Sydney properties for the kids…good idea?

Posted by Jack Guthrie

Research aids us in understanding where the best investment opportunities lie. We analyse macro drivers to pinpoint regions of burgeoning housing demand that will be driven by sustained population growth over the long term. Breaking down data trends provides a more objective interpretation when making investment decisions, and overall brings our clients results.

Although this is an effective form of investing, it is only as common as the ‘suck it and see’ method that many still adopt in the property market. Investors are all too frequently buying within a 15 kilometre radius of their primary residence on an emotional basis, with the main reasoning behind this being the buyer’s sense of comfort in their immediate market. The biggest advocates for this are Sydney-siders who are now aiming to buy properties for their kids – after all their home has appreciated in value significantly, so why wouldn’t the local market do the same again?

There are numerous reasons why buying Sydney right now may not be the most solid investment decision for you and your kids.

Sydney Stagnating

Many in the Sydney market over the last 5 years will have seen their own home grow in value at a rate that is faster than what they could save their own money, leaving many with idea to buy a secondary property. They believe that it may become the nest egg that gives their children the same financial options that they now have. The reality is that the Sydney market has performed well over the last 6 years but is now heading into a period of cooling and possible market stagnation. This could be detrimental as an investment decision as home owners expect to experience the same results that they have during the last market cycle.

Sacrificing Yield & Growth

Additionally, buying locally may restrict your investment opportunities as you are isolated from the various cycles occurring throughout interstate markets. As it stands, investing in Sydney costs a premium and returns lesser yields than our other capitals. Meaning investors are sacrificing the possibility for stronger yield and growth in separate markets, to buy into region that is potentially heading towards stagnation.

Restricting Lifestyle

There has been a resurgence of classical investors that are hell bent on the idea of buying Sydney ‘homes’ at any cost, whether it be in an undesirable area, too expensive to hold or above market value. With the median house price in Sydney almost sitting at $1 million, holding a Sydney home may become unfeasible for many in the event of changing market conditions or rising interest rates. This contrasts a new age school of thought that has come out of Sydney’s high growth environment. Called ‘Rentvesting’, it’s the ability to buy in the strongest growth areas and rent where you want to live. Essentially, this gives buyers the best opportunity for growth in the long term as it allows you to leverage off separate market growth, while allowing you to live a more favorable lifestyle where you choose.

Transfer costs

Parents who have purchased the property in their own name could be shooting themselves in the foot when it comes time to transfer the title to their children. Buyers will face the painstaking process of paying stamp duty on the properties new value while also incurring hefty capital gains taxes. An option that suits modern day investors is the premise of buying a better property in a separate market their own name (that doesn’t need changing ownership in the future). This amplifies an investors idea opportunity for them and their children. To read more about the subject, visit one of our eBooks in our education section, or alternatively click here.

To understand how mixed the performance of a home town investment could be, the following is a cross section Melbourne’s growth by regions. In the five years to July 2017, median house prices in the southeast grew by 67%, while the north and west grew by 36% and 34% respectively. Someone living in Melbourne’s inner ring could have bought in any of these regions off the back of 2012, with their investments performance varying widely as a result. This is effectively the pot shot type of method that many Sydney siders are now undertaking after the most recent boom.

To get the most accurate results we follow the research rather than to rely on sentiment, we understand property markets are complex systems reactive to economic factors. It can be a big step investing in a market you are unfamiliar with, but it can mean the difference between good and bad asset performance.

Posted by Jack Guthrie, on 22nd May 2018