In a torn Australian market, property sales have been a sure thing for astute investors.
But not anymore.
Making money in a weaker market has become a challenge.
“In addition to the cost of renovation, there will always be transaction costs involved in buying quickly, renovating and reselling a property, including stamp duties, legal fees and capital gains taxes,” says Pete Wargent. , co-founder of BuyersBuyers. a national network of buyers agent services.
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“Now there are two more factors that make life more difficult for real estate flippers.”
With interest rates changing and a less certain outlook, Wargent says renovators could find themselves selling in a market where capital gains are no guarantee of profit.
Add to that a sharp increase in construction costs and there is also a tangible risk of overcapitalization.
Data from the Australian Bureau of Statistics shows that timber and steel prices are up 50 per cent, while the average cost of building a new home is up 20 per cent from last year.
“Obviously projects need to be evaluated on a case-by-case basis, but overlapping supply shocks have made access to building materials at reasonable cost less reliable,” Wargent said.
“In many areas of the country, there is also a shortage of available trades, which must be considered as a contingency for any proposed renovation budget.”
BuyersBuyers CEO Doron Peleg estimates that a $600,000 property increased $120,000 in value through a $60,000 renovation could have returned $840,000 in 2021 once a 20 percent market increase was factored in.
“Even after conservatively accounting for 7-8 percent of transaction costs, you can still make handsome profits on such a deal in a short period of time,” he said.
“However, you can also easily see how a reduction in market values of, say, 10 percent could leave an investor undertaking an invested project in a precarious position or at a loss.”
Especially if there are unforeseen cost overruns.
Wargent says renovators and developers need to assume that high costs will persist even if global supply chain issues are resolved this year.
“Flippers must take into account the perspectives of the local market in which they operate in order to effectively manage project risks,” he said.
“If you’re unsure of your ability to sell properties, think longer term.”
The good news, he says, is that a shortage of family-friendly housing is looming in the suburbs of midtown capital cities over the next decade.