If you have 2 properties side-by-side with identical blocks of land, but the dwelling on one property is new and the other is old, the old will have better capital growth. It’s a mathematical certainty – all other things being equal.
Investors have been duped by developers and those pushing new. Historical data, maths & logic confirm that old properties outperform new ones. This is convincingly proven in topic #3 from the Expert Busting series.
Before you go claiming the “benefits” of depreciation. higher rent, lower maintenance or stamp duty savings, check out the full article in the on the Select Residential Property website. None of those things come anywhere close to making amends for the inferior growth.
An extract from the article…JaxonParticipant@jaxonaJoin Date: 2014Post Count: 284
Hi Jaxon, we could have two differently priced properties and compare their growth rates as opposed to the dollar difference.
The point is that the rate of growth is dependent on the appreciation rate of the land and the depreciation rate of the dwelling.
Here’s a cool chart that only takes a few minutes to get the gist, but took me literally months to acquire the data, import into the database and perform calculations…
New property has lower growth rates than old property in general. And it’s due to the typically lower land-to-asset ratio newer properties have.mnapierParticipant@mnapierJoin Date: 2021Post Count: 0
Perhaps it’s just an agree to disagree situation but I find lots of things in your article to be factually misrepresented. I’ll give my opinion on just a few:
Old is better than new
The opening quote “It is mathematically impossible for new property to outperform old property” A bold and frankly incorrect statement. There are way too many markets, many markets within markets, way too many properties, and way too many scenarios in which you haven’t crunched the numbers to make such a statement like that. It’s just not true. It almost feels like you know this because you later have to elaborate by saying “im not saying that a new property in a hot market can’t outperform an old property in a cold market..” which is just one disproving example of your statement. Another one is that the old property could just be in a less liveable state than the new one and as a result would need either significant renovation or just needs to be turned into a new property in order to perform as well as a new property! Either way, for the sole fact that there are cases where a new property CAN outperform established property, it means that your statement is just wrong. It’s just better to tell people what to watch out for. Because like new properties, there are things to watch out for when buying established.
“The higher the depreciation, the worse an investment it is”
That sounds ridiculous. What happens when an old property gets too old? Either a knockdown/rebuild or a renovation right? What’s the next logical step after that if you know what you’re doing? To get a brand spanking new depreciation schedule! Did you just all of a sudden turn that great investment into a TERRIBLE investment because of all the new depreciation? Of course you didn’t! You ask, albeit rhetorically, “how on earth can depreciation be considered a benefit”? There’s an obvious answer! Depreciation can be considered a benefit because you can claim it on your tax! Why else would you believe that every investor “should claim depreciation if they can”. You probably believe that because it is more BENEFICIAL to have a depreciation schedule than it is to not right? Depreciation shouldn’t be a thing that’s looked at as you being “worse off” by being able to claim some money back. I get that you might be a glass half empty kinda guy but are you really worse off if you were thirsty and had half a glass of water available to drink? Better than just being thirsty with no water to drink at all! So yes, you are absolutely better off being able to claim some money back on an inevitable depreciating asset than it is to not being able to claim anything back at all. That’s a benefit!
“Supply is a kick in the groin for growth”
That couldn’t be further from the truth. Supply is absolutely necessary for growth! And it’s just a biased argument to say “new properties represent supply and supply is our enemy” That’s just a really narrow minded outlook on economics in general. You can’t have demand without supply. The balance is crucial, and it’s crucial enough to be considered irresponsible by saying “supply bad”. No! Supply is a necessary requirement. It’s all about the BALANCE. Of course we want scarcity, of course we don’t want OVERsupply. But that’s a debate about balance, not “supply bad, demand good”. There are huge nuances that you are just bulldozing over here. Is that just comfort bias or agenda?
I hope the tone doesn’t come off as too harsh. I’m known to be a little rough around the edges. I appreciate your contribution to the community, but I would suggest that if you are here to inform, maybe a better approach is to instil knowledge about a particular door and what may be behind it, and what could happen if someone choses to open it, rather than telling someone to not open the door altogether. Cheers!
I get a lot of strong opposition on this topic. Mostly from those who derive revenue from selling new. No apology necessary.
The statement about it being mathematically impossible to outperform is on the assumption that all other things are equal. This wasn’t clear early on in the article. So, I take that criticism on the chin.
The full article goes on to compare 2 properties that are identical in every way except one is new and the other is old. In this case it is impossible for the new to beat the old – mathematically.
Yes, eventually the old property will have to be knocked down and rebuilt. The article covers this case. One plus of this scenario is that the profit is the owner’s not the developers. And yes, as soon as the new property is built, the rate of growth as a proportion of the property’s new value will decrease. And it’s because of depreciation. Buildings depreciate and land appreciates. If more of an investor’s money goes into the depreciable part of the asset (e.g. by capital injection), the performance overall is reduced until the depreciation of that capital injection washes out.
So, although it sounds bizarre, the same property will suddenly start to under-perform in capital growth immediately following a knock-down-rebuild. And the reason is depreciation of the capital injection.
There is nothing beneficial about depreciation for those pursuing appreciation. Many make the mistake of assuming depreciation is simply a tax write-off. But depreciation is a real thing. An investor’s dwelling ages and therefore loses value.
Yes, you should claim depreciation, but you shouldn’t go hunting for properties with higher rates of it. Since every bit of depreciation opposes appreciation.
If you can claim $10k in depreciation for a financial year and you’re paying 40c in the dollar tax, you’ll pay $4k less tax. But this is not a benefit. The investor is not “better off” by $4k. They are actually worse off by $6k compared to not having any depreciation at all – i.e. their dwelling barely aged.
Older properties do not depreciate as significantly as newer ones and therefore have better appreciation. The chart clearly shows the relationship between age and growth.
The law of supply & demand is about 400 years old and is a fundamental of price change. To see maximum growth in the price of anything, there needs to be minimum supply and maximum demand. I suspect you’re not arguing against that. But whether new property represents supply. I do, but even if it isn’t called “supply” whatever it is called, there is a relationship between lower growth and whatever it’s called as the historical data indicates.
Something that would lend more credit to your arguments would be some supporting data. It took me months to acquire the data, analyse it and write up the report…
The purpose of the series was to “show up” opinions with a stack of evidence. Opinions are plentiful and cheap. Perhaps you’re examining a different data set to me. What are your sources?