Top end properties were never good investments

After holiday locations, the prestige property markets of our capital cities have proven to be the weakest property sector last year.

Australia’s prestige markets, normally associated with near city locations, water frontage or magnificent views have been often been thought to be safe havens during a downturn.

The argument went something like this…The scarcity of high end properties would protect their values from falling significantly, while the abundance of “generic stock” in the suburbs meant this type of property would languish.

By the way…I’ve never subscribed to this theory.

My experience is that the top end of our property markets has always been more volatile.

I’ve seen the prestige property markets drop in the early 80’s and again in the early 90’s, during the recession we had to have, when the banks took over a huge number of properties in our top end suburbs from owners who couldn’t pay their mortgages. Interestingly the banks literally couldn’t give those properties away for a number of years.

And of course the top end suffered again in 2009 as a result of the effects of the GFC.

When the general economy turns down a number of factors conspire against the premium sector of the market. These include share portfolios dropping in value, margin calls on share investments, business and company profits diving and lower executive bonuses or profits from privately run businesses.

Essentially, property owners who enjoyed the benefits of high incomes, where there was plenty to go around for a luxury home as well as a holiday retreat, now simply cannot continue to service such high levels of debt.

At the same time, demand for expensive homes and holiday pads virtually come dries up.

So it is not surprising that RPData  reports that the top 10% of properties based on price have shown the largest decline in median prices over the last year.

At the other end of the spectrum, cheaper properties recorded the lowest falls in values.

There is nothing unusual about this – the lower end of the market has always been less volatile.

With little prospect for significant improvements in the economy, the share market and business conditions in sight, it is likely that demand for prestige homes will remain relatively low and this segment of the market is likely to remain one of the weakest this year.

I can only see our tourism driven markets performing worse in 2012.