Listener questions – Why has my dwelling value increased when it’s depreciating? Pros/cons of trusts. Media impact on property (Ep.142)

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In this week’s episode, Dave, Cate and Pete take you through:

  1. Why has my dwelling gone up in value when the building is a depreciating asset? The trio sink their teeth into this interesting case study posed by one of our listeners who purchased a house and land package in 2020 and was surprised to find that the value of his dwelling had increased in value since then. How is that possible when the land is the appreciating asset and the dwelling is depreciating? Have we been wrong all this time? 
  2. When should you purchase property in a trust? Trusts can be confusing and complex structures to set up and you may get conflicting advice from various professionals on the matter. So, what should you do? The trio discuss the pros and cons of purchasing property within a trust and how to source the advice you receive from your lawyers, accountants and financial planners. Don’t forget to check out our show notes for some more educational material on trusts and property ownership.  
  3. The impact of the media on the property market. One of our listeners was keen to open a can of worms and asked the trio “do you think the media is culpable in how they report these days because they impact sentiment, and do you see it as an opportunity to invest because you know your fundamentals and are happy to take advantage of a jittery market?” The trio talk through this ripper of a question and how to vet the media noise that we are bombarded with daily. 


Show notes

  • House and Land question from our listener – I purchased a home and land package in Fraser Rise 3336.  
    • $358,000 for the land.  
    • $215,000 for the house.  
    • Total $573,000 
    • Valuation 10 month later has land at $420,000 
    • House at $330,000.  
    • Total $750,000 
  • Question: if the house is a depreciating asset, how has it increased over $100,000 in value? 
  • Risks of buying new property 
    • Depreciation factor 
    • Usually low land to asset ratio – one thing to note here is that this property actually has a high land to asset ratio. It’s above 60%, which is quite rare for medium to high density apartments, which is what we’re referring to. But it can be unusual as well when people over capitalise on the outer suburbs and build the McMansion.  
  • Cost of materials and labour has skyrocketed since he purchased.  
  • To build the same dwelling today would be much more expensive, and the valuer has factored that into their valuation.  
  • The capital growth is give or take in line with what Melbourne has done. It’s lower than regional Victoria has done over the same period and probably a bit lower than what broadly Australia has done. It hasn’t outperformed, but it has kept pace with the market over that period.  
  • He purchased quite a large block, so it’s a more unique block in amongst the group. You can have stand out unique apartments, maybe in more of a beautiful building, views that will never be blocked out. It isn’t carte blanche, every new property will underperform.  
  • But I still think if you revisit it in 5-7 years time, when there are more new properties built in the area, it will nevertheless have the higher land to asset ratio and the fact it is a bigger plot of land will be going for it. 
  • He’s managed to buy an idyllic block, which is clever and will bode well going forward. House cost in total was $235,000 – this is a figure that is quite low. Done really well on negotiations and building contract.  
  • If we separate the building and the land – annualised growth rate of 8% for the land. In one of the most rapidly moving markets, the land has underperformed. But Melbourne did 15%. There could have been a more optimal location for capital growth.  
  • What has worked really well, is that he’s had an appreciation on dwelling value, delivered by global pandemic and supply shortages. He’s taken on a property with smaller deposits than normal, purchased for $600,000 and now worth $750,000 and has equity.  
  • People go into house and land often because of affordability and deposit constraints. 
  • We looked at established older houses with land sizes that could subdivide in northern Melbourne suburbs, however we could not afford much without $25,000 home builder, $10,000 home owner & $10,000 from Defence. 
  • He’s chosen to take advantage of that, but he’s constricted in what he can look for, only house and land. As the market moves on and these things are only available for brand new things, the second hand ones are less glossy. 
  • Out of the whole suburb of Fraser Rise, there’s only a small amount which has been developed. So, over the next 10 years, there will be much more development. A lot of the growth has happened because nationally the growth has gone up, but when things calm down, that will not happen.  
  • Positives 
    • Location to schools, daycare, parks – from a neighbourhood perspective, it has some great positives.  
    • Proximity to central shopping district 
    • Good size yard 
    • Ease of access to regional VIC, where family lives. 1h, 20m to Bendigo. 
    • You can spring board into something else – as a rental property, the rental prospects are really good. If he prices it right and has a good property manager, it won’t be too negatively geared.  
  • Purchasing property in a trust 
  • My mums getting very close to buying a house and is getting confused with the lawyer talk about trusts and she has an account saying no to the trust and someone else saying yes to it. 
  • Just after one to help her get a bit more understanding of the terms they use and how it all works a bit in general to help her ask better questions to the accountant 
  • Go to the source and ask why they’re recommending a trust for you. People spend heaps of money on trusts, only to have multiple tax returns to be done.  
  • Limitations of a trust 
    • If there’s no other income going into the trust, you can’t claim negative gearing benefits via the trust – you’re just carrying forward losses. This is generally speaking why mums and dads should not set up trusts.  
    • If you have a business or some sort of entity that is earning income that can funnel into the trust, then that’s a different story.  
  • A lawyer might say that a trust is a good thing, because it protects the asset. If someone sues you, they can’t access the property that is owned in the trust.  
  • The ability to distribute profits or income – once the kids turn 18, it could be distributed to the kids.  
  • Speak to the lawyer and get the dotpoints in writing, speak to the accountant and get the dotpoints in writing.  
  • The media and the property market 
  • “The impact of the media on the property market”.  
  • The current click bait boom or bust headline media culture can lead many people to believe the market is heading for a crash this year, current hobby horse is interest rate rises despite buffers and historically low levels.  
  • Personally as more of a contrarian investor I see it as opportunity for savvy investors to purchase against the media doom sentient.  
  • Sentiment does though play a big part of people choosing to invest in Australia.  
  • Do you think the media is culpable in how they report these days because they impact sentiment or do you see it as an opportunity to invest because you know your fundamentals? 
  • Media is about short-termism, clickbait. You can have the same journalist write articles about how the market is booming and then going to bust. Now we have access to more information than ever before. Once the market has turned – either upward or retracting – I think the movement of consumers following is faster and bigger and that is what we’ll continue to see.  
  • Even when the market is going backwards, for example in Melbourne and Sydney leading into the last election, they actually proved the best times to buy. If you purchased within a month of any of the major falls, your average return over the next 12 months would be significant.  
  • Don’t base major decisions off one article, you need to be reading lots, understand where the data is coming from and who is providing the messaging. The most important economy to make property decisions off, is your own economy.  
  • 60 minutes peddled out some tripe and within a day our enquiry dropped and dried up. It goes to show how strong something like that can be and how it impacts sentiment. The impact of covid hitting the proeprty market in my world, was far less and far shorter than pre-election downturn.  
  • The point I’m trying to make is be aware of what’s going on at the coal face and look broadly at the statistics and understand the drivers of market downturns. If you listen to the media, you’ll probably never buy.  
  • Focus on the experts that are interviewed – if they are bank experts economists or CoreLogic, take note of what they are saying. But then do your own research. 
  • The ABC remains the most trusted (70%) with SBS close behind on 69% and the Daily Telegraph continues to be the least trusted news brand among the 15 titles. 
  • The Australian Financial Review, included for the first time in this survey, is the most trusted national newspaper, ahead of The Australian. 

