'Bricks-and-mortar' investments crumbling
W&D has always wondered why 'bricks-and-mortar' is considered by some investors as a sound and only basis for investing. Or, even worse, borrowing to invest.
In W&D's experience of dealing with investors, about 25% will consider only investing in residential property, be it homes or apartments. This is notwithstanding the:
- illiquidity
- investment concentration
- transaction costs
- stamp duty costs
- land tax
- rental agent's commission
- tenancy uncertainty AND
- very low yield
And hence relying on significant capital gain to make the investment worthwhile.
But there is something attractive about seeing-and-touching the investment; about being 'in the property market'; about the excitement of bidding at an auction, or going through the dreamy plans; about comparing the investment with friends' investments; about hearing of others' successes or that Australia's wealthiest people have made their pile from 'property' (ignoring the fact that the dosh was made from commercial or retail property, not residential).
Overlay this with (a) super-low interest rates and (b) the ability to finance such a purchase via a self managed superannuation fund or to 'buy-off-the-plan' and, in W&D's ever-so-humble opinion, there will be tears.
W&D's fear of tears has been accentuated by this week's data from Core Logic, the property research company.
So, rents are going backwards. This is because of the massive over supply of apartments (and rental houses). And, as Core logic says, "There is also currently a record high number of new units (apartments) under construction."
The fine folk at Macquarie Bank have put out a list of the postcodes of 'risky suburbs' for apartment buyers. W&D isn't quite sure why postcodes were used. Don't suburbs have names anymore? Will the delightfully named Rooty Hill forever become just plain 2766. Or the seasonal Cutumnal to be just 3537?
W&D scanned Macquarie's list of dodgy postcodes, but could not see any that resembled his own. But, no doubt, if Macquarie (one of the more innovative lenders) is sounding alarms, then there's trouble afoot.
And as Core Logic's Cameron Kusher notes, "With so much stock coming onto the market, the properties won't increase in value between being bought and being completed, so the person who settles on it is underwater from the start."
A selfie of a recent buy-off-the-plan apartment investor
That's if they settle. With apartment sale prices down 30% in some areas, a buyer might be happy just to lose the 10% deposit.
And the doyen of bank research analysts, Brian Johnson of CLSA, in putting out a research note recommending investors have an underweight position in the four big banks, pointed to, among other reasons, 'settlement risk for apartments in Melbourne and Brisbane'.
This will end in tears.
This article is part of First Samuel’s weekly Wry & Dry newsletter. Click here to read more.