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Are New Builds Still A Good Investment?

The key for anyone looking to buy off-plan is to be patient, smart and cautious, particularly in the present environment, writes John Bolton.

By: John Bolton

1 May 2022

No matter your investment of choice, it’s a risky market to be operating in right now. Putting money into shares feels crazy. Fixed-interest managed funds are performing terribly. And whichever way you spin it, the property market is facing into some level of falling house prices.

High inflation, removal of tax deductibility, CCCFA changes and tighter LVR restriction have all played a part in falling prices. But more than anything, this shift is being driven by interest rates.

After 30 years of declining interest rates, where house prices have gone ballistic, we’re now in a very clear rising rate environment. The increases we’ve seen already should result in at least a 10 per cent drop in prices across the market.

So, as a property investor, where do you put your money?

Given they’ve retained tax deductibility, new builds may seem like the obvious choice. If you’re considering buying off-plan there are a few things to be mindful of to help ensure you’re making a good investment.

Be Discerning

Until recently there’s been such a shortage of supply that buyers and renters have been willing (even desperate) to snap up properties they otherwise wouldn’t have gone near.

That’s sent some interesting signals to the market about what constitutes a “desirable” property. The most obvious example, in my mind, being the sheer number of terraced houses and apartments built without car parks.

But the pendulum has swung the other way in recent months, and between falling house prices and the extensive build activity underway last year, we’re seeing far greater supply and choice in the market again.

That’s meant some developers are struggling to line up buyers, and those properties without car parks are much harder to sell.

As an investor consider the ongoing desirability of any property you’re looking to buy. Will you be able to earn as much rental income on a property without a car park? What about capital gains?

With choice having returned to the market, the answer is: probably not.

Take Your Time

Construction costs are extraordinarily high right now as the industry grapples with material shortages caused by supply chain issues and exacerbated by intense levels of lockdown build activity.

Land prices, too, have shot up in the last year, largely due to exuberant developers paying too much – so much so I’d suggest development land prices probably need to fall by 20 to 30 per cent moving forward.

In the short term these costs will have an impact, but the reality is they won’t stay this high forever.

As we get more competition in the market, and balance returns to the supply and demand equation (or we reach a point where property is in oversupply), you’ll arguably start to see better new builds coming to market, at lower prices.

Realistic Expectations

In New Zealand there’s this widely referenced statistic which says you can expect to earn (on average) 5 to 7 per cent capital gains on a property every year.

Within the declining interest rate environment of the last 30 years that’s arguably been a pretty reliable assumption, but the world has changed completely now interest rates are on the up.

When you take a longer term view, adjusting for inflation and the noise of a falling interest rate environment, real returns on property are closer to 1.7 per cent per year, on average.

Any modelling that suggests high capital growth in the current environment is probably misleading, at best, and in fact I’d be prepared for prices to go nowhere for the foreseeable future.

Ultimately, I’m an advocate for buying in any market, and with the amount of choice out there right now there will be some good deals to be had. The key for anyone looking to buy off-plan is to be patient, smart, and cautious. Do your homework, and ask the right questions, to determine whether it’s the best investment for you.

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