It's hard - though not impossible - to overcapitalise when house prices are booming. When renovating in a soft or falling property market, however, the amount you spend on your home and what you spend it on matter much more.

You overcapitalise when you improve a property beyond its resale value. For example, you might pay $450,000 for a place and then shell out $50,000 for a makeover when it will only ever sell for $480,000, regardless of what you do. Worse, you might spend money on a property that won't even make the original $450,000 in a year's time.

The Bureau of Statistics reported last week that its capital cities house price index fell 0.3 per cent in the June quarter, with Perth values taking the largest hit with minus 2.4 per cent.

Researcher Australian Property Monitors is predicting a 10 per cent fall in house prices in the next year, while fellow analyst Residex fears that a "once in 100 years" real estate slump may be on the way.

Property investment adviser and author Margaret Lomas believes the best owners can expect in the next two to three years is low-grade capital growth of about 4 to 5 per cent in some locations. The budget for any renovations, therefore, must address the difference between potential growth rates and current interest rates, she says.

Lomas cites a property bought for $400,000 and mortgaged to the tune of $320,000 which, after three years of 5 per cent capital growth, would be worth $463,000. It would be worth renovating only if doing so boosted the property's value by more than the cost of the work plus a further $23,400 (the difference between $63,000 in capital growth and $86,400 in interest charges over three years).

"It's my belief that this is a highly unlikely scenario, especially if you add the fact that there will be more supply of property, due to mortgage stress, further keeping growth rates down," Lomas says.

In most cases, renovations return their cost and assist "saleability", she says, but they rarely do much more than that. "Those who can quote large gains from renovations are more likely to have bought in an area that subsequently experienced its boom during the renovation period and most of the growth came from the boom rather than the renovation itself."

Angus Raine, the chief executive of Raine & Horne real estate, says it doesn't take much to overcapitalise in some areas. "In the capital cities, spending $100,000 could be overcapitalising; in regional areas, it could be as simple as adding a deck off the living area," he says.

Greville Pabst, the chief executive of valuer WBP Property Group, says the problem is that one man's swimming pool is another man's burden - people value things differently.

"If it's your dream home, if you're staying for the long term, it doesn't really matter," he says. "But if it's a short-term or 'spec' development, you need to be careful about how much you're spending."

Even if you still sell for a profit, overspending will have eroded what you would otherwise have made, says Robert Caulfield, the managing director of the Royal Australian Institute of Architects' building advisory service, Archicentre.

"Even in buoyant markets there are people who do silly things," he says.

Caulfield gives the example of a couple who paid $450,000 for a "fairly ordinary" three-bedroom house in Melbourne's suburban Box Hill.

"They'd always wanted a flash bathroom ... and they decided to convert one of the bedrooms," he says. They spent about $70,000, taking their total expenditure to $520,000.

However, a job transfer meant they had to sell. They were surprised at the agent's estimate of $460,000. Asked how that was possible, with such a desirable bathroom, the agent told them: "You used to have a three-bedroom house, now you've got a two-bedroom house."

Caulfield warns: "If you do something that changes the market you're in, you can seriously devalue your property."

The other mistake people make is thinking expensive fixtures and fittings add to the value of a property - they don't, he says.

"You can buy good-quality Australian-made floor tiles for $25 a square metre; you can also pay $200 a square metre. When they're laid, the average person coming in won't see the difference. The same thing goes for $1000 toilet suites and $8000 cookers."

Caulfield's advice is to stand back from the eclectic mix of ideas you've collected and think about the overall concept of the house. "You can't overestimate the importance of the first impression," he says. "It's the 'wow' factor that you need."

Raine says sometimes all that's required is a cosmetic upgrade - polishing the floorboards, painting the walls white and changing the light fittings.

Valuers can discuss likely prices before and after your proposed renovations, Pabst says. "Show the plans to a valuer, show them the costs ... ask what it will be worth on completion."

There's general agreement that the areas to spend money in are the kitchen, the bathroom and the outdoor entertaining area. Adding a bedroom may be a good idea - but only if that suits your market. There's little money to be made adding a fourth bedroom to an inner-city house when your potential buyers are couples without children, Pabst says.

People should consider what the market wants, not just what they want, Raine says. "It's an investment decision, it's not just about lifestyle."

Design trends

That spa bath you put in? According to an Archicentre report into design trends released today, it probably isn't worth the paper on which it was designed.

Archicentre polled its membership of more than 800 architects on what clients are asking for:

What's hot

Ensuite bathrooms (93 per cent)

Walk-in wardrobes (85 per cent)

Kitchen drawers, not cupboards (82 per cent)

Frameless showers (81 per cent)

Computer points in kids' bedrooms (66 per cent)

What's not

Ceiling-mounted projectors (15.5 per cent)

Spa baths (13 per cent)

Mini cinemas (10.5 per cent)

Bidets (7 per cent)

COST GUIDE              
Archicentre provides an annual cost guide for renovations which is available for download at            
www.archicentre.com.au          
Typical price ranges for 2008:          
Bathroom                $9200 - $24,000
Kitchen         $10,200 - $30,500
Laundry         $4000 - $9500
Extra room*     $16,900 - $36,700
*20sqm