Times are tough in the property market and they are about to get tougher if Labor’s proposed taxation changes go ahead, so where are the riskiest areas to invest in 2019?
RiskWise Property Research has compiled a list of the Top 10 Danger Zones throughout Australia, identifying areas with a large stock of off-the-plan units, especially in the cases of oversupply, to be the most at risk.
Three NSW and three Queensland suburbs made it on to the list as well as two each from Western Australia and Victoria.
Adelaide (postcode 5000) came in at No.11.
Taking out No.1 spot on the Top 10 list is Rouse Hill, in NSW, where additional units coming on to the market make up more than 300 per cent of the current stock.
Norwest, also in NSW, comes in at No.2 with more than 200 per cent stock to come on to the current market.
Slipping down the list was NSW’s Zetland which last year came in at No.1 but this year only made it to No.9.
Almost all Australia’s capital cities were suffering from potential unit oversupply.
Add to that tighter lending standards, the results of the Royal Commission, political uncertainty, a sharp drop in dwelling commencements and Labor’s proposed taxation changes if elected, and you have the potential for major disaster.
The ALP proposes to limit negative gearing to new houses only and reduce the discount on capital gains tax from the current 50 per cent to 25 per cent thereby effectively creating a primary and secondary market, and the impact on the housing market, already in a state of turmoil, will be significant.
A number of markets across Australia are already experiencing weakness and the introduction of these taxation reforms will hit them hard.
Also increased scrutiny of residential property loan applications and restrictions on foreign investors have led to a significant reduction in investor activity and changed the market landscape and consumer sentiment.
Bill Niolouzakis, the newly appointed CEO of listed company iBuyNew, agreed stating house-and-land packages and townhouses had become much more popular, while larger inner-city apartment developments had received significantly lower enquiry.
The saturated Brisbane unit market the story was much the same with rising defaults on settlements, huge price reductions and over-the-top incentives and discounting to get buyers across the line.
While there had been a reduction in dwelling commencements there was still a high level of stock that needed to be absorbed and this meant the area remained high risk.
Last year’s Development Finance Partners (DFP is a major financier for developers) Market Sentiment Survey also clearly showed developer confidence was at an all-time low, in part due to failure to meet pre-sales and sales targets by developers and lower sales volumes.
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Currently, there are a large number of high-rise properties in our capital cities being offered to a smaller number of investors.
This is because there are less investors in the market mainly due to credit restrictions.
Also, lenders are being more cautious about their loan-to-value ratios (LVRs) and more discerning about who to lend to, meaning there are less buyers in the property market.
In fact, many lenders have black listed areas they have determined are high risk or are asking for significantly higher deposits, up to 30 per cent, and this further reduces demand.
This has resulted in a reduction in activity and this has a major impact on the market.
Lenders understand that oversupplied suburbs carry a greater degree of risk – and those risks are just as real for the investors who buy in those suburbs.
All of the major banks, and some of their subsidiaries including AMP, had stopped lending to self-managed super funds (SMSFs) and with off-the-plan units being one of the main investments for these funds, this had further diminished demand.
While unit oversupply was the main cause for an area being high risk (more than 263,600 units have been approved for construction across Australia over the next two years), other factors included, in some cases, poor economic growth and also that demand in the inner-rings did not extend to units.
It must also be remembered that rental units and owner-occupier units are not fully substitute products.
The dwelling types and needs of owner-occupiers are often greatly different from the dwelling types and needs of renters.
Units that are used by owner-occupiers are larger than units that are typically used as rental properties and, more importantly, the price per square metre of rental properties is higher than the price per square metre of owner-occupied properties, especially in Sydney and Melbourne.
This means that, overall, rental units in Sydney and Melbourne are significantly less affordable than units that are owner-occupied.
All this added up suggests that if the proposed changes to negative gearing and capital gains tax take place it is likely to put off-the-plan units at their highest risk ever and this includes equity risk, cashflow risk and settlement risk.
Unless there was phenomenal capital growth, the value of off-the-plan units in many regions was likely to fall and it would become significantly harder for investors to enjoy capital growth, at least in the foreseeable future.
And if you consider that many of the prices for off-the-plan units include a significant commission to the marketer, between 5-6 per cent of the value of the property and sometimes even more, and with the current risks to settle the property … all of these things together make purchasing off-the-plan units in many regions in Australia extremely high risk.