Do you remember the mining town stories of the late 2000s?
The 2000s were dominated by one of the biggest mining booms in Australian history – the biggest since the 'gold rush' of the mid-1800s.
It began in around 2003 when prices for commodities like iron ore and coal began rising and lead to significant mining infrastructure construction causing a property boom in many mining cities and towns around the country.
Property hot-spotting websites popped up and many naïve investors bought “investment” properties in places they’d never even visited.
Unfortunately when the boom ended, infrastructure spending stopped, and there wasn’t a requirement for tenants in these small one-industry mining towns, property prices in these locations began to free fall.
This led to many investors, particularly those later to the party, stuck with a large amount of negative equity, leaving many struggling to recover still to this day as they are holding onto properties nobody wants to buy nor rent.
While some hard lessons have been learned, there will be a “mining town” type scenario in almost every property cycle.
What will it be this time around?
I believe it will be the inner city, Lego land high-rise apartments, in many of our capital cities.
And the WARNING signs are already plain to see.
Firstly, I am not suggesting that there will be a boom for these types of properties like we saw with mining towns.
I am proposing that like mining town investments, they will carry huge risks along with the huge potential for problems.
These types of investments have performed very poorly over the last decade and with the value of many other properties booming, they are starting to be seen as a “cheap” entry into the property by some naive investors and home buyers.
I often hear people say they can buy an inner-city apartment in Brisbane for around $400,000 when the equivalent in Sydney may be worth $800,000.
As the saying goes though, that’s like comparing apples with oranges.
They tend to apply the unproven “surely it’s time” strategy, in that prices are so cheap they simply have to go up in value…… eventually.
This is a very short-term mindset from investors and homeowners who are driven by cheap prices, government incentives, and perceived builders' guarantees.
They are blinded and shielded from even the most recent warning signs.
In a recent article, Michael Yardney suggested that some high-rise apartments will become the slums of the future.
He suggested the way people living will continue to change, not all apartments are equal.
And this high-rise market already has significant risks attached.
There are already 4 major warning signs that these apartment owners may face:
- Structural Defects – Newer high-rise apartments are not like the old “solid brick” construction blocks from the 1970s or ’80s and builders now opt for cheaper products to cut costs and boost profits.
- Fire Issues – The inferior cladding being used is a case in point for above, with 629 buildings in Vic and nearly 450 across NSW at risk.
- Water Issues – While more of a nuisance, the leaking balconies, showers, and roofs can usually be fixed, but it comes at a cost.
- High Commissions and costs – Kickbacks, commissions, champagne sunsets, and rental guarantees are all built into the purchase price.
You would have come across most of these, yet when emotion creeps in and the salesman is offering all kinds of incentives and guarantees, they are easily and quickly forgotten.
COVID has also forced a host of changes, in particular closing our borders and the way we want to live.
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The high-rise, the inner-city apartment is often in high demand from overseas investors, new arrivals, and students that come to study here.
That is all now on hold…. until further notice!
This means that many new planned projects may not have enough presale take up to even get off the ground.
We are also seeing the property values and rents dropping, while strata fees are increasing.
The way owner-occupiers are choosing to live is also very different thanks to COVID and the resulting Lockdowns.
They no longer want to be trapped inside a tight, one-size-fits-all one- or two-bedroom apartment with little to no outdoor space.
They will want more living space, a zoom room or gym, and accessible outdoor space, maybe a bigger balcony or courtyard.
And they’re not keen on the shared facilities many of the high-rise apartment buildings offer.
Demand is falling rapidly for these types of apartments and that should be of huge concern for anyone looking for a “cheap” option.
To put it bluntly, I see no reason to even consider high apartments in medium or high-density blocks as a form of investment moving forward.
As I outlined, the warning signs and risks are far too great to even consider.
Another major warning sign I see for investors moving forward is the re-sale market.
There are significant tax and depreciation benefits that draw investors into these new types of properties, but what happens when they look to resell and these benefits don’t apply to the new purchaser – as they only apply to new apartments
For Home Buyers, while we don’t tell people where they should live, I would imagine the peace of mind and having an appreciating asset should be of importance.
I would suspect the very best-case scenario could see values track inflation, but I would not be surprised to see any growth at all during the medium term.
In the worst case, it may end up like a mining town-type scenario with building issues or poor asset selection trapping people's negative equity.
Will the inner city, high-rise apartment, become the mining town type investment over the next decade?
Only time will tell, but the warning signs are already plain to see.
There are ample examples of structural and building issues on top of high commissions and demand for certain spaces post-COVID.
Despite that, some investors and homebuyers will be drawn in by perceivably cheap prices.
While there will no boom like there was in the mining towns, a sharp fall in demand may cause similar results for investors and homeowners.
At best you will be hampered and held back from building your asset base and at worst you maybe be left trapped and holding negative equity.
These types of properties are cheap for a reason and that will remain so moving forward.