‘Great buying opportunities’ for careful investors looking at new-builds

Tim Reardon, principal economist at the HIA, cites general concerns about the quality and sustained value of new properties. 

“We see a loss of consumer confidence in the market, so people are just, that fear of missing out on the market has gone away, people just being a little more cautious in entering the housing market, waiting to find that bottom of the cycle,” Mr Reardon said to Smart Property Investment.

While there are those who are chasing the bottom of the market to find a bargain, there remains these large supplies of new stock waiting to be purchased – but would it be a wise decision to do so? As always, it depends on how watertight your strategy is. 

Why to consider buying new

For Ben Handler, CEO of the Buyer’s Agent Institute, buying new in the current market can give property investors the opportunity to find real bargains through negotiation, as long as they do their due diligence.

“I think there’s great buying with the available stock that’s available with new developments at the moment,” Mr Handler said to Smart Property Investment.

Going into the new market, particularly off-the-plan, investors need to make sure they take a number of factors into consideration, such as being able to visualise what a property looks like off the floor plan, Mr Handler said.

There also runs the real possibility of how the property will not look like the floor plan.

“There’s concerns around in the contract that your apartment size may very subject to the developer, so sometimes your apartment may actually be smaller than you anticipated,” Mr Handler said.

“I think you’ve got to be conscious of who the builder is and the developer.”

To mitigate these concerns, Mr Handler recommended utilising a buyer’s agent and a solicitor to make sure everything is up to the investor’s standard.

“A buyer’s agent is someone who’s going to be able you identify where’s the right position in the building to go into; is this development in the right location? Is the builder and the developer good?” he said.

“I think buyers need to have some sort of guidance around the quality of their decision, of what they’re doing when they’re buying something that they can’t actually physically see.

“Buyers [also] need to have a solicitor who can really update them on everything they need to be mindful of that may not be so black-and-white that could happen as a result of their purchase.”

Pinning down an off-the-plan property for long-term growth prospects is all dependent on how many other new properties there are to compete with, he said.

“If you’re buying a brand-new property, in an area that's quite heavily dominated by existing stock … I think you're in a very good position to seeing some really good growth in your apartment,” he said.

“If you're going into an area which is heavily dominated by ... off-the-plan new development stock, I think your chances are much limited for you to see upside.”

The flipside: why caution is advised 

Meanwhile, Simon Pressley, head of research at Propertyology, saw buying new properties as something that could potentially be “dangerous” to investors in the current market. 

To explain his point, Mr Pressley used the analogy of buying a brand-new car.

“The first buyer … has to absorb all the taxes associated with bringing that product on the market for its first time,” he said to Smart property investment.

“If you think of any model of car, the new model versus the demo model, they're both new, one might have 100 [kilometres] on the clock, but the person who drives it out the yard will probably pay about 30 per cent less than the one that's got no kilometres on the clock, they've got the same product.”

Citing figures from the HIA, Mr Pressley said when buying new, they found the various taxes of purchasing a new property could total up to 40 per cent of the purchase price.

“There's taxes all the way through the process of construction -- you know, someone buys the land (it's not ... tax but the interest on that land loan until they eventually sell properties is) … the developer has to absorb those interest costs, there's taxes on the trade labour that they pay during construction, there's taxes on the materials in that construction, there's taxes to the marketing people who sell it and then there's tax on the profit, so lots of layers of tax, GST, payroll … and the first buyer pays that through the purchase price,” Mr Pressley said.

“Whether we’re talking new house or new apartment in any location, a comparable yet older property int hat same vicinity at the same time, you could pick up for lot cheaper than whatever that new build's going for.”

Another reason Mr Pressley does not agree with new properties is the lack of originality between the properties, which makes it tricker for an investor to differentiate between near-by properties.

New apartments, he said, could consist of a block of 100, 200 or even up to 800, similarly designed and built properties all within one location and new houses in a big estate suffer a similar condition where once the allure of new wears off, the houses all appear to be made out of the same LEGO set, appearing identical next to each other.

“If there's no differentiation from property A to property B when you're trying to extract equity out of that property through on selling it to someone else, you really can't argue with the evidence that the then buyers will have to say, 'No, I'm not paying that extra $50,000 because here's a bunch of other properties very similar to yours that have sold for this price,'” Mr Pressley said.

“You just can't argue with that one there when there's mass produced projects.

“It's not to say that you can't find a new building at a really, really small project, but there's not many of them, and that's likely to be the case for even today because when developers buy sites now, especially in their big cities, to make it profitable, they have to squeeze as many individual properties out of that one project as they can.”

The biggest markets

Looking to Sydney and Melbourne specifically, Mr Reardon expects these two markets to have a record volume of new apartments for sale this year, which is expected to then drawn in first home buyers.

As the apartments sell, Mr Reardon then expects another wave of investment to follow, which will then stablise the markets, creating an overall favourable market cycle.

“There's been a record volume, significantly above the long-term average, at least 20 to 30 per cent above the long-term average, and now that pent up demand in Sydney and Melbourne has been met, we'll see the volume of homes being built each year returned to still very strong levels but more historically averaged levels than what they've been over the past four years,” Mr Reardon said.

Mr Pressley’s interpretation of market cycles however is that the cycle spells bad news for investors and new properties.

“History has taught us that growth cycles come around greater than once a decade, so someone spins a yarn about, 'Hey, buy this one in Sydney/Melbourne' because it's a bit of a bargain, even if it’s proven to be correct as a bit of bargain, the odds are it might be 10 years before that next cycle starts,” Mr Pressley said.

“Now, when you've got a country as diverse as Australia to pick from, I do not understand the logic behind why someone would lock themselves into an asset in a market that may not experience significant growth for a long, long time.”