Gold Nuggets

David Johnston – The Property Planner’s Golden nugget: If you can access $45,000 of grants and it makes up 10% of the property value, get a unique block, well beneath median price point of the city, there are some good reasons to consider something like that to get into the market and move onto the better quality asset as soon as you can.

Cate Bakos – The Property Buyer’s Golden nugget: My gold nugget is about the house and land package question. We can pick the flaws in a house and land package approach, but when you are restricted on your deposit and rely on government grants, I think it pays to have a good think about the pros and cons of your strategy. Sometimes getting into the property market is a better option than sitting on your hands while you save for a deposit and other times you want to think about how you can get a bigger deposit or tap into LMI.

Market Updates

  1. The power of compound growth. Dave highlights why time in the market is such a key to success. It seems crazy that it took NSW almost 100 years (from 1916 to 2014) to reach a total value of $1 trillion and only 7 years (from 2014 to 2021)  to then reach $2 trillion. But if you look at the numbers, the compound growth has actually remained fairly consistent.   
  2. Why you should be prepared to put your hand up at auction. Cate takes you through the current sentiment at the coal face which is causing many nervous buyers to avoid bidding for a property they really want and subsequently missing out. Many properties that have been passed in have been sold within minutes, so make sure you throw your hat in the ring to get first dibs on negotiating with the vendor.

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