Holiday home buyers on vacation

PORTFOLIO POINT: Investors who are considering buying a holiday home, especially in greater Sydney or Melbourne, should be clear about their objectives.

Weather-wise, it hasn’t been the greatest of summers, especially on the eastern seaboard. The long run of inclement weather has been especially disappointing for those who booked beach houses this summer – an option that is rarely cheap in peak season.

The saving grace for holiday home investors is that most dwellings were fully or substantially booked out months in advance, given the strong competition to secure a holiday home in the peak summer months, so it has been the tenants rather than the owners who have struggled with the heavy weather.

However, lifestyle property owners have not been completely insulated from the poor weather. According to Grant Matterson of L J Hooker on Sydney’s northern beaches, the weather has had a material impact on enquiries and sales volumes.

“As a local, I haven’t headed to the beach this summer too often because of the poor weather – in fact, I was glad to see summer finish as autumn has looked a lot better,” he says. “For many potential buyers of holiday homes the decision is an emotional one. Unfortunately, the poor summer was not drawing people to the area or to buying the beach accommodation either.”

For once, the weather on Melbourne’s Mornington and Bellarine Peninsulas – the city’s prime holiday locations – was better than on Sydney’s northern beaches. However, the holiday market was still muted. In particular, there were relatively few high-end or mid-tier properties sold this summer. The market was much stronger for modest and less expensive properties, such as two- and three-bedroom timber, fibre or brick veneer dwellings.

Weather aside, the divergence in the performance of top-end property versus the rest was consistent across Sydney and Melbourne. “Properties on the northern beaches priced up to around $1.2 million are still selling very readily,” says Matterson. “But for properties over $1.5 million and especially over $2 million, prices have come back and these properties are sitting on the market longer. In fact, the 'days on market’ statistic has blown out. It gives the impression that there are more top end properties for sale than there actually is.”

From a supply perspective, there is evidence of a number of 'forced’ sellers across all types of holiday homes and locations. “Eight-to-10 years ago I didn’t hear of any of that around here,” says Matterson. “But there are definitely people now who have to sell because the bank is knocking on the door. It’s been happening for a couple of years, but with the onset of the second GFC – the one affecting Greece and Italy – it is on the rise.”

I am hearing similar reports for the Melbourne holiday home market. The fragility of the holiday home market is a function of its discretionary nature. No one needs a second home or must lease one for two weeks a year. When times are tough, holiday homes are first to be off-loaded. And it is many professionals in our contracting financial sector who have had to sell their 'weekender.’”

However, property markets in places like Sydney’s northern beaches or Melbourne’s Mornington Peninsula are by no means in dire straits. Generally, run-of-the-mill holiday homes within about 1.5 hours’ drive of our major cities are holding their recent value, although most are sitting below the high watermarks for values that were reached in the early 2000s in Sydney or mid 2000s in Melbourne.

Indeed, the changing way we are using holiday homes is supportive of these more commutable properties. In the past, when the road system was less extensive, owners might only use their properties a few times a year. Now there is a trend for many owners to visit more often.

Further, the long-term structural demand for holiday rentals has grown. As we become increasingly affluent as a nation, we treat ourselves to more escapes from the city. There are more golf weekends, family retreats, bachelor party and bridal shower getaways. This trend has helped owners to increase occupancy rates in off-peak periods. Although the strong Australian dollar and the related growth in foreign trips for our main annual holiday is damaging the major local holiday resort areas, such as the Gold Coast, it is less of a factor when it comes to short-stay regional locations, be they beach or bush.

Does all this make it a good time to buy a holiday home? I doubt that investors should expect steep prices rises. Matterson adds: “It’s hard to see the days of 2003 returning, when the market was running out of control. Now prices will creep up a little bit slower and it should keep going that way as long as the economy keeps going along. You should always buy for the long-term.” I agree.

“Some are buying early for their retirement,” says Matterson. “They’re buying and renting the property out with a view to moving into it when they retire.”

In our experience, those who buy holiday homes purely for lifestyle reasons generally fare better than those whose primary aim is to make money. Capital growth can be very lumpy – slow for several years, and then a spurt in value for a couple of years – and overall, long-term capital growth invariably lags what one can achieve in cities. There is also the uncertain and volatile income stream associated with short-term leases, plus the high maintenance and management costs one incurs with a high turnover of tenants.

So for peace of mind, don’t buy a holiday home if you are depending on earning a financial return on your expenditure – it’s too speculative. You may end up with an asset that on one hand isn’t exactly meeting your lifestyle dream, but doesn’t deliver the financial objective either. Always apply the purpose test: decide which is more important, lifestyle or investment, and act accordingly.

