A FEW years back, I moved into a brand new house. I fell in love at the open for inspection. The place was impeccable. So nice. I moved in shortly afterwards and that’s when the trouble began.
The place was so shiny and new that every little mark and scratch was like a giant gash. I was only renting it too, so I had to worry about my bond. It was stressful and I realised that living in something brand new means you suffer through the most painful part of the ageing process.
But at least I didn’t buy an off-the-plan apartment. New data from BIS Oxford Economics is showing that most buyers who get their hands on an off the plan apartment and sell them again within a few years are either losing dough or getting less capital gain than if they bought an established apartment.
A friend of mine lost money on an off-the-plan investment property a few years back. I didn’t even know it was possible to lose in Melbourne’s property market until that happened. I assumed he just got very unlucky but this shows there are actually many like him.
It’s worth remembering that some of the difference in resale may be because off the plan purchases have advantages like stamp duty exemptions, etc.
Still, it’s an ugly equation for anyone who has put some cash down for an off the plan apartment and is waiting for it to be built. There are two big problems.
1. SYSTEMIC RISK
Most apartments going up these days are taller towers.
Those sort of developments have to be sold off the plan. They get people into a room, show them the layouts and encourage them to put money down for an apartment that is still to be built. This makes good sense for the developer — they don’t want to invest in something unless they’re sure it is popular in advance.
(Incidentally, Australia’s richest person at the moment is Harry Triguboff, the owner of Meriton, an apartment developer.)
But the trend for big towers that are sold off the plan means more and more of the new housing stock is of the kind that tends to do worse than existing apartments, or decline in price. The problem of falling prices is especially pronounced in Melbourne.
If people that have already put down cash for an off the plan apartment realise the value has fallen by more than the cash they put down, they can walk away. And that could lead to further falls in the price of apartments.
2. DON’T TOUCH WHAT YOU CAN’T AFFORD
Everyone knows that most of the time houses go up more than flats, period homes rise more than things built in the 1980s, and that the inner city rises more than the outer suburbs.
The obvious answer for a clever person is to buy the kind of place that will go up. Preferably a cute period home in a nice location. A terrace in Redfern; a Queenslander on Kangaroo Point, or a sandstone cottage in North Adelaide
But, of course, that’s the domain of the people with millions to spend.
If you’re young and currently on the margins of the housing market, an off the plan apartment might be very tempting. The artists impressions make them look incredibly nice compared to a 1970s era flat. But if it won’t go up even after you bought it, your chance of moving up the property ladder is pretty slim.
The safer move might be to try to buy an older apartment. Trust me when I say that new house smell can be more trouble than it’s worth.
Jason Murphy is an economist. He publishes the blog Thomas The Thinkengine. Follow Jason on Twitter @Jasemurphy
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