August ABS figures show strong activity in new dwellings...but beware of paying too much or selling too soon!

The latest ABS figures reconfirm the growing strength in the property market. What the figures don't show is the strength of the Sydney resale market which is leading the way for the rest of the country. With the record low interest rates, low vacancies, steady rent growth, change of government plus increased market sentiment we are experiencing a hype of activity which is leading to panic buying and opportunistic selling. So be very careful as these conditions are a recipe for paying too much for a property or selling a property for short term gains which in most cases may be detrimental in the long term. Here's some real life examples:

Paying too much:

Last week we a block of 4 units where sold in one line as part of a deceased estate. The building was a 1970's construct , they where run down with nil depreciation value and where achieving about $1,800pw rent in total. Based on the figures, to achieve a 5% gross return, the fair price to pay would be between $1.8m to $2m. The agents where expecting around $2m to $2.1m. There is some value add in the property by renovating the apartments at a cost of around $120,000 which would increase the rent to $2,400pw. Based on a 5% gross return this would value the property at $2.5m less $120,000 renovation costs = $2.38m. Our recommendation to our client was $2.2m as a medium term buy and hold strategy with the option to renovate, strata title and sell down in the future.

The property was actually sold at auction for $2.8m. This in my opinion is way above a reasonable price and a result of the market hype.


Selling too soon:

A client sold their property during the last market hype period a few year ago, just before the first home buyer grant expired. They sold their property for $640,000 and was renting for $590pw. They had a interest only mortgage on the property of $380,000. The applicable interest rates where around 7%pa. The gross rent return was positive $78pw.

If they had taken our advice and held onto the property they could have fixed their interest for 5 years at 4.9%pa and the rent would be $670pw giving them a gross rent return of positive $312pw plus the property vale is now worth around $820,000. So they have lost a minimum of $12,000 per year plus the capital gain of $180,000.   The same client wants to buy back into the market which will leave them in a far worse position than if they had not sold their property. In fact, given the strong positive cash flow if they had held the original property, they would have been in a great position keep the original property and buy another property.      




AUGUST KEY FIGURES


Aug 13
Jul 13 to Aug 13
Aug 12 to Aug 13
no.
% change
% change

TREND
Total dwelling units approved
13 896
0.1
5.8
Private sector houses
8 201
0.6
10.2
Private sector dwellings excluding houses
5 374
-0.1
-1.8
SEASONALLY ADJUSTED
Total dwelling units approved
13 687
-4.7
7.7
Private sector houses
8 115
-1.6
10.3
Private sector dwellings excluding houses
5 371
-6.5
3.2



Dwelling units approved
Graph: Dwelling units approved

Private sector houses approved
Graph: Private sector houses


AUGUST KEY POINTS


TOTAL DWELLING UNITS

  • The trend estimate for total dwellings approved rose 0.1% in August and has risen for 19 months.
  • The seasonally adjusted estimate for total dwellings approved fell 4.7% in August following a rise of 10.2% in the previous month.



PRIVATE SECTOR HOUSES

  • The trend estimate for private sector houses approved rose 0.6% in August and has risen for nine months.
  • The seasonally adjusted estimate for private sector houses fell 1.6% in August following a rise of 2.7% in the previous month.



PRIVATE SECTOR DWELLINGS EXCLUDING HOUSES

  • The trend estimate for private sector dwellings excluding houses fell 0.1% in August and has fallen for three months.
  • The seasonally adjusted estimate for private sector dwellings excluding houses fell 6.5% in August following a rise of 24.4% in the previous month.



VALUE OF BUILDING APPROVED

  • The trend estimate of the value of total building approved fell 0.4% in August and has fallen for three months. The value of residential building rose 0.2% and has risen for six months. The value of non-residential building fell 1.1% and has fallen for four months.
  • The seasonally adjusted estimate of the value of total building approved rose 0.2% in August and has risen for two months. The value of residential building fell 2.3% following a rise of 2.3% in the previous month. The value of non-residential building rose 3.9% and has risen for two months.