Have you ever wondered why a particular property type seems to do fantastically well, while another type does not... even in the same location? Last week we discussed the Unit Oversupply issue in Macro terms, and how this would affect certain markets around the country. But what I wanted to discuss this week in much more detail is how this seemingly strange phenomena will directly affect thousands of Mum & Dad investors, and what some of the real scenarios might be when this "Unit Trap" takes hold of unsuspecting victims.
Now, what exactly is "The Unit Trap" you ask? Well let me paint you a picture...
Meet investor Joe. Joe is your average Mum & Dad investor; works hard for his money and is a good family man. Joe desperately wants to get some security for his family's future, so he's looking to get his hands on a property or two so that his money can go to work for him, not the other way around.
In his search for the perfect property, Joe comes across a brand-spanking new unit development in the heart of the CBD... and believe me, it's gorgeous. The brochure is glossy and sleek and it has all the ammenities; Swimming pool, a gym, a roof top terrace, all the trimmings.
And the best thing for Joe (or so he thinks) is that he just has to put down an initial deposit, but doesn't have to settle for another 18 months. Joe is now going to bed dreaming about all the capital growth that his off-the-plan, CBD unit will receive in that time now that he has locked in the price
Joe is excited. He forks out his deposit and buys that 2 bedroom unit overlooking the pool for $650,000. But here's what wasn't in that sexy marketing brochure.
Joe's high rise unit development wasn't the only one going up in the area. Council has hastily green lite at least 10 other inner city developments within 5km radius of Joe's project. They all begin construction and completion at the same time.
This is bad news for Joe, because in the blink of an eye this will create a massive over supply of units in the area. And when that over supply kicks in, it will force the price of 2 bedroom units in that area down by at least 20% or 30%. So, when it comes time for Joe to settle, the bank will fairly value his property at only $520,000, putting him in a very, very difficult position.
And by the way, Joe's deposit was obviously non refundable, whether he has the ability to settle or not.
This is exactly what we are seeing happen in the Brisbane Unit Market right now. With Brisbane council already approving huge developments of 500+ units or more, we're seeing vacancy rates already starting to skyrocket in the Brisbane CBD.
And it isn't just me saying this, just in case you were wondering... a little institution called the RBA agrees with me:
The Reserve Bank of Australia, specifically highlighting the unit markets of inner city Melbourne and Brisbane as potentially risky investments, made the below statement;
In 25 years of property investing I have never heard the RBA warn investors about a specific market. For the Melbourne and Brisbane unit market, I believe the writing is on the wall.
Please note: this is all specific only to the unit markets in these inner city regions, not regular house and land properties.
Our research team and I are looking deep into the unit approvals for the coming years, we can see very clearly the tidal wave of units about to hit the Brisbane unit market, set to wash away any potential capital growth.
Brisbane and South East Queensland still have some fantastic opportunities that I'm really excited about... but it's all about choosing the right surf board to ride that wave, and those unit markets just aren't it!