Don’t be lured by property investment incentives

I’m sure you know that you make your money when you buy your property.

If that’s the case, why are so many investors lured by property developers’ incentives into over paying?

Sam Tamblyn, managing director of valuation firm Urban Property Australia, warned that buyers are overpaying as they are being lured by developer discounts.

Other industry sources urged developers to end discounts and giveaways for new home purchases because the incentives are distorting the market and making it tougher for first home buyers to get financing.

How big are the incentives?

The call comes as research shows the typical block of land now includes nearly $13,000 worth of developer incentives, pushing the median price below $200,000 for the first time since the first home grant-fuelled boom of 2010.

But some industry players warn that what began as a temporary measure to boost demand during the property slump is causing a growing number of buyers problems as valuations fail to stack up.

Developers urged to end discounts.

‘’The rebating has caused an enormous amount of confusion for buyers and valuers about what the purchase price of the land is exactly — does it include or exclude the rebate?’’ said Tamblyn.

“Valuers are taking it to be the net price [without the rebate]. That’s causing problems for purchasers with their loan-to-value ratios and deals are falling over.’’

With financial institutions reportedly reluctant to lend on the face value of the contracts, first home buyers are being forced to provide additional equity to cover the discount.

Those who can’t make up the difference are defaulting on the contracts. [adrotate group=”15"]

‘’This is a big issue for the industry and everybody is under pressure to make it work,’’ said Paul Wheate, director of valuation for Colliers International.

In an article in the Age Australand general manager Rob Pradolin said incentives had become so pervasive it was time developers recognised that prices had effectively come down and adjusted accordingly.

‘’I’m calling on the industry to recognise where prices are, set them at that level without incentives and start selling value again,’’ he said.

‘’It means customers will pay less stamp duty — making it even more affordable — and there’ll be no surprises when buyers go to the bank.’’

The incentives, which include cash rebates, cars, landscaping and furniture worth upwards of $20,000, were introduced in a bid to prop up the new homes market after the boosted first home owners grant was withdrawn and affordability worsened because of skyrocketing land prices in 2010.

But other industry players say removing the discounts is problematic because they can provide a valuable short-term boost to demand, competitors can use them as a point of difference in marketing campaigns, and consumers have come to expect them.

My thoughts:

If you’ve been reading my property investment blogs you know I’ve always suggested avoiding buying new developer stock or off the plan apartments.

The prices are inflated by developers margins, marketing costs, significant project marketing fees to agents and project marketers and developers incentives.

In essence you’re giving away the first few years capital growth.

Obviously you’re paying too much when you buy this type of property and this includes paying more stamp duty and more in mortgage costs over the life of your loan (as you need to borrow more)

In my mind you’re better off buying below intrinsic value when you buy an established property.

Originally published at Property Update -.