August 26, 2014
Ever thought that an apartment is a great investment option instead of a traditional house or unit?
According to Koulizos, P, (2011) the two options differ in performance for a number of reasons.
Supply & Demand
A developer undertakes a project to build 100 apartments and from the outset the bank will require them to sell at least 70% off the plan. So that’s 70 already sold but what about the other 30?
The developer actively markets those properties for sale during construction, but now with so many available at once, oversupply can result.
We all know that price it based on how many people want (demand) and how much there is (supply). Changing the supply of apartments is not possible in such large scale projects so oversupply will become the norm. It’s not uncommon for the apartment prices to then drop as a market correction occurs because of the supply and demand at the time.
Then to add insult to injury when the bank values the completed 70% that were sold at the higher price at the beginning of the project it’s highly likely that the valuation will be less than the price paid, therefore putting the purchaser at risk of not obtaining finance.
In the case of houses, it is possible to build just one house and it's relatively easy to alter the supply.
Land appreciates in value and a building will depreciate in value
It’s widely accepted that properties double every 7 to 10 years and this equates to properties increasing in value at a rate of around 7% to 10% per year.
However a property has two main features, the land and the building. So based on the assumption that land appreciates 10% per year and building depreciate 1.5% per year then these two forces compete with each other to arrive at the assumed 7-10% overall growth.
Let’s say you bought a house for $500,000 and $50,000 of that was for the building and the rest was for the land. Using the assumptions above over a 5 year period the total value is $771,000.
If you bought an apartment for the same price and $400,000 was for the building (including $80,000 for the developer’s profit), then only $100,000 was for the land. Applying the same assumptions over the 5 year period the total value is $457,000.
Naturally these figures vary depending on many factors such as location, local economic conditions, local governments’ incentive schemes as well as negative gearing factors pertaining to your individual financial situation.
In summary if you wish to purchase an apartment to live in, this may be the right lifestyle choice for you. So far as capital growth is concerned, purchasing a new apartment is not necessily a sound investment choice.
Koulizos P, 2011, Source realestate.com.au ; http://www.realestate.com.au/blog/investing-in-property-apartment-or-house/