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Property Boom Can’t Stop Capital Losses

Property Boom Can’t Stop Capital Losses
August 27, 2021 Propertyology Head of Research and REIA Hall of Famer, Simon Pressley

Rising tides lift all ships, but all ships are not made equal.

Fast-rising asset values and very low volumes of properties listed for sale is a perfect storm for poorly informed property buyers making asset selection compromises that they may later regret.

Over the last six or so months I have noticed increased speculation from economists and real estate companies about a so-called ‘strong outlook’ for residential apartments.

There are very few things on this planet which are more complicated than forecasting property markets, but a simple and sensible part of the decision-making process for those who place importance on financial performance is to avoid apartments.

Unlike 10-15 years ago, these days there is a plethora of evidence to draw upon, study the cause and effect, and then use the learnings to make better decisions. I have devoted a lifetime of learnings to topics like this and want to use this short report to educate others.

 

Example #1 [Perth]

While you’re absorbing the spectacular view from the below apartment, use it as a piece of proof that capital growth potential is not something which can be evaluated by scenery, a feeling, or a personal desire to live in something.

This 2-bedroom, 2-bathroom apartment (pictured) is located in the Perth inner-city suburb of Burwood. The person who purchased this apartment 15-years ago sold it just last month for a $67,000 loss.

Example #2 [Sydney]

It is utter blind-foolery for one to rationalise capital growth potential through urban renewal initiatives and beliefs such as capital cities are better, and that population growth is the most powerful force for property price growth. The evidence proves that’s all BS!

Related article: The true meaning of HOUSING DEMAND

It took me 10-seconds to find the below financial flop from Australia’s biggest city. This 2-bedroom apartment is located a short walk from a train station, Stadium Australia and a plethora of restaurants in Sydney’s Olympic Park.

The vendor could not have timed their original purchase better – November 2012 was the very beginning of a Sydney property boom that ran for 4.5 years. And they are now selling with the energy of another boom.

Related article: Sydney’s property market history

But this financial dud produced ZERO capital growth over a period when Sydney’s median house price increased by 126 percent.

Example #3 [Brisbane]

Located only 4klm from Brisbane’s CBD, the below 2-bedroom, 2-bath apartment is within a trendy, waterside urban village with great restaurants, cafes, and a cinema.

Purchased in July 2004 for $633,400, it sold this month for $665,000.

Related article: Beware Olympic-boom rhetoric

Features and benefits might make a buyer feel good at the time of purchase but, ponder how that same buyer might feel about a paltry 5 percent capital growth after 17 long years.

This is not an isolated example. Without even trying, I found another 2-bedroom apartment in the same Hamilton village that also sold this month for a 21 percent CAPITAL LOSS on what the vendor paid 9-years earlier.

Example #4 [Melbourne]

Instead of engaging market intelligence, property investors foolishly use bias and personal feelings and place far too much importance on community features and benefits.

The 2-bedroom apartment pictured below is located in the highly desirable inner-city suburb of Richmond. It is among great cafes, restaurants, high-end retail stores, a short walk to the MCG, and just one train stop to Melbourne’s CBD.

Related article: Australia’s most fragile property market fundamentals

Selling this apartment last month for $260,000 more than the original purchase price might seem like an impressive gain. But the 53 percent capital growth rate is abysmal when compared to the 92 percent increase in Melbourne’s median house value over the same 12-year period.

Great regional cities like Bendigo and Mildura produced the same capital growth rate in just 5-years that this apartment produced in 12-years.

And other great locations such as Launceston (60 percent), Kempsey (70 percent), Orange (78 percent), and Wonthaggi (95 percent) blew Melbourne’s inner-city apartment performance out of the water.

When the tide goes out…

All four apartments featured in this report sold within the last few weeks during this (high-tide) property boom, yet they still produced deplorable financial outcomes.

Clearly, being located in popular capital city suburbs counts for nought. Ditto to how one might feel about personally living there.

15-20 years of evidence confirms that apartments are to Australian real estate what a rubber dinghy is to a boat race.

Contrary to those spruiking a strong outlook for apartments, my suggestion is that a puncture-kit and life jacket is the order of the day in this new COVID-world.

Repetitive lockdowns have already been the catalyst for thousands of CBD and inner-city businesses permanently closing their doors, others are embracing the flexibility of work-from-home, and there’s a lot less appeal now for living in confined spaces.

Here is a great example of a high-performing property portfolio.

Propertyology are national buyer’s agents and Australia’s premier property market analyst. Every capital city and every non-capital city, Propertyology analyse fundamentals in every market, every day. We use this valuable research to help everyday Aussies to invest in strategically-chosen locations (literally) all over Australia. Like to know more? Contact us here

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