Nationwide Australian real estate data shows that there has been a retracement in property value in wealthy areas that experienced a price boom during the pandemic. The fall is more prominent in Brisbane, Sydney, and Melbourne. But it's also noticeable in other affluent and high-end parts of the country.
Considering this data, now might be a good time to invest in real estate. But do you buy a brand new property or invest in an established one? Let's discuss this.
Buying Brand New Properties: Pros and Cons
Zaki Ameer of DDP Property Projects says that “first-time home buyers across Australia were above average in 2019. The segment comprised 28.9% of the market for owner-occupier home loans, a significant increase from 25% since 2012.”
Millennials make up most of these first-time buyers, and 48% of them prefer new builds because they don’t have the appetite for buying an established property and remodeling it later. Aldermore research found that 41% of first-time buyers prefer new builds due to lower energy costs resulting from better insulation and green home features.
Besides first-time buyers, seasoned investors also see value in new properties. The Australian real estate market has traditionally given high capital returns to its investors. CoreLogic Pain & Gain data, surveying 102,000 sales, found that 93.8% of them made a profit.
So, it makes sense for individual locals, investors, and foreigners to buy a new property in Australia. But how do the pros and cons stack up?
Pros
The pros of buying a new property in Australia are associated with lower prices and better rental yields. Here's what we mean.
Stamp Duty Savings
Stamp duty is a tax you have to pay on several transactions in Australia, including property purchases. While stamp duty varies across states and property types, you can get concessions when buying a new property.
The stamp duty can range from thousands to tens of thousands of dollars, depending on the property's price. But when you buy a new property, you might not have to pay the stamp duty on the building itself, but only the land.
Some states also have concession offers for first-time buyers. For example, New South Wales offers a 100% stamp duty exemption for properties costing $300,000 to $500,00 of vacant land.
Similarly, NSW Government Home Builders Bonus exempts buyers from stamp duty on new homes valued at less than $600,000 where the building process hasn't started yet. The bonus is also available for vacant land costing no more than $400,000. Moreover, the state has lowered the stamp duty by 25% on under-construction properties. That's a significant amount of savings.
Low Maintenance
Newer homes require lower maintenance since they are built with the latest materials and technologies. You can also avoid major maintenance and repair costs, such as repainting or roofing.
Better Rental Yields
If you're planning to buy property for rental purposes, you can get higher yields from newer homes. They attract more tenants since they come with the latest amenities and features.
You can also choose to buy new properties with features that homeowners seek. These may include green technologies, open-plan layouts, proximity to the city center, and better insulation.
Cons
Buying a new property has its fair share of advantages. But there are a few downsides to it too.
Unestablished Community
When you buy a brand-new property, it's likely that the nearby community hasn't been established yet. That means limited access to services, infrastructure, and amenities.
Since the CBDs in big cities are already well-developed, most of the new construction is far from the centralized hubs. The distance could translate to lower returns on investment, especially when the property is on the outskirts.
Higher Prices
According to recent data, the median house price in Australian capital cities is $851,386. Meanwhile, the median unit price in these cities is $612,755.
Newer constructions tend to be more expensive because of the:
- Higher cost of materials nowadays
- High energy costs
- Modern and high-end amenities
Unknown Prospects
In most cases, you don't have a sales history for new construction or surrounding areas to estimate the growth potential. So, there's a certain level of risk with investing in newer properties.
Buying Established Properties: Pros and Cons
Ameer says “there is a tight housing supply in the Australian market due to declining new house and apartment unit completions. With a low supply of new homes, investors are inclined to purchase established properties.“
Let's discuss the pros and cons of this approach.
Pros
Here are some benefits of buying established properties in Australia.
Higher Land Value
Established homes often have a higher land value than new builds. The land value could appreciate even if the property's value depreciates over time. So, there's a potential for growth over time.
The most significant increase in land value is prominent in affluent suburbs of capital cities. For instance, Paddington in Sydney has the highest land value in the country, with an average square meter costing $25,755.
Past Sale Record
Established homes pose less risk in terms of investment. Investors can use past sale records to assess a home's potential for capital growth.
Existing Amenities and Infrastructure
Established properties almost always get the top hand due to existing infrastructure. They're closer to amenities, schools, transport links, and other attractions.
Cons
Buying an established property may not be for everyone. Here's why.
Maintenance Costs
An older property will have higher maintenance costs since it has sustained wear and tear over time. You may also have to perform major repairs and renovations, like installing a new roof or re-insulating the attic.
These expenses increase the cost of buying a home. Plus, the work needs to be done before you can rent it out or start living in it.
Lower Rental Yields
Older properties often have a poor rental yield compared to newer properties. One, they don't get the same tenant appeal as new properties simply due to their older builds.
Two, older properties may not have the modern features young tenants require. Some examples include multiple bathrooms, open-plan designs, and energy-efficient lighting.
High Stamp Duty
Established properties do not enjoy the concessions or bonuses that come with new property purchases. So, you'll have to pay high stamp duties, which can be 3% to 4% of your home's cost. For a property worth $600,000, that's an additional 24,000 to $30,000.
The Takeaway
According to Ameer “Whether you buy a brand new property or an established home depends on your personal preferences. If you do not mind the high stamp duties and are more focused on capital growth, an established home is the way to go.”
However, if you're looking for higher rental yields and modern amenities, invest in a brand new house.
