Ugly Brisbane

Chris Joye had APM (a division of Fairfax) conduct an analysis to determine in which markets most buyers have lost or made money.  APM looked at all properties sold since January 2009, and conducted an EVR (electronic valuation) on each of these properties to determine if the current valuation was more or less than the purchase price.  In Brisbane 71% of properties sold since January 2009 were now worth less than the purchase price, according to APM's valuations.  Who says that you can't have a capital loss when buying property?

From my brief review of the property market in Brisbane (e.g., looking at listings and actual sales, talking with agents, making offers on properties, etc.) it seems to me that the situation in Brisbane is somewhat dire.  And it may not improve soon, and could get worse.  Even though interest rates are falling, a more important factor is employment -- and unemployment in Brisbane is on the increase.

See Chris Joye's Another Cut article.

Brisbane Apartment Prices Still Going Backwards

Australian capital city home values continue to rise with a 1.4% jump in September.

The September RP Data Rismark Home Value Index results marked the fourth consecutive month-on-month rise in home values, further cementing the fact that a housing market recovery is underway.

Capital city dwelling values rose by 1.4 per cent over the month of September, the largest month-on-month rise recorded since March 2010.  Adelaide led the way with the strongest results where values were up 2.4 per cent, followed by Perth at 1.6 per cent over the month, Sydney at 1.5 per cent, Melbourne at 1.4 per cent and Brisbane values up 1.1 per cent.

Highlights over the quarter
Best performing capital city: Darwin
Weakest performing capital city: Hobart
Highest rental yields: Darwin houses with gross rental yield of 6% and Darwin Units at 6%
Lowest rental yields: Melbourne houses with gross rental yields of 3.6% and Melbourne units at 4.3%
Most expensive city: Sydney with a median dwelling price of $522,000

However, Brisbane apartments did not do so well.

Brisbane apartment prices:
September 2012 - down 0.8%
Quarter - down 0.8%
Year to Date - down 2.7
Year on Year - down 4.5%
Median price based on settled sales of Brisbane apartments over the quarter - $385,000.

Ten Percent Under Water in Queensland

"Ten percent of Queensland homes are currently worth less than or equal to their purchase price while 36 percent are worth more than double the purchase price.  At the same time a year ago, 5.3 percent of homes were worth less than or equal to their purchase price and 39.3 percent of homes were worth more than double their purchase price.  These results highlight the growing impact of the continued underperformance of the Queensland housing market."

From RP Data Accumulation Report, June 2012 Quarter (Report released September 2012)

Brisbane is slightly better than the Queensland statistics.

Capital growth flat in August after rising in June & July: RP Data

The above headline does not really apply to the Brisbane apartment market.  Read on....

After recovering by one per cent in June and 0.6 per cent in July following the RBA’s back-to-back rate cuts, dwelling values across Australia’s combined capital cities were unchanged in August. At the end of August, dwelling values across Australia’s combined capital cities were down just -0.6 per cent in the first eight months of the year compared to a -2.2 per cent year-to-date loss in May. The year-on-year numbers have also shown a substantial improvement. Dwelling values were down -2.4 per cent at the end of August compared to -5.3 per cent in May.

“Improved affordability since June has helped dwelling values rise across every capital city over the three months ending August 2012, apart from Adelaide. The big question is, ‘can this growth be sustained?’ On the one hand, winter is seasonally slow, so these results have been encouraging. On the other hand, we know that there is likely to be an increase in new supply over Spring, which may introduce some headwinds for a recovering market. How the market plays out over the Spring season will be an important litmus test for its resilience,” Mr Lawless from RP Data said.

A spokesman from Rismark added, “Late last year we forecast that housing conditions in 2012 would deliver a material improvement over the -3.8 per cent loss suffered in 2011. Despite the fact that the RBA did not cut rates again until May, and we had the banks hike rates by about 25 basis points in the intervening period, the national market has clearly stabilised.”

The Brisbane apartment market showed some improvement over the past 3 months, but still not enough to recover from price deflation in late 2011 and early 2012.

Brisbane Apartments: Capital Growth to 31 August 2012

Month:  Up 2.1%
Quarter:  Up 2.1%
Year to Date: Down 1.9%
Year on Year:  Down 2.3%
Median Price Based on Settled Sales over Quarter: $350,000.

