Capital growth investors ‘in trouble’

Investors who have chased capital growth by targeting detached houses across Australia’s CBDs have been warned that a lot could go wrong over the next decade, raising questions over the dwelling stock they should be purchasing.

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The Australian Population Research Institute’s report into housing affordability – The housing affordability crisis in Sydney and Melbourne Report One: The demographic foundations – predicted a mass shortage of separate housing close to the CBDs of Australia’s two largest cities, with baby boomers holding onto their family homes instead of downsizing.

The finding has led to speculation that prices for these properties will soar as they become increasingly rare, and younger families scramble to secure a larger house with a backyard. Smart Property Adviser’s Kevin Lee, however, said this “appears logical until you realise that a few million boomers will want to ‘cash in their chips’ over the next six or seven years or so, sell that multimillion-dollar home and party”.

Mr Lee said the report presented some “major concerns” for younger homebuyers and investors – particularly those who “bet on Sydney in the last two years and got lucky”.

“Most property investors are speculators who only chase capital growth, because that’s what they’ve been brainwashed to do,” he said. “They actually believe this is investing, when in fact it’s nothing more than gambling”.

The report also indicates that investors purchasing apartments should choose their stock carefully, with a majority of apartment floorplans unsuitable for family living and unlikely to find sustainable favour with future buyers and renters.

“These apartments are predominately tiny 60-square-metre or smaller dwellings with no access to protected outdoor space. They are totally unsuitable for raising a family. They are tiny because developers selling to investors need to keep prices below $600,000,” the report said.

Mr Lee said this finding had serious implications for investors.

“Instead of speculating on capital growth, I believe investors should be targeting properties where the rent covers the mortgage on a principal and interest basis. If they are going to buy units in capital cities, buy only existing stock – never new or off-the-plan – 10, 20 or 30 years old, age doesn’t matter. Try to get two-bedroom units that have two bathrooms, plenty of natural lights, plenty of storage and that with some strategic cosmetic renovations you can expect a premium rental,” he said.

RESULTS Mentoring’s Brendan Kelly interpreted the report’s findings differently and said it highlighted the long-term value proposition of investing in detached housing on a block of land.

“Yes, it will make your standard quarter-acre block or your house-and-land in a city far more expensive because they’ll be rarer – the scarcity factor will just increase,” he said.

“There’s [already] a trend away from a lot of land to smaller blocks of land, and what you’re going to find is land is going to become more scarce as it becomes more difficult to subdivide further.”

Investors looking for a long-term hold should target houses with a backyard, he said.

“As an investor if you’re looking for safe money over a longer period of time, then go for your larger blocks of land and hold, because that will only amplify in value as zoning changes and population demand requires smaller sized dwellings.”

But investors who can’t stretch to houses certainly won’t suffer as a result of tightening supply in detached housing, he said – and nor will the apartment dwellers themselves, despite the report concluding that “it is unlikely that households of 2022 will achieve the dwelling standards of their counterparts in 2012”.

“People will adapt and change to what’s available. And it’s just a part of life. In the '40s and ‘50s it was quarter-acre blocks – how many people are hankering for a quarter-acre block? Nobody out there right now is saying ‘I must get a quarter-acre block, if it’s not quarter-acre I’m a second-rate citizen’. That’s not the case at all. The nature of expectation is shifting,” Mr Kelly explained.

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