A Greener House - The Sustainable Property Investor's Guide to Buying, Building and Renovating

Chapter 1

Understanding value

Most people are interested in what their home is worth, and the topic of making money via residential housing is a popular one to discuss. As opposed to other forms of investment (for example, shares or term deposits), housing provides the rare opportunity of also living in your investment. It also gives you some control over how much you can sell for, with any improvement that you make often being reflected in a higher sale price. Property gives you a high degree of control over your destiny.

There are other reasons for the hype about property value. Housing in some form or another affects everyone every day of their lives. Most people sleep somewhere for around eight hours every night, which requires the use of a safe and sheltered location for a preferably uninterrupted period. Think for a moment about how much time you spend inside your home — although it varies from person to person, usually most of your life is spent inside your dwelling. And like most things in life, there is a cost attached to having this level of access and exclusivity.

Depending on your current situation, you will have a particular level of interest in your home. A property’s value can be viewed from the perspective of:

• a homeowner who has a long-term mortgage and wants to feel like they are ‘getting ahead’ financially. This is often achieved when the value of their home rises and their loan value decreases.
• a renter or tenant who is hoping to eventually leave the rental market and buy a home, and therefore needs to keep abreast of the current cost of housing in order to save a sufficient deposit.
• a homeowner who owns their property outright and may be looking to relocate.
• a family that has reduced in size because the children have grown up and left home — the parents now have an ‘empty nest’ and would like to downsize.
• a younger family that may expand in size in future and therefore need to ‘upsize’ their property to a larger home with extra bedrooms.

Clearly, each of the households briefly described above has a vested interest in the future value of their current home. They need to know what it is worth and how to increase its value. People rarely stay in their home forever — eventually most properties are sold and the asset is converted into a cash amount.

It is obvious then that this fascination with real-estate values is linked to the sale or transfer of property over both the short term and the long term. Every household is on a different part of a life cycle with varying degrees of urgency in regards to house-selling — some would like to sell tomorrow while others are looking towards selling in a few years time. And of course, everyone would rather sell their property for more rather than less, if given the choice.

Another of the main attractions of property is the ability to decrease how much tax you pay. In order to provide an incentive for households to buy their own home (and therefore not rent when entering retirement), homeownership is promoted by the government as a low-tax environment. Under normal circumstances, your principal place of residence (PPR) is 100 per cent exempt from capital gains tax (CGT), so you don’t have to pay tax on any profit you make after selling the property. This is different to what happens if you buy and sell shares, where tax must be paid on any profit you make when they are sold (after deducting costs). In some regions there are other concessions for residential property, such as lower stamp duty (payable on purchase) if you are an owner-occupier, and the possibility of receiving money through the government’s First Home Owner Grant (FHOG).

Another attraction of residential property is that the family home, which is most often in the form of a detached house, townhouse or unit, has a flexible level of tenure (use). This advantage allows its use to be easily converted from owner-occupier use to a rental property, or vice versa.

Other people are interested in housing values because they would like to increase their investment in their home as an indirect form of superannuation, or because they want to provide a secure, safe and happy environment for their household to grow up in. Many people aren’t out for the money all the time — they just want to feel like they are ‘getting ahead’ and living a comfortable lifestyle.

The value of your home is affected by a practically endless list of factors; sustainability is just one of the variables. Before trying to understand the relationship between sustainability and housing values, we need to have a better understanding of some of the theories that affect property. Housing can be thought of as a good that is traded between buyers and sellers, just like any other good or service. However, there are many special considerations that affect house prices.

While a detailed discussion of economic theory is beyond the scope of this book, a basic understanding of the economy can help you to grasp the complexities of the sustainable housing market. Remember, though, that property is subject, at times, to other influences, for example legal restrictions such as zoning and heritage controls.

Property value

It is important to understand what property value actually is and what it means to different people. The term ‘property value’ refers to how much a parcel of real estate (usually including an improvement such as a building or a house) is considered to be worth today if sold.

The concept of value is complex, and many people are confused with what it actually means. This is partly due to the many different types of value that exist in relation to property, including:

• for sale value. This can sometimes be negotiated lower depending on how firm the seller is on their asking price.
• special value. A type of value that is unique to someone and usually much higher than the normal value, for example the special value of a particular good such as a high-profile sustainable house. Also, ‘special value’ refers to the value of a parcel of land to an adjoining owner.
• insurance value. The amount of money required to restore property back to its original state in the event of destruction (for example, by fire), including clean-up costs.
• future value. How much something should be worth in the future (based on today’s present value currency), due to the combined effect of inflation and risk.

When discussing property markets with reference to value or money, there are three main areas for consideration: price, cost and value.

The focus of this book is on value (with relation to sustainability), but we need to distinguish between these three terms, which are often confused with each other. Let’s look at each term in further detail.

What is price?

‘Price’ refers to the sale or transaction price of a good, and implies an exchange. Remember that the ‘price’ of a good may or may not equal to its ‘worth’ in the open market — this is an important concept when thinking about a sustainable home. For example, if a household has purchased a good (for example, a house), the amount that it sold for (its ‘worth’ to that household) may or may not represent the price the majority of people would pay for it. Just because you paid a certain amount doesn’t mean it is worth that much to sell. Therefore a particular property may only relate to a certain purchaser and they may have special reasons for paying that price.

What is cost?

Before we can work out what your home is worth and how to improve its value, let’s look at what ‘cost’ means. The term ‘cost’ is often confused with price, although they have two different meanings.

The term ‘cost’ actually refers to the phase to which it is related, such as the new cost. When we are talking about residential property, this can be either:

• the actual construction costs; that is, the direct cost of labour and building materials, plus indirect costs such as taxes
• the overall development cost; that is, all the costs involved in creating a property (including purchasing the land), and bringing it into an efficient operating state.

Due to their actual cost, many new buildings do not proceed because they would cost too much to build in comparison to what they would be worth after they are finished. For example, if a new house and land cost $600 000 before construction but when completed was then worth $500000, it would not be economically viable. This is one of the reasons why most cities have vacant parcels of land or disused buildings — because the land owner has weighed up the ‘cost’ of a new building and found it does not add up to how much the open market would pay for the finished product. Note that there is a distinct gap between ‘cost’ and ‘worth’, which applies to a proposed renovation of a sustainable property as well as new construction. If you undertake a renovation it may cost more that you could sell the house for — therefore the renovation may not be a good idea over the long-term from a financial cost-benefit perspective.

Remember that at other times when the sums do add up (that is, the financial benefit exceeds the financial costs), the construction will commence and the land is no longer vacant. In these cases the cost of the completed building will have ‘added value’ to the original property, plus some profit if the developer (or homeowner) is seeking to...