Brisbane apartments are doing better year on year and in the last quarter than Brisbane houses.

Source:  RP Data

FKP's SL8 Monster

FKP developed a project in West End, called SL8, a few years ago.  It is interesting to look at how it has performed.  FKP advertised this as an architect designed building in a good location.  In my opinion, the design was poor, and the location (even though in West End) is not great.

Here are the recent resales of apartments in SL8 (all two bedroom apartments), 8 Musgrave :

• Apt 146, sold off-the-plan for $545,000 in 2007; resold for $475,500 in May 2012
• Apt 123, sold off-the-plan for $585,000 in 2008; resold for $449,000 in November 2011
• Apt 174, sold off-the-plan for $725,000 in 2007; resold for $600,000 in November 2011
• Apt 144, sold off-the-plan for $765,000 in 2008; resold for $610,000 in October 2011
• Apt 214, sold by the developer for $520,000 in July 2010; resold for $440,000 in September 2011

Who said you can't loose buying property?  Every purchaser who has resold in SL8 has lost money.  And don't forget, the above does not take into account stamp duties and real estate agent fees.  Most buyers lost more than $100,000 when reselling.  If the buyers borrowed 80% of the purchase price, the buyers would have lost 100% or more of their equity.

Why such massive capital losses?  The property market has clearly gone into negative territory.  But a key factor here in my opinion is that the developer priced the apartments above the market value even in 2007, promoted the development heavily (including website keyword optimisation), and delivered a mediocre product.  (Have a look at the comments regarding this FKP advertorial.)  Take extreme care when buying off the plan!

Housing Risk

An interesting article by Chris Joye:  Housing Risk: It's greater than you think.

"Using some complex statistical methods pioneered by US academics, we estimate that the annual volatility of an individual home with no debt is about 18 per cent. That is similar to the observed risk of the Aussie sharemarket.

But this assumes you have no debt. What happens when you leverage up? The most variable dotted line in the second chart displays the monthly returns yielded by an individual home with 80 per cent gearing. This has a spectacular impact on risk and return. The annual equity volatility of a single property jumps from 18 per cent to north of 38 per cent. On the other hand, returns are also higher.

The key to mitigating risk is diversification. This ideally means a portfolio comprising multiple assets situated in unrelated regions. Hard to achieve, I know. Without diversity, your best way to reduce risk is by using less debt."

See also: 10% lose money when they sell home -- circa 15% after costs

Barefoot Investors Advice re Property

"My opinion on traditional Aussie housing hasn't changed one iota: I still firmly believe that most investment properties bought today are a trap. Their prices are too high and their returns too low to justify the dangerous debt burden needed to 'get in the property game'. That fact is backed up by the Australian Tax Office's latest figures, which show that, despite collecting $28 billion in rents last year, Australia's landlords still reported a $4.8 billion loss. Less than four in ten property investors made any money last year." Source: Barefoot Investor

Value Accumulation by major Queensland regions

Across Queensland, 9.6 percent of homes are worth less than or equal to their initial purchase price while 36.6 percent of homes are worth more than double their initial purchase price. At the end of the corresponding quarter in 2011, 3.7 percent of homes were worth less than or equal to their initial purchase price and 40.3 percent of homes were worth more than double. These results highlight the growing impact of the continued underperformance of the Queensland housing market.

Source:  RP Data

Profits and Losses on Actual Sales Data

From a report from RP Data, that shows a number of people made losses when sell property -- it is not true to say "as safe as houses" if you buy badly or at the wrong time or hold for a short period:

As a special feature in this report we examine the level of gross profit or loss based on residential dwellings that sold during the March quarter of 2012. The results are shown in the graphs below across all sales and also divided between homes that were purchased pre and post GFC (before or after January 1, 2008).

Of those owners that had purchased their home prior to the financial crisis (for the purposes of analysis we have used the date of January 1, 2008), a lower 7.2 percent had sold their home at a loss. A much greater 42.3 percent of these vendors sold their home at price which was at least double the previous purchase price.

