One of the first choices new investors are faced with is whether or not to buy a new property or one that is established.
Over the past few years, we’ve seen the value of new properties soaring in a lot of areas, and that has made people think that this is a good investment strategy. We’ve seen house and land packages growing in value and even off-the-plan properties rising.
But the thing to understand about the market over the past three or four years is that it is the market that has been doing the heavy lifting. Not the properties themselves in many instances.
While a new property could have gone up in value by 60%, it’s not really the property itself. We’ve experienced a nationwide boom and that has dragged everything along with it.
Even properties that were poorly located or that came with issues have seen their values rise. The overall uptrend of the market that is being driven by a surge in immigration is masking the fact that buyers are getting away with some questionable purchases.
When you buy an established property, you are typically paying a premium for the fact that it is brand new. The premium you’re paying is effectively the margin the developer is making and that is a big factor that holds back growth.
We also see that when people buy new properties in land subdivisions, there is oftentimes no shortage of supply. So when you go to sell, you are not only competing against all the other properties in the suburb, but also the brand new homes in the next subdivision that is just getting up and running.
Again, we’ve seen many of these areas grow by virtue of the fact that population numbers are so high leading to a real shortage of homes. But should that dynamic ever change, these types of properties are going to fare incredibly poorly.
In contrast when you buy an established house in a blue chip area, you know what you’re going to get.
You can see that there is a long track record of price growth that dates back 30 or even 50 years.
You can also see that there are plenty of comparable sales taking place that can give you confidence on price but also that there is steady demand.
When market conditions normalise and we go back to where we have a more balanced market, we should expect that established properties will outperform new homes.
That’s why this is the time that you should be actually thinking about what your investments will look like in 10 years. While it’s great to be chasing short term growth when everything is going up, it’s a lot smarter to take that long term view.
If you buy well in an established suburb today, you can be confident that you will reap the rewards in 10 years time.
If you are buying new today, you are gambling that what’s been happening for the past 3 years can carry on for another 10.
