The worst properties to buy in an uncertain market

We are living in interesting times aren’t we? Property Market

After some wild price growth in some areas (we’re looking at you Sydney and Melbourne) there is currently a large degree of uncertainty about our economy and our property markets.

This will result in two types of property buyers:

  1. Those who see it as an opportunity to take advantage of a short-term lack of general confidence in our property markets
  2. Those who will sit on the sidelines waiting for the situation to become clear

While periods of uncertainty and confusion creates opportunities for investors who have a long-term focus, they also create two property sub-markets that are particularly vulnerable in fluctuating environments.

While these markets might look attractive on paper, they can present significant risks for investors.

As always, knowledge is your best defence against error so let’s have a look at these ‘worst markets’ and why they pose a risk to investors.

1. Off the plan apartmentsoff the plan

While buying off the plan isn’t inherently bad in every circumstance, the risks are often much higher, for several reasons.

Firstly, when you buy off the plan, you’re locking in a purchase price at what is meant to be the current market value of a dwelling that won’t be completed for several months, or even a year or two.

Of course, you hope the property will increase in value during the construction phase and by the time it’s completed you have a little nest egg of equity already in place.

However, that’s not what has been happening over the last few years and, disappointingly for the buyers, on completion most off the plan properties are valued at considerably less than the contract price.

In my mind you should get a discount for all the uncertainty that goes with buying a property that has not been completed, but instead marketing costs, agent’s commissions, developer’s margins and GST add a premium to the price. 

That together with the banks’ reluctance to lend as much on this type of property and you’ll need to be able to immediately front the shortfall between the lender’s revised mortgage amount and the purchase price.

Plus you’ll often find hundreds of identical apartments listed simultaneously for sale or lease which will only add fuel to the fire, potentially lowering values further.

As well over the last few years the concerns about structural integrity has steered many investors and homebuyers buying off the plan properties

And if you purchased to sell at a profit, you might have to reduce your sale price just to stay competitive in a market flooded by investors with the same idea.

At worst, you might find yourself having to hold onto the property, if there aren’t enough buyers in the market.

The fact that off the plan properties mainly appeal to investors rather than the deeper owner occupier market, means that’s it’s a property sector to clear of at present ( in fact you’re probably always better to steer clear of these properties.)

2. House and Land packages

For similar reasons, investors should tread carefully around house and land packages.

They share the same vulnerable characteristics as off-the-plan apartments, in that values can fall during construction, leaving buyers with a gap to pay on completion. house real estate

In addition, while you’re getting a shiny new investment with great depreciation benefits, you’re also paying a premium price and don’t have the potential for value-adding to your investment.

That means you’re relying solely on market movement to gain capital and earn equity which is unlikely because the demographic who buy in these locations are usually interest rate sensitive.

And while they tend to be hard workers, young family’s wages tend to rise by CPI at best, meaning there is little momentum to push house prices higher.

How should you approach the current market?

In essence there are much safer options available than purchasing off the plan properties and house and land packages; ones that aren’t so vulnerable to changes in market conditions.

I prefer to buy established apartments, townhouses or houses in the inner and middle ring suburbs of our capital cities where there is a strong demand from affluent owner occupiers who can afford to and are willing to, pay for them. property market

These properties tend to have the essential pillars of growth: near great infrastructure and transport, proximity to large job centres, the ability to purchase at fair market value (rather than at a premium) and the option to “manufacture” growth through improvements.

Without a flood of similar properties on the market, as is common with new developments, competition amongst buyers and renters will drive prices and rentals.

This is a foundational growth factor that can be absent in off the plan markets.

For mine, there are too many risks currently in the off the plan and new house markets for property investors.

Now is the time to take action and set yourself for the opportunities that will present themselves

If you’re wondering what will happen to property in 2020–2021 you are not alone.

You can trust the team at Metropole to provide you with direction, guidance and results.Flat Design Illustration Concept Of Team Work

In challenging times like we are currently experiencing you need an advisor who takes a holistic approach to your wealth creation and that’s what you exactly what you get from the multi award winning team at Metropole.

If you’re looking at buying your next home or investment property here’s 4 ways we can help you:

  1. Strategic property advice. – Allow us to build a Strategic Property Plan for you and your family.  Planning is bringing the future into the present so you can do something about it now!  This will give you direction, results and more certainty. Click here to learn more chess-game-leader-investment-strategy-win-success-negotiate
  2. Buyer’s agency – As Australia’s most trusted buyers’ agents we’ve been involved in over $3Billion worth of transactions creating wealth for our clients and we can do the same for you. Our on the ground teams in Melbourne, Sydney and Brisbane bring you years of experience and perspective – that’s something money just can’t buy. We’ll help you find your next home or an investment grade property.  Click here to learn how we can help you.
  3. Wealth Advisory – We can provide you with strategic tailored financial planning and wealth advice. Click here to learn more about we can help you.
  4. Property Management – Our stress free property management services help you maximise your property returns. Click here to find out why our clients enjoy a vacancy rate considerably below the market average, our tenants stay an average of 3 years and our properties lease 10 days faster than the market average.
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Kate Forbes

About

Kate Forbes is a National Director Property Strategy at Metropole. She has 15 years of investment experience in financial markets in two continents, is qualified in multiple disciplines and is also a chartered financial analyst (CFA).
Visit www.MelbourneBuyersAgent.com.au


'The worst properties to buy in an uncertain market' have 3 comments

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    July 29, 2017 Jarrah

    Thank you for this interesting article. Buying established units or townhouses provide indeed some room for improvements however they attract lower tax depreciation and may be none if the construction is too old. In addition it exists other incentives that make biyung off the plan or new build units interesting: lower maintenance fees or saving on stamp duty. From what I understand in your article you do make minimising tax as a priority when investing. Why is this a good strategy? How do you evaluate the benefit from one option to the other?

    Reply

      Avatar

      July 29, 2017 Jarrah

      Sorry for the typo in my comment. I mean you do NOT make minimising tax a priority when investing. Why is it a good strategy? How do you evaluate the benefit of one option rather than another?

      Reply

      Michael Yardney

      July 29, 2017 Michael Yardney

      Sorry Jarrah I think you have it wrong
      The main focus of my strategy and that of all successful investors is capital growth – tax, depreciation, one off stamp duty savings are all secondary and short term benefits.
      We evaluate the options with numbers and figures and stats – that’s the right way – not what looks good

      Reply


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