If Money's Tight, Unload That Investment Unit-fast
Sun Herald
Sunday December 8, 2002
I THINK even Blind Freddy must have got the message last week about the future of the residential property market.
As we've been expecting for a while, two vastly different markets are forming. The home unit investment market is teetering on the precipice ahead of one almighty crunch, while the market for owner-occupied housing will slow but remain fairly solid.
Frankly, I can't believe the stupidity of some property developers at the moment. But, even more importantly, don't you become equally stupid and buy a home unit at the moment.
I know that's a broad-brush statement and there will always be individual properties that can be a bargain, but now is the time to be extra careful because there aren't too many bargains around.
I was dumbfounded to see the latest building approval figures showing a 68per cent rise in private home units for October. This means the construction boom in this area is still surging despite clear evidence of rising vacancy rates, low auction clearances and prices coming off the boil.
I expect some of these October-approved units will be mothballed until the market picks up, but it is still a clear indication of how out of touch many developers and investors are.
A colleague at Channel 7 told me excitedly the other week that she had just negatively geared an investment home unit off the plan in the inner-Melbourne suburb of Docklands. She was so excited that I didn't have the heart to tell her she was buying at the top of the market.
But, like many others, she still believed the developer's spiel: ``It will cost only $50 a month, let the taxman pay half, rental guaranteed, double your money in five years." Such claims in this market are downright lies.
When this end of the market comes off it will be fast and ugly.
Many investors have borrowed against the equity in their house to negatively gear their foray in to a residential investment unit. Tenants, however, are taking advantage of low interest rates to buy their own property, so vacancy rates are rising. Investors will be squeezed. A vacant property means no rent and more cash from the investor to meet a bigger negatively geared gap. Many won't be able to afford that gap and will have to sell their investment just when even more units are being built and completed.
This vicious cycle is a nightmare for investors in inner-city Sydney, Melbourne and Brisbane units.
Talk to your accountant and financial planner, but if a residential investment home unit is stretching your finances already, flog the property now if you can, because the market is just going to get worse.
Owner-occupied house prices will have a totally different scenario to those for investment home units.
When investors are financially squeezed they usually sell, and sell quickly. When house values start falling you stop reading the real estate pages, ignore the trend, stay in the house longer and ride out the downturn.
While clearance rates fall, so do the number of houses coming on the market, so therefore values are underpinned.
The owner-occupied housing market is a lot more sensible and a lot less volatile than that of investment home units.
The September-quarter figures for house prices show Sydney prices rising 5.8pc compared with 4.2pc in the June quarter, and they're up 21pc for the year.
Melbourne price rises slowed considerably to just 0.5pc in the three months to September compared with 7.7pc in the June quarter.
Melbourne's house price boom has been much hotter than Sydney's over the past three years so its slowdown was expected.
Even so, the anecdotal evidence is that Sydney house prices are starting to slow in the lead-up to Christmas.
Profit from two homes
ONE of the great advantages of living in your own home is that it's exempt from capital gains tax. So wouldn't it be great if you could own more than one?
The latest inTAX magazine has a couple of scenarios where this could happen.
If a couple marry and each comes with his or her own principal place of residence, they can choose one to live in and rent the other out. If they sell the rented property within six years of the marriage any profit is exempt from capital gains tax.
In your interest to check
MANY investors appear to be confused about when interest can be tax deductible.
As a general rule, if you borrow to make an investment which is expected to earn an income return, then the interest on the borrowings is deductible.
So borrowing to invest in shares whichpay a dividend means the interest can be deductible.
But where the investment is made solelyto make a capital profit, interest willnot be deductible. Make sure you check with your accountant.
© 2002 Sun Herald
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