Some new build townhouses bought at the peak of the market have fallen 30–40% in value, leaving investors facing negative cashflow, significant losses and, in some cases, properties they still can’t sell.
In a recent episode of Cheques and Balances, Lighthouse Property Director Adam Farrell joined James and Mike to unpack examples that investors had brought to Lighthouse after previously purchasing these properties. They look at what went wrong and why many of the problems come back to the fundamentals of the property itself.
Why Have Some New Build Townhouses Lost So Much Value?
There’s no denying that new build townhouses have developed a bad reputation in recent years.
Part of that comes down to timing. Buyers who purchased at the top of the market in 2021 were buying in an environment where demand was extremely high and people were taking whatever properties they could get their hands on.
As Michael points out, property is generally a 10 or 20-year asset, so judging its performance over only a few years doesn’t necessarily tell the whole story.
But the market downturn doesn’t explain everything.
James highlighted examples of properties that have fallen between 30% and 40% in value, compared with an Auckland market that was down around 18% over the period discussed.
That additional decline is where the quality of the individual property starts to matter.
Poor location, too many identical properties, impractical layouts, a lack of parking and large developments can all affect the supply-and-demand equation when the market turns.
The Problem Isn’t All New Build Townhouses
A bad experience with new build townhouses can easily lead buyers to conclude that the entire property type should be avoided.
Adam doesn’t agree.
There are poor-quality properties across every category. A standalone freehold home can have problems, just as a townhouse or apartment can.
The difference comes down to what you’re actually buying.
Adam argues that if you get the supply-and-demand fundamentals right, a property should be better positioned to perform over time. That means looking beyond the fact that something is simply a “new build” and considering the characteristics that could make people want to own or rent that particular property in the future.
For Lighthouse Property clients, that means focusing on factors such as developer quality, proximity to the CBD, practical floor plans and the number of similar properties being built nearby.
An $850,000 Townhouse That Sold for $600,000
Adam shared the example of a friend who bought a two-bedroom, two-bathroom, three-storey townhouse at the peak of the market in 2021.
The property had no allocated car park and was around 80 square metres across three levels, meaning a significant amount of its floor area was taken up by stairs.
He paid $850,000.
Two years later, personal circumstances forced the property to mortgagee sale, where it sold at auction for $600,000.
Timing clearly played a major role. Being forced to sell in a falling market meant the loss had to be crystallised rather than giving the property more time to recover.
But Adam also believes the property’s fundamentals contributed to the scale of the decline.
When the broader market had fallen by around 20%, properties dropping 30% or 40% suggested there were additional supply-and-demand issues at play.
When Too Much Supply Becomes a Problem
The number of identical properties surrounding a townhouse can make a significant difference when it comes time to rent or sell.
If one owner urgently needs to sell an identical property and accepts a significant discount, that transaction can affect other owners in the same development.
The same problem can occur with rent.
When large numbers of similar properties are available in the same location, owners can find themselves competing with one another for tenants and buyers.
James pointed to outer-Auckland locations where large numbers of townhouses were developed at the peak of the market.
When buyers can suddenly purchase something cheaper and closer to the city, owners further out can find themselves competing on both rent and sale price.
Several investors who have since come to Lighthouse for advice are already facing this problem. (These properties were purchased before working with Lighthouse and were not bought through our property advice.)
In some cases, the properties are now down around $200,000 from their original purchase prices. Their cashflow top-ups have increased as the rental market has softened, and even after accepting the prospect of a significant loss, some owners are still struggling to sell.
Why Location Still Matters
Location isn’t simply about whether a suburb is considered desirable.
Michael highlighted proximity to a city centre as one factor that can help protect a property from larger market swings.
The closer a property is to the CBD, provided it remains in a reasonable neighbourhood, the stronger the underlying demand may be.
Adam applies a similar principle when looking for properties for clients.
The aim is generally to get as close to the CBD as possible without compromising cashflow.
He also looks for areas likely to experience population growth over time while avoiding property types that are being supplied in large numbers.
