Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

'Huge fan of your work. Very impressive!' - Scott Pape, The Barefoot Investor, Australia's #1 bestseller.

'Must-read, must-follow, one of the finest analysts in Australia' - Stephen Koukoulas, ex-Senior Economics Adviser to Prime Minister Gillard.

'One of Australia's brightest financial minds, must-follow for accurate & in-depth analysis' - David Scutt, Business Insider.

'I've been investing 40 years yet still learn new concepts from Pete; one of the finest young commentators' - Michael Yardney, Amazon #1 bestseller.

'The most knowledgeable person on Aussie real estate - loads of good data & charts...most comprehensive analyst I follow in Oz' - Jonathan Tepper, Variant Perception, 2 x NYT bestseller.

Monday, 17 October 2016

New dwellings...& the incentives to buy them

New wheels

We traded in a car this week for about a twentieth of what it was bought for when new.

Not so keen so reproduce this underwhelming result, in its stead I bought a 2012 Ford with 36,000 clicks on the clock, for around half of its 'as new' price. A bit more palatable.

Being no spring chicken any longer, I could obviously afford to buy new, but it's only a runabout and buying second hand simply offers far superior value. 

Besides, I feel I should practice what I preach: when compounded over a couple of decades, $20,000 could be worth quite a lot in the future. 

Of course, someone must buy all the new vehicles, else they'd never be sold. But who?

Well, some people just like the 'feel' of driving something brand new. And it sometimes makes sense for some company car drivers. 

Other people just have money burning a hole in their pocket, I guess, and more power to them...

Who buys new dwellings?

In a similar vein, buying new property tends to incur quite a hefty price premium, and for those buying 'off the plan' there is always that nagging risk that the final product doesn't much resemble what was breezily sketched in the brochure (those busy main roads just never seem to feature, hey!). 

Some speculators go down this path anyway, hoping to make a fast capital gain before the property is even constructed. I've seen this work very well (e.g. Barangaroo), but have seen it go wrong more often (too may places to mention). 

I must confess I've bought new property in Sydney before, and I'm even considering doing so elsewhere again right now, though I wouldn't necessarily recommend it to anyone looking for a bargain.


In fact, why would anyone buy new property? It's a bit like buying a new car in many ways.

Well, firstly, some people just like the undeniably fresh feel of an unused dwelling. 

Secondly, downsizing Baby Boomers can comfortably afford to buy new for cash using the proceeds from their home sale - so they may elect to buy new, as indeed they have earned the right to. 

Thirdly, and unfortunately, some would-be investors attend 'educational' courses which convince them that there are great benefits to buying new, often not realising that the apparent white knights doing the educating are actually salesmen (sometimes egregiously posing as psuedo-financial advisors). 

The middlemen/salesmen may secure up to a 6 per cent or greater commission from the developer, unbeknownst to the unsuspecting buyer. Goodness knows how this is still allowed to happen, but nevertheless it does.

Nascent self-managed super-funds (SMSFs) and inexperienced investors are key target groups for this type of salesman. 

In truth, there actually are tempting depreciation and other deductions available to investors in new properties, since policy makers know that they must attempt to incentivise investors to buy new dwellings in order to stimulate construction.

Strangely these generous benefits are rarely mentioned in the now-traditional annual negative gearing debate.

That said, if anyone ever throws you this sales pitch in order to flog you a new property, tell them you're considering buying a one-year-old dwelling for the same benefits and gauge their reaction (if they're dead set against the idea, you'll know why: obviously they are angling for a sales commission from the developer). 

Fourthly, a high percentage share of the new dwelling stock in Australia is bought by non-residents, a cohort typically restricted from buying established stock (except in certain circumstances, such as for development purposes). 

The Foreign Investment Review Board (FIRB) typically restricts non-residents to new properties or development projects in order to encourage construction, and by and large this policy works. 

For this reason - especially with lenders less than keen to extend finance to offshore buyers of late - non-settlements on new apartments will be one of the most keenly observed market metrics over the next two years. 

And fifthly, purchasing new just suits some buying demographics. It is frequently said that Chinese buyers like unused property to the extent that some don't even let out their new dwellings, in order to keep them in a pristine condition.

Incentives for first homebuyers

For first homebuyers, there are typically incentives available to buy or construct new homes.

These tend to vary over time, and by state and territory. The available incentives as at September 2016 are summarised in the table below. 

In the same way that I wouldn't buy a new investment property for the depreciation benefits due to the purchase price premium, first homebuyers should be wary of buying new solely to get their hands on cash grants. 

Fortunately, most young people are quite wise to this, and a larger cash grant doesn't necessarily equate to more buyers. 

In August, for example, the housing finance figures recorded only 6 (six!) owner-occupier commitments for the purchase of new dwellings in the Northern Territory, despite a lavish cash grant of $26,000 being available for first-timers!

That said, well-targeted grants do tend to be effective, as the recently revised first homebuyer statistics showed. 

New dwelling purchases

With such a high share of new dwellings being bought by offshore buyers, particularly from mainland China these days, the domestic housing finance figures only show a part of the story. 

Overall, the August housing finance commitments figures showed domestic transaction volumes for new builds holding up well, which is good news for the economy given that there is a record number of completions due over the next two years. 

At the state level, when the original data is plotted in rolling annual terms, it appears that volumes began to increase steadily in each of the most populous states from around 2012 when the interest rate easing cycle commenced in earnest.

Stay and renovate

Finally for today, various forecasters have long predicted a boom in major renovations.

Generally this makes sense as a concept, for the stamp duty thresholds for the two largest cities were originally designed with much lower purchase prices in mind.

As such, from the sublime to the ridiculous, stamp duty collection in Sydney has risen to what would previously have been thought of as absurd heights - the state's coffers are literally overflowing!

Homeowners should therefore be incentivised to stay put and renovate rather than incur the punitive transaction costs of moving. 

In the event there has indeed been a decent boom in major renovations activity in Sydney, but to date this has not been replicated elsewhere, and the anticipated contribution to GDP has not yet materialised.


The Sale of New Motor Vehicles figures for September are due out tomorrow. 

New motor vehicle sales are tracking at close to their highest ever level, driven by record sales in New South Wales.