OPINION: Which is worth more: a million-dollar section with a $100,000 house or just a million-dollar section?
The answer is the million-dollar section and the reason is capitalisation.
Anyone buying the section wants to put a big flash house on it, not a small, simple one. A $100,000 house isn’t going to cut it, so the buyer will have to spend $10,000 demolishing it before building their dream home. The section was undercapitalised.
Back when I was at university, land was cheap and the guide for good capitalisation was to spend two-and-a-half times the land value on the house. A $20,000 section (millennials won’t remember those) needed a 100-square-metre $50,000 building for a total property value of $70,000.
Since then, land price (I was going to write value, but in real terms, the value hasn’t changed) has gone up faster than incomes and inflation. Capitalisation rates are approaching one to one.
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