Selling off your backyard could send the original house value into free fall.

Towering apartment blocks aren’t the be-all and end-all of urban consolidation.

The push by governments to limit urban sprawl and increase housing density has also prompted the widespread subdivision of suburban house blocks.

But if you’re planning to ”cash in the backyard”, you need to do your sums and look closely at the potential downsides.

There’s no doubt that carving up land in middle-ring and inner suburbs is becoming more popular. Investors frequently battle to outbid each other at auctions for houses on corner blocks of 800 square metres or more to maximise their money.

They then split the property, keeping the original house on one title, and erect a new dwelling, with its own title, on what was formerly the backyard.

Many baby boomer home owners, faced with rising costs of living and reduced incomes, are also looking to unlock the wealth lying dormant in their backyards.

Little wonder that councils such as Melbourne’s City of Boroondara are receiving one development application a week to subdivide an existing single-title block.

But putting two dwellings on a 700 to 800-square-metre site may not generate the windfall profits you imagine. Far from it. This type of subdivision can even send resale values into free fall.

The upside of selling the backyard is that you can put cash in the bank. However, David Hallett, the Victorian state manager of the building advisory service Archicentre, warns that you could devalue your original property so the net gain may not be as much as you think.

Real estate agent Richard Jellis, of Jellis Craig, couldn’t agree more.

”My experience has been that [subdividing] absolutely cripples the value of the front house if you stick one house behind another with a side driveway,” he says.

Smart investors favour corner blocks because the resulting two dwellings can be accessed by separate street frontages.

Mr Hallett says when considering a subdivision, you need to bear in mind the design and orientation of the new home to ensure privacy and the ambience of the living space are maintained by clearly setting out siting guidelines in the sale documents.

”People should place a premium on access to sunlight and the ability to utilise natural screening,” he says.

Mr Jellis says some home owners face a choice of either moving to cheaper accommodation or subdividing because of financial difficulties. But in his view, many are ”better off looking at the reverse-mortgage option”.

Mr Jellis says most house buyers do not accept 300 to 400-square-metre blocks. ”It is OK in certain areas and for certain buyers, like double-income-no-kids buyers and those in semi-retirement,” he says.

”But it’s not OK for family buyers who are looking for 700 to 800-square-metre blocks and are prepared to pay for it.”

Mr Jellis advises investors and home owners with subdivision on their minds to stick to corner sites and to consider levelling the site and building two new townhouses.

”You are going to pay a lot more for a corner situation than what you might call an inside property,” he says. ”The market, in my experience, will pay significantly more for end products that face away from each other”

“If you pay $1 million or $2 million for real estate, you don’t want overlooking windows and noise within a metre of your boundaries if you can avoid it.”

Mr Jellis says some older housing estates that were laid out in the 1930s or earlier have single-dwelling covenants, which work to push up real estate prices.

”There are a lot of estates in Camberwell, Canterbury and Hawthorn East where the single-dwelling covenant is still retained,” he says.

”They are valued highly by the people who live there because they know that there will never be a second dwelling constructed next to them.”

“Properties attract a premium when they are situated in subdivisions where you can’t subdivide.”

Posted by Chris Tolhurst – Domain (The Age) on 3rd March, 2012