well as a contractor's proposal and value the expected value of the home once renovations are completed.