To invest in a house or not? A question that has followed generations across the globe. In Australia, investing in a house comes as no easy task. However, it becomes important to consider the pros and cons before investing in property.
Brief Overview
House prices in Australia have sky-rocketed over the years. With the onset of the coronavirus pandemic, house prices have risen steeply due to low-interest values. According to abc.net.au, Australian house prices have risen by a whopping 22% during the year 2021.
Construction growth in Australia also falls under a steadily rising sector with a growth of 6.4% in the year 2021. This means a new array of houses and newly built property will be available inevitably creating an upward trend in demand and house prices.
On the other hand, we entered 2022 with rising rates (with more increases to come), oversupply of some properties (e.g. apartments in Melbourne or Sydney). Buyers are at least initially more reserved as rates could rise by the end of 2022, or fairly certainly in 2023.
Pros of Investing in a House
Capital growth
One of the biggest advantages of investing in a house comes from the long–term capital growth. Unlike apartments, houses have increased capital growth due to the long-term appreciation of the land and real estate. Additionally, with rising house prices, appreciation of both property and land can be highly profitable. For example, the median Sydney property grew by more than 15% p.a. between 2015 and December 2020.
Investment properties reap benefits
Purchasing a property for investment can be a lucrative venture. House rentals will often bring the investor a significant long-term income. Further, owning an investment property in Australia brings forth a slew of tax deductions.
Leveraging investments
In Australia, banks most likely lend a high percentage of the total value. This means that the use of borrowed money for the investment of houses can be significantly higher.
For example, if John purchased a property for $2,000,000 with a deposit of $400,000 and borrowed the remaining from the bank. Then a year later, John decides to sell the property at $2,100,000. The property shows a 10% increase in value, however, the return-on-investment John gets becomes 50% as John has made $200,000 in profit from the deposit. This equates to a 5x leverage as John has earned 5x 10% return.
It’s your house!
The simplest albeit the best part of owning a house comes from the complete and utter ownership over the property. You gain the freedom to renovate and decorate the house as you please. Additionally, you gain a sense of security and stability of not worrying about a landlord kicking you out!
Cons of Investing in a House
House prices
With ever-increasing house prices, it becomes increasingly difficult for first-time home-buyers to consider investing in a house. Compared to apartments houses often cost more, with increased prices closer to the city.
Not all houses have good resale value
An important facet of investing in a house involves figuring out the best area to purchase the property in. Unfortunate purchases in suburbs with low growth rates may lead to low capital growth and return on investment – in busy markets like what we have seen since 2021, buyers can end up limited on time and disregard fundamentals in favor of getting a foot in. This can end up as a bad investment during a slower market. A slowing market is what we seem to be approaching in 2022 with rising rates.
Hidden costs of investing in a house
An underlying con of owning a house comes with the array of hidden costs in buying a property. Houses generally require fees in the form of conveyancing, maintenance costs, safety inspections, and repairs. You may find out more about the hidden costs of buying a house in Australia here.
Rising material costs
Both building costs and material costs for renovations/repairs have risen roughly 30% in Australia since 2021. This is a huge amount and buyers should be aware of what they are committing to.
