Holiday Houses - Are They All They're Cracked Up To Be?
With Christmas break only weeks’ away, we’re soon approaching the Holiday House Silly Season. After a crescendo of work pressures all the way to Christmas Eve, it’s little wonder that holiday-ers who have headed to the coast for their annual R&R start romancing the idea of a holiday house.
The idea typically starts with aspiration and dreams of a weekly piece of heaven and before two glasses of wine are finished, the prospective buyer has convinced themselves that the notion is a good business idea.
As a Buyer’s Agent, I field Holiday House phone calls intermittently through January and February. The week after holidays finish are widely known in the travel industry as a peak holiday booking period. Travel search engines run hot at corporate office desks when reluctant workers have to return to work for the new year. Acclimatising to work again is difficult for many, and it is easy to be wistful about an easier lifestyle when the idea of a holiday house sits in the not-too-distant memory.
Not surprisingly, the peak selling season in our coastal areas such as the Surf Coast, Mornington Peninsula and Gippsland Lakes are over Summer (and specifically between Christmas and Easter). This is counter to the metro markets that almost shut down completely in January and really and exhibit peaks in Spring and Autumn.
Unfortunately for those who get swept up with the holiday romance idea of purchasing a coastal property, many do so without consideration of the downside. While some cherish their family beach house and remind me year after year that their decision was the best they could have made, many buyers feel otherwise when the reality of holiday house ownership kicks in.
The first disadvantage for any buyer is the cost of the property; not the purchase price, but the ongoing ‘out of pocket’ cost that is endured when a tenant is not helping pay the mortgage down. If the property is purely for personal use, not only is there no rental to recoup some of the costs, but there is no tax deductibility benefit either.
The second issue that people face is the ongoing maintenance and upkeep required on the property. From mowing lawns, painting, gardening, cleaning and tasks as menial as putting bins out, many owners loathe feeling like a slave to their latest purchase. After all, the idea of the purchase was to get away and relax.
A significant upset can arise when cashflow gets tight and the decision is made to rent the property out. Either a long-term fixed residential tenancy (which gives the owner some cashflow comfort and certainty), or a short-term, AirBnB style option can ease the financial burden, but it means that the property is not able to be used by the owners. In the case of short-term rental, the opportunity to rent for a strong return is usually in the optimal holiday period when the owner would have preferred to enjoy it.
The fourth negative relates to borrowing capacity with the lenders. A holiday house is an added liability on the borrower’s A&L and the banks determine future borrowing capacity accordingly. Those who don’t factor in future plans when they commit to a lifestyle decision as significant as a holiday house can live to regret it if it means that they can’t upgrade their own family home or invest in high capital growth investment properties.
The last negative I’ll broach relates to market volatility and seasonality. Often the acquisitions are made in the peak of the season (a little bit like air conditioners being purchased at the start of summer; nobody wants to install an air con unit in August), and as a result, the buyers often pay a seasonal premium based on supply and demand. Worse still, when economic conditions soften and holiday house owners need to access finance, the holiday house is the first property asset they’ll reluctantly sell because it’s a discretionary property (as opposed to a home). I recall the Phillip Island market in the 2012 downturn; the coast road was peppered with sale signs and prices declined in the coastal markets far harder than the city markets.
Holiday houses are joyous and memorable, but buyers should always question whether enjoying someone else’s holiday house a few times a year and investing the dollars into a more profitable venture is a better option.