Capital gains were much weaker for those vendors who had purchased their home in 2008 or thereafter. A larger proportion of these vendors recorded a loss on their sale, with 27.5 percent of dwellings sold recording a sale price lower than the initial purchase price. On the other hand, only 7.5 percent recorded a capital gain of more than 50 percent compared to the original purchase price. These results reflect the significantly weaker housing market conditions since 2008 and the benefits of a long term hold when it comes to turning a profit on residential property.

Oracle Buyers Loose Appeal

A number of off-the-plan purchasers for The Oracle development at Broadbeach refused to settle.  One reason they gave for their refusal was that Peppers purchased the management rights for the complex.  The purchasers lost their appeals today.  There were two decisions, Gough, and Walsh.  See also Courier Mail.

"... there is little support for the conclusion that, in addition to the role played by the Oracle name in identifying the apartments to be sold and purchased, there was also a promise by the vendor that Tower 1 be known or described as The Oracle at the date of completion. If such a promise existed, it needed to be inferred and the inference, if it could be drawn, was far from obvious.  ...  For the above reasons, I would order that the appeals be dismissed and that the appellants’ pay the respondent’s costs of the appeals, including reserved costs if any, on the indemnity basis."

The main reason the buyers did not settle was because the apartments dropped significantly in value between contract signing and settlement.  That is a risk of buying off-the-plan, and is not a ground to refuse to settle.

Loss-making Landlords

According to the ATO, there were 1,751,679 property investors declared to the ATO in 2009-10 - representing one in seven taxpayers - an increase of 59,235 from the 2008-09 financial year.

Total losses on investment properties were $4.810 billion in 2009-10, or $2746 per property investor, down from $6.528 billion ($3857 per investor) in 2008-09. Of the 1,751,679 property investors recorded by the ATO in 2009-10, 63% or 1,110,922 were "negatively geared", meaning that holding costs (eg, interest payments, maintenance, and other costs) outweighed income from rents.

Of these negatively geared investors, nearly three-quarters earned less than $80,000 in 2009-10, and the average loss was $9132 per negatively geared investor, or $176 per week.

The concentration of negatively geared properties in lower income and older age cohorts has potentially important ramifications for the Australian housing market. The risk of widespread selling of investment properties is likely to intensify once Australia’s 1.1 million negatively geared investors come to the realisation that there is little prospect of a resumption of past strong rates of capital growth and they are stuck with a loss-making investment.

See Full Story here and report here

Negative Equity

The share of homes with mortgages worth more than the property's value increased at the end of last year as the housing market stalled and prices turned lower. The rise suggests an increase in negative equity, where a mortgage can be worth more than the value of a house. Property information group RP Data said that 6.4 per cent of homes were valued at less than their purchase price in the December 2011 quarter, rising from 4.9 per cent of the market in the September quarter. By city, Brisbane fared the worst with 9.2 per cent of property deemed to be "underwater" in financial terms, followed by fellow mining state capital Perth at 7.4 per cent.
See Brisbane Times, Smart Company and Business Spectator

Casino Towers Auction Result

A sub-penthouse in Casino Towers (Apt 3803, 151 George St), recently sold at auction for just over $800,000.  This was a large two bed apartment, about 130 sqm internal.  It faced East, and did not have river views.

The owner/vendor purchased this apartment in August 2006 for $875,000, and so lost money.

The first owner purchased this apartment off the plan from Devine for $840,000 in 2005, and so over 6 years, this apartment went down in value.

Extent of Losses

RP Data reported recently that Brisbane apartments in 2011 lost value of 6.5% (when looking a medium sales prices of apartments that actually sold in 2011).

Let's assume Mr Investor purchased a Brisbane apartment on 31 December 2010 as an investment for $485,000.  Assume that he borrowed 80% of the purchase price, including stamp duty.  Stamp duty is $14,850.  So the total purchase cost, including legal fees and bank fees, is just over $500,000.  Mr Investor put in $100,000 of his own money, and borrowed $400,000.

That apartment, if it went down 6.5% in value, is now worth $453,475.  That is a capital loss of $46,525.

So Mr Investor has had a capital loss of over 46% in one year.  That is the risk of leveraging.  A small decrease in value means a large capital loss where there is a leverage situation.  (If Mr Investor had to sell, he would pay over $10,000 in real estate agent fees, making his capital loss even greater.)  If values decrease further, Mr Investor will be completely underwater.  I suspect that there are many apartment owners in Brisbane who have little or no equity left.