Renovator’s delights in Sydney’s top end residential property market – beware of fool’s gold

A further 0.25% cut in the official cash rate this month and a rebound in US orders for durable goods failed to allay investor concerns about Europe’s continuing debt woes and the impact of the poorly understood carbon tax. As a result, the local share market moved into correction territory at the beginning of the month with investors diverting resources to perceived safe havens such as the US dollar and low yielding Australian Government bonds. If purchase volumes are any guide, so called ‘renovator’s delights’ over $900,000 in Sydney’s residential property market also fell into the safe haven category.

According to research by Curtis Associates, in this month alone, there were at least 22 such recorded purchases above $900,000 with the Local Government Area of Canada Bay accounting for half of those transactions. The most expensive purchase was of 22 Beresford Road, Rose Bay on 9 June 2012 for $2.21 million. On the north side, 78 Baroona Road, Northbridge stole the unrenovated mantle when it sold on 30 June 2012 for $1.65 million.

The thrust of this article is that perceptions of such properties as a safe haven, together with at least two other influences may this month have contributed to the creation of a perfect storm exposing some buyers to the risks of paying too much and thus, overcapitalizing in the short to medium term.

Leaving aside the hype generated by the final of The Block – itself a function of artificially high clearance rates generated by artificially low reserve prices – those influences were:

• media commentary leading to a perception amongst buyers that a low interest rate environment is here to stay and
• the widely publicized malaise in the construction industry leading to further perceptions that renovation costs:
  • are lower than in fact they are even in a depressed building market and
  • will be contained indefinitely as builders operate at a loss to keep staff and their sub contractors employed.

Having been elevated to the status of a national sport rivaled only by the Tour de France and Olympics, the first of those influences needs no further comment.

The second is in a different category and emerged in an article appearing in the 28 June 2012 edition of the Australian Financial Review entitled “Builders depressed by property blues” which discussed the collapse of three major construction companies in New South Wales this year; the fact that new housing starts in that State were at their lowest levels since the data series began in 1984 and noted that shares in building materials suppliers such as CSR were trading at 25 year lows.

The article also referred to remarks by Mr Peter Kennedy, the National President of the Master Builders Association that “[c]ontractors are pricing too low. They are desperate to keep the work going. It is one of the worst times I can see in my 40-odd years in the industry.”

Is the builders’ pain, the buyers’ gain?

The answer is ‘not necessarily’ with some buyers perhaps needing to be reminded that construction costs may still erode all gains on re-sale in the short to medium term as these case studies show:

• 11 Betts Avenue, Five Dock. In need of renovation, this property sold under the hammer on 23 June 2012 for $996,000; the purchaser perhaps being unaware that two doors along, the newly and well renovated 15 Betts Avenue, Five Dock with DA approval to extend further, had sold three weeks earlier for $1.275 million. Allowing $40,000 stamp duty on $996,000 with no allowance for holding costs and risk, this left the developer of 11 Betts Avenue a paltry $239,000 to break even tested against the value of its near neighbour in the same market
• 9 Milton Street, Ashfield is a well renovated home sitting on 340m². It sold on 2 June 2012 for $934,000. Exactly two weeks later, the renovator’s delight at nearby 42 Carlisle Street, Ashfield sold for $1.014 million. Whilst this property sits on 600m² it is difficult to justify the discrepancy in prices between these two properties on land content alone.

If the concerns raised in this article are real, one would expect a similar story to emerge next month in the east when the price which the unrenovated 58 Milroy Avenue, Kensington brings at its 7 July 2012 auction is tested against the $2.355 million fetched post auction on 5 June 2012 by the delightfully renovated 22 Virginia Street, Kensington. And in that comparison, the difference in land content between the two properties is a mere 5m².

Another to watch in this regard on the north side is the largely dilapidated but high set 43 Rosebery Avenue, Mosman which is expected to fetch more than $1.25 million at its scheduled 7 July 2012 auction.

As to how long aspirant buyers and developers of renovators’ delights might have before the window of opportunity to exploit the malaise in the construction industry closes, one perhaps need go no further than the remarks made by the award winning builder of numerous luxury homes in Sydney’s eastern suburbs, Elvis Mardini who, in the 7 June 2012 edition of The Australian cautioned: ”[underquoting by builders] is a strategy that ultimately will prove unsustainable”. With at least three major constructions comapanies having already collapsed and more rumoured to follow, he is no doubt right.