Property flipping getting tougher as interest rates and building costs rise

Flipping property has been a solid investment strategy over the past 18 months, but a leading buyers agent warns there are now additional risks that could make the practice less profitable.

Co-founder of BuyersBuyers, Pete Wargent said on top of transaction costs, house flippers face higher interest rates and slowing market conditions.

“As interest rates rise, there is less certainty about the market outlook, and a renovator could find themselves selling into softer market conditions,” Mr Wargent said.

“The generic market capital gains may not be there to carry a project through to profitability.”

Mr Wargent said construction costs had also risen considerably in the past 12 months, denting investors’ profitability.

“Construction costs are presently very high, so there’s also a tangible risk for over-capitalisation if property market participants don’t budget carefully,” he said.

“Figures from the Australian Bureau of Statistics showed that the prices of timber and steel have rocketed about 50 per cent higher, while a range of other materials and services have seen the average cost of construction of a new home up by 20 per cent from last year.

“Obviously, projects need to be assessed on a case-by-case basis, but overlapping supply shocks have made access to construction materials at a reasonable cost less dependable, while in many areas of the country, there is a shortage of available tradies, which needs to be factored in as a contingency to any proposed renovation budget.”

Mr Wargent said construction and materials costs can hang on, so renovators and developers should assume elevated construction and trade costs could persist for some time, even if global supply chain issues are resolved this year.

“Geopolitical events are unpredictable, and supply chains may right themselves in time, but demand for materials and construction services remains relatively high for the time being, so there’s every reason to expect costs to remain high for some time,” he said.

BuyersBuyers Chief Executive Officer Doron Peleg said should property values fall, flippers could find themselves without a profit.

“In 2021, purchasing a property price for $600,000, adding $120,000 of value with a $60,000 renovation, and factoring in a property market increase by 20 per cent, could lead to a profitable sales price of $840,000,” Mr Peleg said.

“Even after accounting conservatively for 7 to 8 per cent transaction costs, there’s a still generous profit to made in such a deal in a brief period of time.

“However, you can also easily see how a reduction in market values of, say, 10 per cent could leave an investor undertaking a flipping project in a precarious or loss-making position, particularly if there were unforeseen cost overruns due to materials or trades shortages.”

Mr Wargent said market conditions were varied around the country and investors needed to be aware of the outlook.

“Sydney and Melbourne are the most expensive markets, where households may have larger mortgages, and rising fixed mortgage rates have already dampened sentiment,” he said.

“Some other markets such as Adelaide and a range of regional markets still have some solid momentum.”

“Renovator and flippers need to factor in the outlook for the local market they are operating in, to effectively manage project risks.”

Property investors need to keep a long-term perspective if they’re concerned about softening conditions according to Mr Wargent.

“If you aren’t confident about your ability to flip property, think longer term,” he said.

“There’s a looming undersupply of family-appropriate dwellings in the middle-ring suburbs of many of the capital cities, and there are plenty of prospects for growth in rents and property prices in these landlocked areas over the coming decade”.

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.