Some property investors may consider the idea of buying into a new estate (or a house & land package). These investors are not told the full story though as I have never seen the glossy brochures point out the oversupply issues with many of the new housing estates and also that fact that the properties are sold at a premium to reflect the developer's profit, not to mention the inflated property promoters commission which is often $20,000 to $30,000 per property. When you consider that land appreciates and buildings depreciate, overpaying for a new house which is for investment purposes does not make a lot of sense. The only real benefit to the purchaser of the new property is the depreciation allowance granted by the ATO which is really a false economy when you consider that the investor has often overpaid for the property to start with. Over supply of land In the map below I have shown a block of land in this new estate that was sold to an investor for $228,000; the land size is 321sqm. You can see all the land that is available and that will be developed around the investor's property. The map doesn’t even show all of the land available because there is so much of it. When property is scarce and demand exceeds supply, property goes up in value (like any commodity) – when supply exceeds demand the opposite occurs. Consider the following example. Inconsistent price’s of the land Another problem with this investment is that the sales prices are inconsistent. Some investors have gotten a better deal than others. The table below shows all the sales prices for the properties in the St. Sales prices range from $416 per sqm of land to $765 per sqm of land. Whilst it’s common for the sales rate per sqm to decrease for larger lots, the purchaser of No.15 paid $250,000 for 600sqm of land (a rate of $416 per sqm), whilst the purchaser of No.39 paid $228,000 for 321 sqm of land (a rate of $710 per sqm). The property promoter might say that the land has gone up in the last 6 months but that’s not the case when you look at all the sales and dates. No.15 just got a much better deal than No.39. This could be for many reasons. Other property sales in the suburb This new house is on the market for $389,000 (331sqm of land) - This house is on the market for $429,000 (717sqm of land) - it’s 5 years old so still has depreciation benefits. Why is there a $50,000 price difference between these two properties. Clearly it’s because the 2nd property is a bigger house on a larger block. So it’s more expensive, even though it’s 5 years old and the smaller one is new. I guess this is making the investors new house and land package look expensive. I.e. They paid $228,000 for the land + $200,000 to build so $428,000 in total. To break this down, let’s say we were considering two investment options (in the same suburb)- the new house and land package versus the 5 year old property that is priced at $429,000 and on 717sqm of land. New House & Land Package – costs investor $430,000 321 sqm land purchased for $228,000 Let’s say that the land appreciates at 8% p.a. Let’s say that the cost of the new build is $200,000 And as per the ATO guidelines let’s say that the building depreciates at 2.5% per year. After 10 years, the land is worth $492,000 (8% p.a x $228,000 x 10 years) After 10 years, the building is worth $155,000 ($200,000 less 2.5% p.a. x 10 years) Total value @ year 10 $647,000 Or the investor purchases the 5 year old house on 717 sqm. This house is in the same suburb and not far from the new H & L investment, so we agree that if land values increase in the suburb then the capital growth on both will be the same - right. 5 Year old house on 717 sqm – asking $430,000 Let’s say that the 717 sqm land is valued at $320,000 (i.e. conservative when you consider that people are paying from $250,000 to $315,000 for 600 sqm for new land not far away. So the building is worth $110,000. The total is $320,000 (land) + $110,000 (building) = $430,000. A valuer will often use this approach - it’s called the ‘replacement value’ valuation method. Let’s say that the land also appreciates at 8% p.a. And we said the depreciated building is worth $110,000. In reality you would likely be able to claim more than $110,000 worth of value on the building because it hasn't depreciated that much yet. After 10 years, the land is worth $690,000 (8% p.a x $320,000 x 10 years) After 10 years, the building is worth $ 85,000 ($110,000 less 2.5% p.a. x 10 years) Total value @ year 10 $775,000 Even if you apply the common sense approach to the above two property purchase options - do you think that after 10 years that the larger 15 year old house on 717sqm of land would be worth more than the smaller 10 year old house on 321 sqm of land if they are both in similar locations - I think so. It’s commonly accepted that land appreciates in value and buildings depreciate in value. That’s why the ATO allows investors to claim ‘depreciation allowances’ for properties built after 1987. If property investors were provided with this information in the glossy brochures given to them by the property promoters then I am certain that they would make better investment decisions.