We analysed a random selection of 210 new houses that were sold in Auckland in 2007 and then ascertained the current value by looking at current QV valuations for each property. The average growth was 67%, nearly a third less than the average growth for the total market (which is mainly existing dwellings). In addition the maximum growth was 96% compared to some of our best-performing investments having grown by 163%.
So why do existing dwellings outperform new houses:
Buying a new house is a lot like buying a new car, you pay a significant premium for being that first owner, with everything crisp and unlived in. And in the first few years the property stands out from the rest. However, five years down the track the once fresh and brand new property starts to lose its glow as it starts to become like all the other existing homes meaning that the premium cannot be realised in resale or rent.
Most new housing is built in new subdivisions – often with 100s of sections available and with many houses having a similar floor plan. The law of supply and demand dictates that when the supply is plentiful, the price will adjust accordingly. In new housing areas, where there are 100s of sections and similar homes available, prices will be suppressed. Whereas most existing houses are unique in some way, therefore there is a more limited supply and higher demand and more growth.
New houses after 5-10 years are generally in the same condition as established homes in established suburbs. However often these new houses are in a new community which is still growing – the schools may not have been fully developed, or if they have, their reputation is yet to be proven, the sports clubs are generally limited and the shopping centres are still under construction. Therefore given that the homes are in similar condition people choose the suburb with reputable schools, clubs and shopping areas. There is less demand for properties five years old and over in newer suburbs and less price growth.
Typically, developers sell new homes to investors on the basis that they are lower maintenance. However, if you buy a reasonable 20-40 year old house and do all the necessary maintenance when you purchase, then the two main maintenance items you have over the next 20 years are paint and carpet. And whether it is a new home or an existing home these wear out at the same speed. In my experience, new homes being larger have higher maintenance costs compared to a refurbished existing home – even though the yield on the new property is not as high as the existing home.
Following is a comparison of two properties we built/bought in 2007/8 in Papatoetoe. These properties are in the same suburb, only 1km apart, both brick and tile with aluminium joinery. Not only was the existing house cheaper but it had 145% higher capital growth combined with the yield doubling after ten years compared to the new property.
In summary, we recommend thinking twice about buying brand new homes as investments as existing houses are not only considered to be more desirable based on the above points but also generally wiser investments.