There have been huge price growth and decrease in different Australian property markets and fortunately, stabilisation and correction are now in place. However, this situation creates an uncertain environment for property investors.
Some properties may appear attractive but the truth is, they can present substantial risks for investors.
There are two property sub-markets which are more vulnerable in fluctuating environments: off-the-plan apartments and house and lot packages.
Purchasing off-the-plan apartments is not always a bad move but the risks are usually higher because investors lock in a purchase price at a supposed current market value of a property which won’t be completed for months or even years.
The investors can only hope that the property’s value will increase during the construction phase and they will have a bit of equity by the time it is completed.
However, in the last few years, it has not happened. By the time off-the-plan properties are completed, the values are often significantly less than the contract price. Investors should actually get a discount for all the risks that go with a property which has yet to be completed but instead, the price even comes with agent commissions, marketing expenses, developer margins and GST.
Banks are also reluctant to lend on this property type so investors have to take the shortfall between the lender’s approved mortgage amount and purchase price.
There will be hundreds of identical apartments all for sale or lease, potentially decreasing the values more. They may have to hold on to the property if there aren’t enough buyers.
Meanwhile, investors should also be careful when buying house and lot packages, which have the same risks as off-the-plan apartments.
Investors may receive depreciation benefits but also pay a premium price that there may not be any more room for value-adding to the investment. They may rely on market movement to gain capital but buyers in these locations are often interest rate sensitive. This means earning equity is unlikely.
Investors may be better off investing on properties, which are not very vulnerable to market condition changes.
Established townhouses, apartments or houses in the inner and middle ring suburbs of capital cities may be better options because of a strong demand from affluent owner occupiers, who can pay.
These properties are often near great infrastructure, transport and large job centres. It may also be purchased at a fair market value and improved for further growth. Because there’s not a lot of similar properties, competition among buyers and renters may drive prices and rentals.
For more information about property investment in Australia, contact a Specialist to discuss your particular circumstances.
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