The risks of flipping property for quick gains are increasing

Property buyers should be increasingly wary of the promises of fast gains from flipping real estate.

Flipping risks are high

As we approach the peak of each market cycle, in all asset classes, new markets entrants increasingly chase the allure of quick gains, and this property market cycle will be no different. But flipping property in a hot market in the expectation of fast returns can lead to regrettable decisions, especially as the costs of renovating, tradies, and building materials are currently high.

Flipping property in a hot market in the expectation of fast returns can lead to regrettable decisions.

The media headlines have reported such trends lately in the U.S. as speculators have turned to online apps and algorithms to help them flip properties quickly, hopeful of a quick profit, but shortcomings in the models and processes have seen many come unstuck.

We undoubtedly believe in a huge role for technology and algorithms in the acquisition of property. Indeed, we have built sophisticated models to determine where and what consumers should buy, including our powerful ‘Where to Buy’ report, and valuation tools to assist consumers in doing so. But still, real estate is a local asset, and buyers need to follow a systematic process when buying, ensuring they cover off all of the required due diligence.

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Transaction costs risk

The transaction costs involved in the buying and selling of real estate increase the risks of losses for those looking to flip properties. The average duration of property ownership has increased over recent years, yet still, 5 to 10 per cent of properties can be sold for a nominal loss, even in a hot market.

The available statistics show that such losses are often related to the purchase of new property which subsequently loses value, but also often relate to the resale of properties within a relatively short timeframe.

It’s fairly well recognised that due to transaction costs, such as stamp duty and real estate agent’s fees, buying and selling property in Australia too frequently can be a costly experience. Homeowners intuitively understand this, and the average holding period for houses has increased over recent years.

Recently due to low stock levels owners have feared being unable to execute a suitable move, and the average holding period for houses is now more than a decade across most parts of Australia.

Average length of house ownership in Australia
Figure 1 – Average length of house ownership

For units and apartments around the country, more commonly bought by younger buyers and investors, the average holding period has been typically somewhat shorter. Here too, however, the average tenure of ownership is longer than it once was, with the average holding period for units in the two most mature capital cities, Greater Sydney and Melbourne, now being close to a decade.

Average length of unit ownership in Australia
Figure 2 – Average length of unit ownership

While the mobility of the workforce is important for the economy, the longer duration of ownership has reduced risks for most owners. We simply caution that the costs of stamp duty, conveyancing, building surveys, and selling fees can increase the risks for those adopting a flipping strategy, especially in the current market conditions.

The long-term trend for housing prices in Australia has been consistently upwards, despite economic downturns.

A longer average holding period serves an important function for owners of established dwellings – and that is a reduced risk of capital loss upon resale. The long-term trend for housing prices in Australia has been consistently upwards, despite periodic recessions and economic downturns.

Favoured property types

Typically houses have performed better than units from a capital growth perspective, well-located land being the scarce commodity in Australian real estate. In particular, there is an ongoing undersupply of desirable houses in the middle-ring suburbs of some of our capital cities, while higher density units have tended to be supplied by the market more readily over the past decade.

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Attached dwellings with a high land-to-asset ratio in mature capital cities such as Sydney – typically more boutique developments in highly sought-after areas – have also tended to fare well over time.

Units in other parts of Australia, especially areas where there has been overbuilding, have lacked the same scarcity value, and on average have not performed as well.

Annual rates data show that where owners have retained property for 10 years or more the risk of loss on resale is dramatically reduced. Focus on properties with a scarcity value, a high land value content – detached houses where the budget permits for the location you’re interested in – and take a longer-term view.

Price deceleration increases flipping risks

The property market is expected to be strong in 2022, but there will be no repeat of the rapid price gains experienced across the country in 2021. There are more listings coming online now, but competition for A-grade properties remains fierce. See a list of our most affordable suburbs.

The property market is expected to be strong in 2022, but there will be no repeat of the rapid price gains experienced across the country in 2021.

Our national network of buyers agents have years of accumulated expertise in sourcing and negotiating the best deals, and these professional skills are perfectly complemented by our sophisticated market research tools. Even within suburbs and streets, there are nuances best interpreted by local market expertise, and in a rapidly moving market, an expert buyers agent offers invaluable insights.

The statistics show that a well-executed purchase at the right price with a properly carried out due diligence process, combined with a reasonable time horizon, will greatly reduce or eliminate the risk of capital loss.

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