Knock down rebuilds artificially increasing Median house price in Eastern Suburbs Melbourne and other places as well

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  spal on 27/07/2017 - 07:30

  You are correct, it was sold for 2.73 million.
  You are also correct that the seller didn't make 130%. After taking into account the building costs.

  Further, one need to factor in finance costs, selling costs, GST and income tax. On the other hand if the seller is a builder, their build costs would be substantially lower than estimates, plus they will get some GST benefits from margin scheme.

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  mskeggs on 27/07/2017 - 07:44

  Everyone has always renovated houses and taken the profit without factoring in the costs. Certainly as that happens to literally every property it is a bigger influence on price escalation than just rebuilds. The reality is who cares what profit somebody made or didn't make, the market ensures that comparable quality houses sell for comparable prices.
  Median prices show what the middle valued house is selling for, it is irrelevant how that house came to be on the market.

  Now if you are using this information to critique property as an investment class, sure, holding and renovation costs need to be considered, but so do capital gains tax implications which can be favourable with houses.

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  [Deactivated] on 27/07/2017 - 08:38

  -2

  Making a profit on flipping a knock-down-rebuild or reno is only a recent phenomenon (say past 15 years or so).

  In a normal market (not hyper-inflated), over capitalization (ie spending too much on construction) is a real problem. You'd have to wait several year for the median property price to rise to recoup your construction costs.

  • 

    Diji1 on 27/07/2017 - 10:35

    Making a profit on flipping a knock-down-rebuild or reno is only a recent phenomenon (say past 15 years or so).

    Incorrect. Reality TV showing house flipping is 15 years old.

    • 

      [Deactivated] on 27/07/2017 - 10:50

      What's your point?

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  ihbh on 27/07/2017 - 08:41

  Yes, you are correct. The net capital gain return on real estate is less than the gross return calculated as selling price at any point in time, divided by previous selling price (less 1). Leaving aside transaction costs and taxes, the net return is = selling price 1 - selling price 0 - capital contribution by owner.

  An extreme example - say you buy a block of land for $100k and build a house on it for an additional $100k, and sold it for $200k a year later; the records will show a gross capital gain return of 100%, but the net return is actually 0%. Same principle apples for renos, and knock downs and rebuilds.

  You can estimate the average gap between the gross and net return by looking at ABS figures over the long term for cap ex for housing divided by the value of housing stock.