Monthly Archives: October 2014

Trading space for location.

As traffic continues to clog the roads, young families are opting to stay closer to the CBD for less space. Properties such as apartments and townhouses that were once considered largely unsuitable by families are now in demand.

Smaller terraces and semis without large backyards are also in high demand by young families. As a result local parks have enjoyed a resurgence in popularity.

By international standards, apartment living for families is not a new concept. Indeed, buying into an apartment as a stepping stone to eventually buying a house is a logical path.

For example the reality of living in Sydney is that it’s become more and more difficult to navigate. Jumping in the car and heading across town is an ordeal in itself if traveling at a busy time. A busy time was once considered the typical peak hour to and from work. Nowadays, there is not much difference between weekday and weekend traffic flow (jam). The impact of work travel/lifestyle on the property market cannot be underestimated.

A lot of discussion has centered around the potential oversupply in the apartment market. With investors, first home buyers and baby boomers being a natural purchaser of such stock, along with families now considering apartment living, the demand may well be there to meet the supply. This will be a positive for the overall market as massive oversupply in the apartment market would eventually impact on the wider housing market.

Fools Gold In Real Estate.

Real Estate salespeople are full of promises when in pursuit of new business.

The most common promise made by agents is the promise of an exceptionally high selling price.

From a consumers perspective, it is also the most broken promise.

Real estate agents know the home owners will look upon their services more favourably if they quote a high price.

The home owner is inadvertently swayed by the agent with the high price quote, rather than scrutinizing the merits of agents selling strategy.

Amazingly, the agent can then fall short on their promises and still get full pay.

Before signing with an agent, insist the agent signs a guarantee whereby they get no commission, or a reduced commission if your home sells for less than the agent quote you.

When you insist on such a guarantee, you will soon discover the agent who truly believes in their price quote as opposed to the agent that is attempting to lure you with fool’s gold.

Auction lessons from The Block 2014.

  • The Block achieved a 100% clearance rate. If it were not aired on television, agents would normally say that a 100% clearance rate is terrific. It’s good because they gained a commission. 3 of the 5 vendors were left clearly devastated. Clearance rates are never a true indication of success when selling.
  • Once the auction hits the written reserve price, the vendor is compelled to sell. The ultimate goal of agents at every auction is to get the price to reserve, where it will sell. If it does not continue to rise from there, it’s the owner’s loss.
  • Creating good theatre and the best possible sales result are separate events. It was compelling and excruciating viewing but a better result could have been achieved if the sales process were not pushed through on the night.
  • In 2012 when 3 of the 4 auctions passed in, a higher result was in the week or two post-auction.
  • The concept of multiple emotional buyers (afraid of missing out) who just keep on bidding, only happens in the minority of cases. Most of the bidders turned up with pre-determined limits and were not going to exceed that limit. The bidders were considered and unemotional.
  • Auctions looks good when they smash the reserve, but the reality is few go this way. If you set a market based reserve, the auction will struggle to go much beyond the reserve because it requires two bidders.
  • Renovating for profit is easier said than done. 0nly the professionals can continually make profits renovating. Most people profit from renovating because the market conditions save them. They profit through market increases not renovations.
  • To purchase an un-renovated property, pay stamp duty of 4 or 5%, do a cosmetic renovation paying retail price for goods, paying an agent to sell it and hoping for a profit is overly optimistic.
  • Michael and Carlene lost control of the sale once it hit reserve. Many vendors don’t realise that once bidding hits the reserve, they are compelled to sell.
  • Frank the professional bidder took bidding from $1.35 mil to $1.7 mil in one jump. The buyers knew what the property was worth. He bid $1.7 / $1.8 and $1.9 without hesitation.
  • If the under bidder did not turn up, Frank would have bought the property for $1.7 million given $1.7 million was over the reserve. You need two buyers to get an outstanding result at auction.
  • The professionals bidders knew not to bid unless it was on the market. On the market being above reserve price.
  • The contestants time was not factored into prices, were the tradespeople’s full rate covered in the reserve price etc. There were many costs not even factored into the reserve price.
  • The contestants simply experienced publicly what thousands experience privately when it comes to selling a renovation project.

Finding value

Extracting the best offering in the market

Finding value in a real estate market that has been rising for two years seems optimistic. Value can be extracted in many more ways than just buying at a low price. Indeed, there are not too many (if any) sales happening at a low price.

Even though the market is fully priced, there are still opportunities galore in this low interest rate environment.

First Home Buyers

Many first home buyers are devastated at the way house prices have run away. It feels as though they are locked out of the Sydney market forever. Indeed, with most one bedroom apartments close to the CBD now selling well above $500,000, is it any wonder that someone earning $80,000 feels as though they will never get there?

