If we ever needed proof of a disconnect between the cost of building apartments and the prices at which they’re sold, it came a couple of years ago when a prestige new development in central Sydney started selling off the plan.
From the moment they opened for business they were swamped. One investor even bought a whole floor.
Quickly, the developers closed the door and set to work, adding tens, sometimes hundreds of thousands of dollars to the prices of the units. A couple of hours later they reopened and it still sold out.
So you can see why the Reserve Bank this week started getting antsy about speculative investors driving up the costs of homes.
When interest rates hover around five percent and property prices in Sydney have gone up 16 percent in the last year and 12 percent in Melbourne, the prospect of “buying” a unit, renting it out, then flipping it a few years later is very attractive
Add in the tax breaks on the difference between what you get in rent and what you pay in interest and running costs, plus the depreciation on new units, and it’s free money for those who have the financial heft to get the loan in the first place.
Now, the RBA hasn’t actually done anything to curb interest-only loans – it has just grumbled about them. But if they do act, you have to wonder how effective restrictions would be.
Yes, speculative investors have added to the overheating of the market – especially since resident owners don’t get negative gearing tax advantages. But putting the screws on interest-only loans will only take the pot off the boil.
Prices will still be simmering unless that recent forecast of a glut of new units and a five percent drop in values in the next three years comes to pass.
Meanwhile, the smart money is still to buy what you can afford but rent somewhere better. That way you get the best of both worlds. If there’s cream around, there’s no reason it should all go to the fat cats.