Property Q&A

This week:

• Buying a third apartment in Melbourne.
• Is rent money dead money?
• Disappointing bank valuations.
• The outlook for Geelong property.

Melbourne apartments

We have around $600-700,000 to invest. We already have two fairly new apartments that we rent out in Melbourne’s Elsternwick and St Kilda, valued at about $500,000 and $800,000. We aren't sure whether we should buy another brand new 'Bayside' apartment off the plan in, say, Elwood, so that we save stamp duty or whether we should buy an older 60s or 70s-style apartment, which won't be 'outdated' before long. Or should we perhaps look in inner northern Melbourne suburbs to diversify? What would you recommend?

From your question, I think you have a pretty good idea of what my answer will be! No, please do not buy any more 'new’ properties. Indeed, before you make any more investments, I suggest you undertake a thorough portfolio review to see if these current properties have performed well since you bought them, and consider their ongoing merits as investments.

Assuming your portfolio review gives the current properties a green light and you hold on to them, I suggest you look outside the Bayside area for your next investment. As well as considering inner northern suburbs, you might also consider eastern suburbs such as South Yarra, Armadale, Hawthorn or Kew. This budget may allow you to buy a two-bedroom Victorian cottage in the inner north; or a quality two-bedroom apartment in an established (Art Deco through to 1970s) block containing no more than 20 apartments and, of course, with allocated parking in Melbourne’s eastern suburbs.

Renting

Is rent money dead money?

It’s an expression bandied about a lot, especially by those interested parties trying to encourage renters to buy. But the expression is somewhat misleading and a little insulting. There are plenty of people who rent by choice and it is often a very sensible financial and lifestyle decision.

Saying rent money is dead money infers that paying rent is a waste, while paying a mortgage always leads to great wealth. Well, in the first instance, in return for rent, a tenant obtains a service – accommodation. Secondly, when paying a mortgage, the repayments are usually higher than the rents for equivalent property. In essence, the home buyer has to shell out more of their disposable income in order to own the asset. And if you buy a home in an area where capital growth is consistently poor, you will waste a lot of money on interest payments.

There are many renters who decide not to buy a home, but use the spare income to invest in other financial assets, including investment property. These renter-property investors often have superior buying power over home buyers, due to the combination of earning a rent on their investment property and receiving a negative gearing tax break if their net income holding costs are negative.

Low valuations

What can you do if a bank valuation is completed and the value is a lot lower than the one you expected?

Aware that they missed a bullet during the GFC, banks are being much more conservative with their valuations, which is often leading to them providing valuation numbers that are lower than the market price one would expect if the property was sold today by a willing but not anxious vendor.

If this lower bank valuation affects the amount of money you can borrow on an existing property, you might decide that this enforced conservatism is no bad thing.

But if you wish to challenge the valuation, ask the bank to justify it. What comparisons have they used? You’ll want to have done your own comparisons to back up your belief that the valuation should be higher. Alternatively, you can obtain your own professional valuation as a point of comparison, with the increased authority this brings. This process may see the bank increase their valuation.

Geelong

What is the outlook for Geelong property? I’m thinking of investing there.

Geelong is a city in the midst of a steady revival. It has benefitted from improved road and rail links with Melbourne and the current upgrading of Avalon airport will also help. The waterfront area has been developed and the town has a renewed cultural vibe. Geelong is also a retail and entertainment destination for the rapidly growing suburbs to Melbourne’s west. Job opportunities have also been improved by the relocation of some large employers from Melbourne, including the Transport Accident Commission. No doubt the city’s image and profile have also been helped by the local team winning three AFL Grand Finals in recent years!

Consequently, price growth in Geelong has performed quite well over the last decade, at around 8-10% per annum. Prices still remain relatively affordable compared to a major capital city. As such, it is an option for investors with a budget of, say, $300,000. They do tend to sacrifice some potential capital growth by this approach, a factor which can be ameliorated if they look to pay down the debt quickly and use the acquired equity to then buy into a capital city market.

I expect Geelong to maintain its current economic trend, although a possible question mark is the future of its Ford motor car plant, especially since it is an iconic employer and brand. But all things being equal, your strategy has merit. Be sure to buy close-in to the Geelong CBD, avoid busy roads and off-street car parking would be a plus.

Monique Sasson Wakelin is a director of Wakelin Property Advisory, an independent firm specialising in acquiring residential property for investors. Monique can be found on Twitter: @WakelinProperty.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Monique? Send an email to monique@eurekareport.com.au