Written on the 29th of July 2009 by Your Investment Property Magazine
The bottom of the property market: general wisdom has it that it is a great place to buy, and a poor place to sell.
But gauging when the market has bottomed can be tricky, and following broad rules alone is usually not enough.
Numerous media publications and property experts have already pronounced we are at or near the bottom of the property cycle in Australia in 2009. "I don't know if we're going into the bottom, at the bottom, or coming out of it," says Pino Tedesco, director of Metropole Property Investment Strategists, based in Sydney. "But we'd all have to agree we're somewhere around the bottom."
Prices, especially at the top end, have come down considerably around the Country. In certain regions, such as Perth nearly all prices are down considerably; whereas they are flat in others areas such as Sydney, Brisbane and Melbourne. There have also been some exceptions, such as Darwin, as well as the lower price bracket – spurred on by competitive first homebuyers – where prices are rising. But the overall picture has not been one of much growth lately in Australia.
The truth is, nobody can ever know when the bottom has hit until after the fact, and it might be a different picture in various parts of the country.
"One never knows when we are at the bottom until the market moves out of it, so the answer is easy – when the market is rocking from side to side at the bottom, as it is now, that is the time to buy," says Liz Wilcox, director of Hot Property Specialists, a buyer's agency in Queensland. "At the end of the day, $5,000 to $10,000 is neither here or there, because history has shown us, since the first property was ever sold, that the market always recovers better than ever."
Tedesco agrees, saying it is only if you sell the property early on that you would realise such price drops. "It's only if you sell it after it goes down that you would realise a loss," he says. "But property isn't something you want to trade in and out of. The costs are too much – stamp duty and capital gains taxes."
Buying with confidence
While the media reports have commonly cited the negatives and downward spiral of the economy recently, investors need to be aggressive at this time of lower confidence, capturing a moment of lower prices, says Paul Wilson, director of the We Find Houses buyer's agency.
"If you think it's a good buy and you're worried the market will drop again, you have to find the confidence to go out and secure it," he says. Wilson says even if the price slips early on, it will eventually rebound back up if you buy smartly. Eventually, it will show some considerable growth if you hold it for more than 10 years, he says.
One way to understand what kind of situation is facing investors is to look at history, says Mark Armstrong, director of Property Planning Australia. In Sydney, for example, the June 1980 median house price was $69,700. Some 13 years later, it was $519,000, with an average annual growth of 9.12%. Looking from June 2003 to December 2008, when it reached $538,000, the five year average annual growth was 0.66%. Melbourne has similar numbers. "We are nearing the start of the growth cycle," says Armstrong. "I don't know when it will start, but it will happen. It's not a question of 'if,' it's a question of 'when.' And it's always better to be early than late."
Tedesco agrees that now is a good time to be buying, not saving cash, when the interest rates are so low. But in order to do so, the potential buyer needs both the cash and borrowing power, and the confidence that they can make payments.
"For me, if I've got capital sitting there not being utilised, and with interest rates so low, I would then say, 'It's time to invest.' If you park it in property, you then have a long-term strategy." Many investors have already taken note. Tedesco, as well as other buyers' agents and real estate agents have recently reported record or near record inquiries and transactions in early to mid 2009. "For me, that's a bit of a barometer for the number of people seeing this in a positive light," says Tedesco.
Buying strategy
But just because prices in general are down, that doesn't mean any buy is a good buy. Investors need to look at the market smartly, and understand where the best values can be found and with the least competition, with hopes that they can even be negotiated down further. That's especially true in the first-homeowner-dominated lower end of the market, where competition is fierce, and prices often go above the original asking tag. Tedesco says he would prefer waiting before buying anything in the lower end.
"I'd rather wait there until the competition subsides," he says. "If a good opportunity comes up now, let's buy it. But don't force anything. " Where there are good opportunities now is in the middle to higher end, with few interested buyers. And those who are interested may also find financing difficult. That has sent prices sinking. PR Data reported the number of suburbs with median house prices above $1m dropped from 152 to 134 from March 2008 to 2009. Some in the report were in freefall. Over 12 months to March, Western Australia locations Ardross and South Freemantle saw median prices drop $277,500 and $263,000 respectively, about a quarter of their value.
"Anything coastal or considered prestigious in the current market is getting a reality check," says Wilson. "It's not prestigious now because people either aren't buying them or can't get financing for them."
Bang for your buck.
Without much competition, capable investors are in a good position to negotiate. Tedesco says he negotiated a 5% deposit instead of 10%. In another case, he negotiated a listed price on a waterfront reserve home in Abbotsford from $1.59m down to $1.25m, a 21% drop in price. "If there's less competition, you can do that," he says.
Wilcox says it never hurts to ask for certain inclusions in the contract. "If the agent tells you the vendors want a 60-day settlement, but you want 30 days, ask for it," she says. "If you like their outdoor setting, see if you can include that in the negotiations. Everything is negotiable."
This is perhaps especially true when there is a down market and less competition. You can sense your negotiation edge often by examining some clues around the property,
says Wilcox. "Some clues to look for - does the property look 'lived' in? Maybe the owners have moved out and left their furniture in the house, or hired furniture, to aid the sale," she says. "Did you notice an empty pantry?" Wilcox says sometimes it is "more about what isn't said that what is."
