Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

5 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision - where world class experts share their thoughts on economics & finance - & author of Things That Make You Go of the world's most popular & widely-read financial publications.

"Wargent is a bald-faced realty foghorn" - David Llewellyn-Smith, MacroBusiness.

Friday, 28 November 2014

New Home Sales Tick Higher in October

New Home Sales +3 percent

The latest round of new home sales data released from the Housing Industry Association yesterday.

HIA's Chief Economist Harley Dale noted: "Australia is on track to commence a record number of homes this year", which means that an abundance of new stock is going to hit the market in 2015-16.

New home sales increased by 3 percent in October, with detached house sales in the quarter rising in Queensland and New South Wales. 

Property Update

Property Update is a great free resource for property related information in Australia - subscribe for free here.

With this week's construction data and new home sales figures, new homes and properties are all the rage this week. 

Today on Property Update Tyron Hyde of Washington Brown considers new versus old property depreciation benefits:

"Buying new property will always result in the highest tax depreciation benefits.

Generally speaking the higher the building, the higher the depreciation. Why? Because taller buildings have more services like lifts, gyms and fire services.

And services like these attract higher rates of depreciation in comparison to bricks and concrete.

But it’s also important to remember that purchasing a new property can sometimes cost more than buying a 3 – 5 year old property.

The difference in depreciation benefits between these options is not necessarily as substantial.

Purchasing a ‘newish’ property can mean paying less stamp duty and might mean a higher depreciation deduction relative to the purchase price.

Washington Brown’s Online Tax Depreciation Calculator shows a first year deduction of $18,000 for a Brand-New high rise unit costing $650,000 in Sydney.

The calculator also shows that paying $650,000 for a unit built in 2011 would still attract a first year deduction of $17,000.

That’s only $1,000 difference over the whole year – not enough to make or break the deal in my opinion!

Another thing to consider is that when you buy a second hand property you can often get a more realistic view of the real value of the property by researching any re-sales that have occurred in the building once the building has been completed.

That’s only way to find out the true value of a property.

Almost new property (at 3-5 years) will still get you more than enough depreciation benefits. In summary, you don’t necessarily have to be buy Brand-New to get the best depreciation."

Indeed, and a point I was have alluded to frequently over the last year - record new property construction means a record supply of this type of new stock, which generally struggles to make sense as an investment.

Tyron is being tactful here, but since we don't have clients with high rise units or new or off-the-plan properties, we can be more blunt!

Buying a new unit as a place of residence is one thing, but high rise units are generally a rubbish investment for a host of reasons. Lifts, gyms, pools and 24 hour concierges cost the earth and are a genuine pain for landlords.

New properties may sneak a few dollars in extra depreciation to put on your tax return as noted by Tyron above, but the tax-effected amount is likely to border on trifling

And in any case, depreciation is generally a little higher on new builds because new stuff does depreciate, often including the real value of the property.

Price Differential is Key

Imagine you buy a new 2 bedroom apartment with "all the bells and whistles" (ah, how I have come to hate that phrase!) for $575,000 today, for which after stamp duty and closing costs, you are all-in at about $600,000. 

Equivalent established 2 bedroom properties that are five years old are selling for around $475,000.

Given that we have an inflation target in Australia of 2-3 percent, and given that in a decade's time the glut of new stock will no longer command its newness premium, how long will it take for you to get back to break-even point on your investment (i.e. a real return on investment of $nil)? 

8 to 12 years? After holding costs, perhaps longer, and we haven't even adjusted "returns" for risk. As an investment case it would certainly leave a share market investor scratching their heads.

Yeah, I know, you'll do better and find the property "hotspots", and the developer will throw in a "discount" or a storage cage. If you say so.

Property can be a grand investment if you know what you're doing, but in this era of low interest rates, low inflation and higher land prices, the developers and the sales agents will cream off their profits from new builds. 

You'd struggle to convince me buyers of new stock at today's prices will make a return, though. 

For Versus Against Buying New

This neat article from Your Investment Property sums up the situation beautifully. 

George Raptis, who has been around on the real estate scene for longer than Raptis would even probably care to mention, lays out just a few of the many reasons in favour of established property from an investment case perspective.

The case for why new properties are a better bet is put forward by...well, a couple of developers. 

And as their mangled rhetoric aptly demonstrates, new apartment sales makes perfect financial sense...for the developers!