Ever wondered why two suburbs within the same city could have such huge differences in property values?
Take Sydney as an example. Why is the median value of a house in Bondi ($3.2m – March 2020) five times the price of the median house value in Penrith ($660,000 – March 2020)?
Whilst the price difference between these two postcodes may not come as a surprise, the underlying reason should always be remembered as you build your portfolio. I’m sure we could start a debate around the answer, and I’m confident we could build a long list of reasons why the price difference exists, but this list can also be reduced to one key factor.
The difference is the land value.
The land value may justify a more expensive build, which also contributes towards the value of each home, but that same rule applies regardless of where you build.
Even an apartment building that costs the same to build in two cities can attract very different sales values due to their location, and the location is just another way to describe land value.
Land Appreciates, Buildings Depreciate
Land is a limited resource and therefore continues to increase in value, depending on demand. If there is a growing demand for people wanting to live in a postcode, growing demand is also placed on the land value. The more land content you hold, the more uplift your property achieves.
On the other hand, the Australian tax department sees the building as a depreciating asset. Therefore, under our tax laws, investors are able to depreciate a brand new property over a 40-year period; then it theoretically needs to be replaced. The key take-away for property investors is to always consider the value of land content.
Land Prices Rise Despite COVID-19
The chance to build a new brand new home thanks to the government’s recently announced HomeBuilder scheme has lured thousands of buyers into the market with developers across the nation reporting skyrocketing sales activity.
A sharp rise in land sales activity can only result in one outcome – land prices rise!
Land Developers are quickly finding themselves without the ability to supply residential lots of land to match the buyer demand. Most Developers were already sitting on limited supplies with few Developers planning to continue land subdivisions until COVID-19 was firmly in the rear view mirror. Now with buyer enquiries at record levels, land supply is fast becoming outstripped.
Investors weighing up the benefits of adding an investment property will need to carefully weigh up the changing ‘risk to reward’ ratio. Forecasts of a possible 20% to 30% fall in Australian home values have now been reduced by the same analysts to under 10%. Every day the property market displays its resilience; these forecasts continue to improve.
I expect to see land value increase by up to 20% by December 31st when the HomeBuilder grant ends. Investors who plan to build would be wise to carefully consider the impact of not securing land ASAP.