Understanding price
Finding a good price is, of course, not the only goal. And before you do any negotiation, it's important to know what you really think the place is worth.
Therefore, before considering purchasing a property in a down market, you can't rely solely on an impression that the price has fallen. You need to be more specific and find out what the actual value is. And this is not as simple as reading some statistics on median values or basing it on the listed price. In Sydney's Drummoyne or Double Bay, you could find houses on the same street listed from $1m to $5m, says Tedesco. Knowing what the right price is can be daunting, but getting professional help and possibly multiple valuations can often make the process more smooth and instil more confidence.
"It's even hard for some valuers to obtain value, so obviously for an investor, it's scary stuff," says Tedesco, a former valuer. "That's the problem. You need to know what it is worth."
The advantage here is that as an investor looking in a price bracket with few competitors, there is little need to rush into anything. Time is on your side, something that is not often the case for the seller.
Following the cycle
Another important thing to understand when considering a purchase in the bottom of the market is the cyclical nature of the Australian property market. The simple truth that most investors already know is that property values generally often go up and down, while consistently growing over time. But there are more specific patterns to keep in mind as well. And it is in knowing these patterns that one can gain some confidence about the future.
Armstrong explains that when properties first become more affordable, it is the first homebuyers that are first to move. They are drawn both by emotion and new affordability. These first homebuyers are, by definition, former tenants.
The next group to follow is commonly investors, who come when they see affordability and safety, says Armstrong. They want to see something happen first. But once they come in, they can often push away the first homebuyers as they usually have more capital behind them.
The final group is the existing homebuyers, perhaps an established couple who have thought all along that they don't have to buy, and will wait until they are confident values are rising. They are usually the final group to enter the market, and as such they are usually the ones that cause prices to rise. "Owner occupiers drive property values the most because they really want to live there," says Armstrong.
Selling strategy
With that in mind, it would seem a mistake to sell at the bottom of the cycle, before prices have returned to an upward
trend. But there are many reasons to sell- and even in a down market, they can be valid.
"The good old saying is so true '`There very rarely is a bad time to buy property - just a bad time to sell'," says Wilcox.
Armstrong , who also operates a division called Sell Smart, agrees that selling right now should be avoided, if possible.
"I think the idea of selling in a down market should be a last resort," he says. "The aim of real estate is to hold on to property over the long term, and there are a lot of things people could do before selling." That could mean looking at financial options with a difficult mortgage, such as going interest-only with the payments. Another could be increasing the rent on tenants, as in this market, vacancies are low and it may always be possible to increase income in that manner.
If you own and live in a family home, look at renting it out and renting yourself somewhere cheaper. Look at those options and research more, if possible, before considering a sell. That's because when you sell, you might not only realise a loss in the price during a down market, but you also have to pay the usual agent fees and advertising. Also, don't forget that if you return to the market, you need to pay that stamp duty again. "In any market, you buy low and you sell high," says Armstrong.
There are, however, some situations where you may have to or even want to sell - even in a down market.
Reasons to sell
Armstrong lists a number of the reasons one might want to sell. First, one reason could be that it is an underperforming asset, and it won't likely perform over the medium- to long-term as you had hoped. "In that case, it's logical to cut your losses and just get out," says Armstrong. Plus, it's important to remember that if you do sell in a down market, you could also then go on to buy in that same market. In that sense, the effects are not so severe, as whatever your losses might be, you can also count towards gains in buying.
Another reason to sell, says Armstrong, is if you are approaching retirement, and are looking at a plan after you sell – such as putting your money in a tax shelter. "You might take the short-term approach of selling, and then combining it with the long-term strategy of getting in a tax shelter, giving you a better return," says Armstrong.
The final reason to sell would be if you had to sell. But that's nowhere you ever want to be, if possible. "A forced sale in a down market is a really dangerous position to be in," says Armstrong.
Maximising sale price
Whatever your reasons, when you decide to sell in a down market, it's especially crucial to try to maximise your sale price, and maximise the property value. But it's equally relevant to try to minimise the expenses. One of these costs is the agent's fee. Make sure you try out the competition, rather than go with the first one you come across.
"In a down market, agents have fewer listings," says Armstrong. "You've got more competition, and can negotiate with them." Sellers can also negotiate with advertising and print media, or try simply just posting on the Internet first. "Have a good advertising budget, but very well thought through," says Armstrong. "The goal is to advertise the property, not the agent, which often happens."
He adds another key is to maintain control over the sale. That can relate to simply deciding whether to sell via auction or private sale. Often an auction is preferred, especially when you expect to get a possible bidding war that could push the sale price even above expectations.
Plus, if you opt for auction, you can still decide not to sell on the bidding day itself . You can sell before, or after the auction. The key is to always maintain control, and not just sell for whatever price comes up by the highest bidder. If it's too low, you can pass and try to negotiate for more afterwards.
"If nobody is bidding, then you've exposed that there is no demand," Armstrong says.
Hot Property Specialists Buyers Agency hope that this information can help you now or in the future, when you are looking to buy Real Estate in South East Queensland.
Please Note: this information is to be used as a guide and at all times, when looking to purchase Real Estate you should use more than one source to base your discussions and you should consult you financial advisor as they will know your personal circumstances. We also recommend you engage the services of a Solicitor to aid in the legal side of the transaction.
The bottom of the property market: general wisdom has it that it is a great place to buy, and a poor place to sell.