If there are fewer examples of the property you own but plenty of people wanting to live in that area, the supply-and-demand equation becomes much stronger.
How Big Is Too Big for a Townhouse Development?
Adam generally focuses on developments with fewer than 20 homes, with 20 already sitting towards the upper end of his preferred range.
That doesn’t mean every larger development is automatically a bad investment.
Variation within the development can matter too.
Adam gave the example of a 19-home development where he purchased one of only two corner two-bedroom properties. While there were 19 homes overall, his particular property still had an element of scarcity.
There are also situations where buyers have specific limitations around price or location. If they aren’t willing or able to compromise on either, accepting a larger development may be the trade-off required.
As Michael points out, a good investment can still exist within a larger development if the buyer pays the right price upfront.
The Small Details That Can Make a Big Difference
A floor plan can look perfectly reasonable on paper without telling the whole story.
Adam highlighted corner units as one example.
Corner properties can be particularly attractive within a townhouse development, but buyers still need to look closely at how the property has actually been designed.
Development restrictions can result in compromises that aren’t immediately obvious from a standard floor plan, including changes to ceiling lines.
Parking, usable floor area and layout also matter.
An 80-square-metre property spread across three levels may technically provide the required floor area, but a meaningful portion of that space can be consumed by stairs.
These details affect how practical the home is for the people who will eventually live there, which ultimately feeds back into demand.
Not Every Townhouse Is a Bad Investment
Adam also shared an example of a client who had previously bought a one-bedroom apartment without parking in Christchurch City.
The property performed poorly, and that experience had influenced the client’s mortgage broker to the point where they didn’t want the client buying another new build.
But the new property being considered was fundamentally different.
It was a freehold duplex in a smaller region where land was cheaper and, importantly for that particular client, it was cashflow positive.
The comparison highlights why broad rules such as “townhouses are bad” or “new builds are bad” can be misleading.
The right property depends on what the buyer is trying to achieve.
Adam generally doesn’t recommend apartments to clients seeking capital growth because of their performance. But he also acknowledges that an apartment producing a very strong yield and positive cashflow could make sense for someone whose primary objective is income.
The asset needs to match the investor’s goals.
What Makes a Quality New Build?
For Adam, the same fundamental principles continue to come up when assessing a new build:
- Developer quality
- Proximity to the CBD
- Practical floor plans and layouts
- Limited numbers of identical properties nearby
- Smaller developments where possible
- An area likely to experience population growth
- A purchase price that makes sense for the property
None of these factors guarantees how a property will perform.
But they help distinguish between buying a property simply because it is new and buying one because the underlying asset stacks up.
Key Takeaways
- Some new build townhouses discussed in the episode have fallen 30–40% in value, compared with an Auckland market decline of around 18%.
- The investors who have since approached Lighthouse for advice purchased these properties elsewhere and did not buy them through Lighthouse Property.
- Buying at the peak of the market contributed to these losses, but market timing doesn’t explain the full difference in performance.
- Large developments, oversupply, poor locations, no parking and impractical layouts can weaken demand for a property.
- Too many identical homes can create competition between owners when properties need to be sold or rented.
- Adam generally focuses on developments with fewer than 20 homes, although the individual property and the buyer’s circumstances still matter.
- Proximity to the CBD, developer quality and practical layouts are among the fundamentals considered when assessing a new build.
- Not all townhouses or new builds are poor investments, just as a freehold standalone home isn’t automatically a good investment.
- The right property also depends on the buyer’s objective, including whether they are prioritising capital growth or cashflow.
- Property should generally be viewed as a long-term asset, and being forced to sell during a downturn can crystallise losses that might otherwise have had time to recover.
Next Steps
If you’re looking for your next investment property, speak with the Lighthouse property team about finding an asset that stacks up on the fundamentals.
If you’d like to watch more, check out this episode below.
For a no obligation discussion to see how we can help you on the path to wealth, please contact us.
Disclaimer:
The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