The situation for first home buyers requires patience. The mass development across Sydney will bring opportunities in the next few years. These opportunities will most likely come in one of two ways – savvy developers catering for the first home buyer market or distressed re-sales when a market correction occurs.

The best value for first home buyers is currently in the rental market. It is far cheaper to lease a property in Sydney than buy one. The rental market is where first home buyers will find the best value for money until the right opportunity arises.

Prestige Market

If we define the prestige market as being over $2.5 million, then it’s fair to say that there is still some value in this market. This current boom started where all booms start, at the lower end of the market and has gradually worked its way higher in price.

The prestige market never really recovered post Global Financial Crisis (GFC) like the lower and middle markets did. The post GFC rally of 2009/10 did not register in the prestige end of the market. You only need to look at the (low) auction clearance rate of the prestige market in comparison to the broader market in recent years to see the weakness.

2014 has been the first year that could be described as a good one for the prestige market. Unlike the broader market, it does not look fully priced either. Anyone looking to upgrade from the booming mainstream market to the prestige market should find the selling excellent and the buying reasonable in comparison.

 

Lifestyle Markets

When the GFC hit, the lifestyle markets got hit first and hardest. Boat salesman probably did not set any sales records either! The lifestyle property markets are probably further behind the prestige market in their recovery. Quite simply, property is cheap in many of these markets. For many baby boomers looking to exit Sydney for the tree or sea change, now could be the time. Sydney is looking fully priced whilst lifestyle markets are showing enormous value. It’s worth noting that lifestyle markets tend to drop first and rise last, so any move into the space needs to be carefully considered.

 

Interstate & Commercial Markets

 

Investors should note that it is the Sydney and Melbourne property markets that have boomed in recent times. Many other capital cities around the country are surprisingly flat in this low interest rate environment. If you are looking to invest, whilst it would be great to buy the house next door, that may not be practical. Unfashionable markets can often throw up the best value. Renowned market analyst Louis Christopher believes that Hobart may be one of the best buys in the country at present, whilst Perth is clearly the most risky in his view. For an in-depth analysis on interstate markets, you can purchase a copy of Louis’ report on www.sqmresearch.com.au for $39.95.

 

In our previous edition of Real Estate Report, we spoke about the commercial market. Contact our office on 02 9818 2133 if you would like a copy. Globally speaking, our commercial market is in huge demand. Domestically, we still cannot work out if foreigners are overpaying for our commercial real estate or we are selling it too cheaply. But make no mistake, overseas buyers are infiltrating the commercial market as they eye off juicy net returns of 7-10%. Be careful and do your research in this space though.

 

 

Rental Market

 

Rental prices have been stagnant to slightly declining in the past 18 months. As property values shot up, rents went down, creating a value pocket. It would be speculative advice to suggest that someone sell their existing residence in this boom environment and rent until prices settle down. Make no mistake, some are doing just that though.

 

If you do find yourself having to rent for whatever reason, you can be comforted knowing that you are leasing a property well below the repayment rate had you purchased it. Renting temporarily does not mean that you have given up on the dream of ownership, it’s just a sensible place to be when prices reach heady levels.

 

Finance

 

Paying down debt in a boom seems rather boring and sensible. Maybe it is. But it is easier paying down debt when interest rates are at record levels. If you are paying principal and interest, you are creating equity in your home with each repayment. Now that may be sensible, but it’s definitely not boring. Whilst buying and selling seems exhilarating, the profit is often washed away by the transaction costs.

 

How would your finances look if interest rates rose 2%? They probably won’t in the short term, but if they did, could you afford to maintain the mortgage? If so, consider paying the extra 2% now whilst rates are low. The 2% will compound in the next 10 years to make it a very wise (& profitable) decision.

 

There is no doubt there are many other pockets of value in the market if you are thinking laterally. If and when the market does correct at some stage, that will create another set of value opportunities to those that are looking hard enough for it.

 

Rental Market Under Pressure.

House prices have continued to soar throughout 2014. What has been lost in the reporting is that prices in the Sydney rental market are softening. As a landlord it’s crucial that you’re aware of the current market conditions. The great enemy for all landlords is vacancy. A vacant property produces zero income.

Some landlords mistakenly believe that a rent increase is their right on the expiration of the lease. However, any rental increase should be in line with market forces to avoid your tenant deciding to depart for a cheaper property down the road.

If you’re looking to purchase an investment property, it’s also important to recognise that the sale value and the rental value are completely disconnected and unrelated. Incoming investors are staring down the barrel at booming sale prices with declining rents. Negative gearing is a favoured investment strategy for many investors entering the market.

If the yield is too low on the property, it means an eventual profit is even more elusive.

There is still good buying to be had in the market, but value is harder to find for investors.