High Rental Ratio To Purchase Price But No Capital Gain

SQM research. Apt Prices in Red/Yellow  Houses in Blue. Doncaster 3108    Click to enlarge

Apartments may seem an attractive purchase because of their higher rent yield to purchase price ratio but the short term gain is nullified by the absence of any long term capital gain. In the period since 2011, Doncaster asking prices have fallen by as much as $50K. This is one of the reasons why Australian lending authorities are revaluing off-the-plan dwellings, sold up to two years beforehand, well below the initial purchase price. As a result, ­purchasers are ­required to cover any shortfall ­between the sales price and what banks are willing to lend. Depending on the amount of money paid, their have been instances where purchasers have defaulted, walked away and forfeited their deposit. If the trend continues it will be financial trap for owner occupiers who will have

little chance of redeeming their original out lay if they wish to sell.. “like when you drive a new car out of the showroom” as one state politician so eloquently explained.

Magnolia Doncaster Hill
Click to enlarge

This is why most of off-plan units in Australia are now being sold to overseas buyers. One reason for this is that overseas buyers are only allowed to buy new or off the plan properties. Another reason is that these units are often priced way above current market prices, so investors who know whats happening with the local market will not be as interested.

Chinese investors have become big buyers of off-plan units in Australia. One reason for this is that they want to place some of their money outside of China and they regard Australia as having a stable economy. This means that their primary priority may not always be to make a good investment. Quite clearly, without overseas buyers, nearly all the off-plan projects, particularly those on Doncaster Hill, would not have proceeded.

A lot has been written about the huge flow of money coming out of China almost as if it’s people are desperate to place their money outside of their country. This is not ideal if they are buying apartments off the plan sight unseen and trusting some of the agents representing developers. There will be people who will take advantage of their desire to purchase Australian property by representing them as high quality housing when clearly they are not.

Since the local demand for apartments on Doncaster Hill disappeared after 2012, overseas developers have come to the rescue of its flagging strategy by purchasing all key development sites and are now building the high rise apartment towers and selling them through overseas agents.

The difficulty however will be when these overseas buyers want to sell they can only sell on the local market, which makes me think there will be a huge mismatch between stock coming on the market and purchaser demand down the line.


  1. Cannon says:

    By the time you deduct Council rates and Owners Corporation fees you will be lucky if you get a 3.5% net rental return.
    When you take into account an annual depreciation at of 5%, based on your graph, plus the legal costs when you purchase, it is hardly what you would call a wise investment.

  2. Sando says:

    Doncaster Hill may not turn out to be the safe haven that Chinese investors have chosen to place their money, if the current mismatch between the price paid for apartments through overseas intermediaries and the much lower prices they are fetching on the local market, continues. A safer option would be to invest in detached housing where prices are continuing to escalate.

  3. Geraldine S says:

    The rental yield on an apartments is higher than detached houses in Doncaster because they can be purchased for about a third of the cost. If you want to invest in renting an apartment it is best that you purchase an apartment in a low rise development where there are not too many apartments where your resale prospects will be much higher. The Body Corporate fees will be much less in a three storey apartment building because there are no lifts which are very costly to maintain.

  4. Boofagill says:

    Local investors are looking for capital growth, not just rental returns which is why they are not competing with the overseas buyers for apartments on Doncaster Hill. How can Doncaster Hill be a safe place for their money while apartments have such a high rate of depreciation. The first signs of discontent are already apparent with some apartment owners are not paying their Body Corporate fees. The bureaucrats and politicians don’t care because they won’t be around when things come to a head, just as long as they get the buildings up to collect the rate revenue. Fancy planning a Centre of this magnitude without proper public transport, except for buses.

  5. Bluefly says:

    Rather than buying an apartment, which is a dead end, my advice is to purchase a house with a certificate of title to a block of land that can be redeveloped. If you have limited resources you should consider buying a property with other members of your family or a couple you know well who can share the the mortgage payments. This method of purchasing is called tenants in common where each person has an equal share. If everybody agrees there is nothing to stop you from subdividing the land and creating two separate titles. I have seen this done in Doncaster where the existing house has been converted into two dwellings.

    1. Val Adami says:

      I agree! This is how our parents bought their first home in West Footscray back in the sixties by buying a property together with my aunts and uncles. The women grew all their own veggies in the the back yard, baked their own bread, kept hens for eggs and made all their own wine. Then they would all chip in to buy another. This was achieved when sufficient equity was established in one home they would then refinance the first mortgage for the down payment on another and so on. My advice to young couples is to do the the same thing and don’t get conned into buying an apartment otherwise you will never be able to buy a proper home to raise a family.

  6. Kip says:

    The vendor can still go after you if your lender has reneged. Banks are using the apartments that don’t measure up to the new standards, effective from March 17 this year, as an excuse to devalue your purchase. One government minister recently suggested that the Federal Investment Review Board (FIRB) change the rules concerning new apartments and enable overseas buyers to resell their apartments on the same overseas market where they purchased. A clear indication that the government is concerned at the diminishing local market and the lack of interest by lenders in financing these high rise apartments.

  7. Brighton Street says:

    Most of the heavy losses on apartments are occurring in the high rise towers not so much in the medium density developments.

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