Real estate: Pam Walkley on the temptation to cash in
With home prices soaring in various hotspots, it can be tempting to cash in
Where is the best place to buy an investment property today – city, suburbs or regional?
If you own a house in one of the booming areas outside the major capitals – and have made a motza on it – you may be considering whether to hold or sell. In the lifestyle area of Byron Bay on the NSW far north coast, for example, house prices jumped 48% in 2020 to a median of $2.2 million.
Many of us have long dreamed of living outside the big cities, but how to get to work every day was a major stumbling block. But Covid-19 has shown it’s possible to work almost anywhere as long as you have a decent internet connection and are not required to be in the office too often.
Byron owners have enjoyed a 119% rise in median prices over five years. And while it’s probably been the hottest market outside the capital cities over the past couple of years, it’s not alone. Noosa Heads on Queensland’s Sunshine Coast has seen one-year prices rise by 12% to a median of $1.4 million with five-year growth of 76%. In Bulli, a pretty seaside town in the Illawarra region of NSW, one-year prices are up 17% to a median of $1.65 million and five-year growth is 64%. Geelong city, on Victoria’s Corio Bay, scored a 23% house price rise over the past 12 months to $885,000 and five-year growth of 49%.
So, if you’re a property owner sitting on a large capital gain, should you realise it? The answer depends on two major factors: first, whether you’re a homeowner or investor, and second, what life stage you’re at.
If you’re a homeowner, the good news is you won’t pay any capital gains tax on your windfall if you sell, whereas if you’re an investor you’re likely to have to give the tax office a chunk of your bounty. If you decide to sell the family home, where will you live? If you want to stay in the same area in the same standard of home, there would seem to be little point in selling and buying as you’d just be adding moving costs, including stamp duty. If you bought a Byron Bay median price property, for example, stamp duty alone would amount to $106,000.
Maybe you figure you can buy a rundown property in the same area to live in and renovate it to create value, but many people have the same idea, so these opportunities can be scarce. If you’re prepared to move to another area, then you need to look for suitable properties in places where prices have not shot up as much. Ballina, for example, is about 30km south of Byron Bay yet it’s seen slow house price growth over the past year – just 0.97% to a median $627,500. Five-year growth is a healthier 45.93%, so maybe it’s in for some catching-up. The area has recently benefited from extra flights into its airport and upgraded road infrastructure. Belmont, a southern suburb of Geelong, is another example: growth there has been lower than in Geelong city, 11.7% over one year and 54% over five years, and prices are more modest with the median sitting at $610,000.
Investors who sell need to have a plan to use the proceeds, either to reinvest in another property or something else, maybe even starting your own business.
If you’re an empty-nester, selling the big family home and finding something more convenient to live in could be appealing. Maybe you’d like to move to an inner-city pad, closer to the amenities you’re likely to need as you age, such as medical facilities. The May 2021 federal budget also made making downsizer contributions to super available earlier, from age 60 rather than 65. This enables individuals to make a contribution of up to $300,000 from selling a home they have lived in for more than 10 years.
If you’re raising a big family and need more space, you may be willing to take your windfall and use the proceeds to buy a bigger, but less well-located, home.
If you’re an investor, you need to also look at returns. Rental returns from booming areas are quite low – for example, the gross return in Byron Bay is 1.87%, in Noosa 2.6%, Geelong 2.53% and Bulli 2.87%.
Compare this with 48 ASX-listed companies with dividend yields of 5% or higher at the time of writing in mid-May, according to data from marketindex.com.au, indicating there are higher returns available from shares and managed funds.
If you’re an investor close to retirement you may decide owning an investment property is too much of a hassle. And if you think you may need to draw down capital to pay for your dream retirement, it’s far easier to sell some of your shares or funds than to sell part of an investment property.