I agree with lefty. Really think you should cut back the area. Even if you don't pave in the degraded area just plant it will look larger. Two levels shrink the space one level feels more like a room. Also I can tell the fence is your neighbors because the rails are facing your side. I would face the fence so that it looks better in your side.

Get the professional sander guys in to repair the living areas and kitchen but don't go too dark with the stain as it will kill the lovely grain in the matai. I'm thinking a couple of tones richer than the timber knots showing in your photo, definitely no yellow tone at all. In NZ stepping on to carpet especially in a kiwi winter is so much nicer than a cold floor board shock!!! A nice area rug for the lounge and you're done.

Sanded and polished timber floors have a evergreen classic appeal that never goes out of fashion. Carpet and other floor coverings do have a tendency to have a style that is relevant to a particular period in time. Have you ever walked into a home and thought the carpet, lino or tiles were from the 60s, 70s or 80s? Natural timber floors never date and you can easily update the look of your home with warming floor rugs and furnishings. Carpeted homes may pose problems for Asthmatics and those that suffer from allergies. There are a few environmentally friendly coatings available if you do choose to sand and polish your floors. This link will offer some insight into your floor coating options. http://budgetfloorsanding.com.au/timber-floor-finishes/ All the best with making your decision

Hi Joanna If your floors are natural timber (Rimu,Kauri etc) then all you need to do is get them sanded and polyurethaned and they will look stunning. Would be a shame to cover with cold tiles. As long as you have insulation (batts) under the house, should be fine. Spend the money getting floors coated properly would be my advice. Good Luck Julie