Welcome to the Danger Zone. Are you a gambler, a risk-taker, enjoy life losing six-figure sums at the casino? Well, you could very well do so if you don’t think long and hard about your property purchases. Here we discuss the perils of making dangerous decisions when it comes to investment properties.
Perhaps this sign should be plastered across every property purchase agreement, so it can be easily visible to anyone considering signing on the dotted line?
The property spruikers will tell you prices always go up. But, let’s face it, buying property is not without significant risks and it really is a case of ‘buyer beware’ if you have not done your research before making purchasing decisions.
Recently RiskWise Property Research analysed 3000 suburbs around Australia. From there, it compiled a list of the Top 100 most risky ones in which to buy. What they found set alarm bells ringing. Despite grave concerns that almost all capital cities are suffering from potential unit oversupply, the market continues to grow with more than 315,000 approved for construction around the country over the next two years.
Lenders understand that oversupplied suburbs carry greater risk – but it is also those risks that are passed on to unwitting investors who buy in those areas because they are either too naïve or fall for marketing hype from property spruikers. In fact, many major banks, including the Reserve Bank of Australia, have compiled ‘blacklists’ for postcodes that are suffering from potential unit saturation. Lenders will either require a much higher deposit as security on a loan - or they may turn down a loan application entirely.
However, unlike a straightforward property handover, off-the-plan investors must be able to attain finance approval after construction is complete, and this means if the market has sunk during the build period, they are faced with an extravagant mortgage on an over-valued property. Scary indeed. Additionally, off-the-plan dwellings are typically marketed to investors, and when many – sometimes hundreds – of identical dwellings come online simultaneously, it can be a race to the bottom as investors drop rents to lure in a tenant. Squashed property values and high vacancy rates are hallmarks of the new oversupply issue and it all leads down a rickety road to a dangerous territory. Do you really want to enter?
Five key factors have been found that create poor off-the-plan investment environments and, therefore, perilous and precarious property purchases.
1. Poor economic growth: Undoubtedly, the No.1 failure factor for both houses and units is poor economic growth. Research has shown that areas with weak economic growth will significantly underperform the national benchmark.
2. Oversupply and high numbers of new units: Even in areas that enjoy a strong, sustainable economic growth, the dampening effect of off-the-plan oversupply on the market is clear. A high proportion of new units in a relatively small area shows a strong correlation with poor capital growth.
3. Houses versus units: Off-the-plan units are weaker investments than new house builds in the same suburb.
4. Middle-ring units vs. inner-ring units: Inner-ring demand doesn’t extend to units, with CBD units delivering poorer capital growth than units in the middle ring.
5. Renter ratio: The higher the renter ratio, the poorer the capital growth performance of off-the-plan dwellings. Houses and units purchased in suburbs with a renter ratio lower than 50% delivered five-year growth of 41.6%. Where the renter ratio was higher than 70%, we saw an average 22.3% growth in the same timeframe.
The bottom line is if you don’t do your research, and steer clear of bad buying decisions, you are on a collision course with a quagmire of stress and worry before heading straight into dangerous financial territory.
Talk to us about seeking appropriate financial advice. Call us on 1300 861 143
This information is current as at 11/04/18.
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