Many factors will influence your decision to stay and renovate, or to build a new home. The most important is usually location. The current location may be so ideal that it may be an easy decision to stay. The lack of availability of suitable building lots in the desired area may also dictate staying in your existing home.
Economic factors will also likely play a role. Over-improving a house for the neighborhood may dissuade some people from renovating, while improving the house to match a more sophisticated neighborhood may drive the decision to stay.
Sometimes a particular feature would indicate a new house should be built. For example, if your vision for new, larger spaces would require 9′ ceilings for a balanced look and feel, and your current home has 8′ ceilings, it is probably more economical to choose new construction over renovation.
Living through a large-scale renovation can be a substantial interruption to your day-to-day life, and often proves to be emotionally and physically challenging. Additions can be somewhat isolated from the current house in many cases, however a renovation project (with or without an addition) may involve a majority of your primary living space. The dust, noise, and lack of privacy may tip the scale to building a new house or to moving into temporary housing during the project. If the kitchen and bathrooms are all involved, moving out will almost always be a necessity to allow the project to proceed as quickly as possible.