Safe as houses? What a capital idea
The Sunday Age
Sunday December 6, 2009
Making a solid capital gain on your property begins with buying well, writes Chris Vedelago. CAPITAL growth. It's the Holy Grail of home ownership.Everyone who buys a property hopes that when the day comes to sell it, they will reap a windfall €” a fat chunk of profit to fund their next step up the property ladder or a cushy retirement.While it's essentially true that if you sit on a property for long enough its value is bound to increase, achieving strong, sustained capital growth involves far more than just the passage of time.Here's a guide to the do's, don'ts and things you need to know about capital growth.The propertyWhile the general state of the economy and property market always plays a role in determining a property's value, for the average consumer the driving force behind capital growth is far more localised and, ultimately, personal."You make your profit when you buy," said Janet Spencer of Buyer Solutions. "It's really about asset selection and what you pay."Property type and quality. Suburb and street. Price. These are the factors a buyer can control that will have a profound influence over how much and how fast a property potentially appreciates in value.Some common strategies include targeting affordable suburbs next to popular or expensive suburbs, where the entry price is lower but demand is likely to spill over.There's also the adage of picking the "worst house in the best street", piggy-backing on the capital growth of quality properties through proximity.But those who take this approach with an eye to future renovations need to be careful they don't over-capitalise."Those that invest heavily in developing a unique internal design that is funky and a one-off may find that the demand for such a design is limited," said Nigel O'Neil, chief executive of Hocking Stuart."Likewise, building a large family home in an area where the demographic is shifting to young couples with no kids would limit the likely capital growth, as the demand for that property is likely to decrease over time."Access to public transport and arterial roads, parks, shopping, restaurants/cafes or location in specific school zones are also major attractions for buyers.But there's a big difference between being close to services and infrastructure and being next to them.That means staying away from properties on main roads, rail lines or that back onto businesses or schools where potential redevelopment, degradation of amenity or noise will be a problem."Those issues can be a handbrake on capital return," said Iain Carmichael, director of Bennison Mackinnon. "Something that looks cheap because it's on a main road or with a school behind generally means it's going to look cheap next time around when you have to sell it."Deciding which features are the most influential will, of course, depend on whether you're buying a home or a rental property.But buyer's advocates caution that even owner occupiers need to pragmatically balance out lifestyle options with practical investment criteria if they want to see strong capital growth."Property is always compromised in some way, depending on your budget or your living needs. It doesn't mean that it won't go up in value but it will be compromised," said Catherine Cashmore of JPP Buyer Advocates."The properties that get the most capital growth are usually the ones that have some sort of outstanding feature, because they are the ones that will hold value in any market."Put simply, a second-rate property in a second-rate location will return second-rate capital growth.The purchasePotential capital growth, at least in the early years of ownership, is often helped or harmed at the point of purchase.Vendors, of course, want to get the most they can for their property. Their fondest hope is to attract multiple prospective buyers who will compete intensely, even irrationally, during the sale and end up paying top dollar. "It's a market truism that just because a person pays a price for a property, that doesn't mean that's its value," said buyer's advocate Bruce Renowden."In fact, if you auction the same property in the same market 10 Saturdays in a row you'll be just about guaranteed to get 10 different prices."What you spend should be determined not just by your budget, but also through a logical and calculated assessment of a property's likely market value at that point in time.Valuers and buyers' advocates do this by examining comparable sales for a given type of property in that (or a similar) street in that suburb."People fall in love with a property and get hoodwinked into thinking the property is actually worth that much, so they pay extreme prices," said Ms Cashmore.But every "extra" dollar spent above a property's estimated market value is one more to pay interest on, not to mention it increases the amount of time you have to wait before you gain any ground in terms of real capital growth. "People spend 5 to 10 per cent or more than they intended because they figure it's only a few extra dollars a month (on the mortgage)," said buyer's advocate Michael Ramsay. "But it can take years to get that back and, for some, it will come back and bite them."Calculating capital growth also involves far more than just buying, selling and then pocketing the difference.Every sale incurs a series of costs €” agent commission, advertising, legal or banking fees, etc. €” that cut into the "profit", particularly when accounting for the stamp duty paid on the original purchase price.Capital gains tax can also apply, depending on the length a property is held.The market andthe saleEconomists and analysts focus on documenting and explaining every twitch in the property market, producing a flood of statistics, forecasts and opinions that many consumers struggle to understand.Nevertheless, without a basic grasp of the general state of the market, all the research, pragmatic assessments of a property's value and potential for capital growth can be wiped away with a single, poorly timed decision to buy or sell.Take the example of the so-called "pick and flick" transactions seen during the height of the 2007 boom, where properties were bought and then resold within 12 to 24 months at a substantial mark-up, thanks to intense demand.While vendors who successfully rode the rising market were able to realise substantial short-term returns, this kind of market speculation proved extremely risky.When the market cooled in 2008, interest rates rose and the global financial crisis decimated confidence, some would-be vendors and purchasers who'd bought at the height of the 2007 boom had mortgages on properties they couldn't afford, simply couldn't sell, or couldn't get back the same price they had paid.The lesson here is that realising capital growth is also very much an issue of timing, about having the forethought and resources to hold on to a property if the market should stumble. While buying low and selling high will return the best result, in a stable or rising market a quality property in a good location will nearly always sell well.
© 2009 The Sunday Age