The winners and losers in all markets

There is a simplistic thought pattern that rising property markets are good and falling markets are bad. Supporting the point, transaction volumes historically increase in rising markets and decrease in falling markets. These fluctuations in volumes are sentiment based as much as they are practical decisions by the respective buyers and sellers. Rising markets feel good whilst falling markets don’t. Whilst there may be more winners in a rising market and vice versa, it is not a universal principle.

When you understand how a rising market can actually work against your best interests and a falling market can be used to your advantage, the property market takes on a whole new persona.

Depending on what your goals and objectives for trading real estate are, you will be better positioned to act decisively or remain patient when you are conscious of the winners and losers in all market conditions.

First homebuyers – rising and/or fully priced markets benefit those at the top and disadvantage those look to enter the market. First home buyers find the level of entry difficult in booming markets and are best served looking to enter the market when real estate is flat. Many people think that first home buyers are permanently locked out of the market which is an overstatement. There is no doubt that current conditions are difficult in Sydney for them, but an opportune time will come again. Indeed it was first home buyers that created the post-GFC boom as they took advantage of declining prices (and Government grants). First home buyers who were brave enough to venture into the market in 2008 are now on the property ladder and climbing.

Upgraders – if you own a property and intend to sell it to purchase another one in the same market, you are more likely to sell in a rising market. But you are quite possibly better off upgrading in a falling market. If you sell a $1 million home and intend on upgrading to a $2 million home, a 10% rise in the market will provide an extra $100,000 on the sale but take $200,000 more on the purchase.  Conversely, a 10% market decline on the same transaction wipes $100,000 off the sale but a whopping $200,000 off the purchase.

When you consider that a lot of fees and services such as stamp duty (& agent’s fees) are based on percentages, the lower the price the better when upgrading.

Transitioning into a different market – if you are selling out of a booming Sydney market to buy into a sleepy seaside village with flat to declining property prices, you win on both sides of the ledger. You sell high and buy low. The Perth market, for example, is severely depressed at the moment. If you were to sell in Perth and move to Sydney or Melbourne, you will sell low and buy high. As important as it is to sell at the right time, if you are transitioning into a different market, picking the right time to buy is equally important.

Negatively geared investors – creating a deliberate weekly loss to gain some tax advantages may seem like a sound and plausible strategy whilst prices are rising. When prices are flat or declining, the investor loses twice – a weekly loss plus declining asset value. Investors who are negatively geared need a market that rises faster than the accumulated losses through the negative gearing, to stay in front on the investment. Sharing a profit with the tax man is preferable to keeping a loss to yourself. Many property investors have lost sight of this one. If you get yourself into a position where you are positively geared, capital growth is yours to keep rather than compensation for carrying a weekly loss over a number of years.

Investors – it is possible for investors to benefit in both flat markets and booming markets. The key is to transact accordingly. There are two types of investors, incoming and outgoing. Savvy investors know there is a right time to enter a property market and equally an appropriate time to exit.

A crude yet timeless real estate cliché such as ‘when rates are high it’s time to buy and when rates are low it’s time to go’ is worth keeping in mind. This should not be your sole guiding light but it is worth keeping in mind. Sure, every expert says ‘sell high, buy low’ but how many actually act on this advice? Prices are currently high in Sydney and low in Perth. How many investors are brave enough to buy in Perth at present? Yet in 2011/12 when interest rates were much higher and the mining boom was ticking along, Perth was fully priced and Sydney was in a severe lull. Sure, hindsight is 20/20, but so is research coupled with long-term planning.

Last time sellers – if first home buyers are the losers of a boom, then last time sellers are the recipients and vice versa in both instances. From a demographic perspective, there are a lot of last time sellers coming through the system in the next 15 years as baby boomers sell down their assets to fund their retirement. The family home will be increasingly sold down by baby boomers who are looking to unlock equity and move into smaller more manageable properties in lifestyle locations.

Baby boomers in Perth feel hard done by given the market has crashed there whilst last time sellers in Sydney feel as though they have won lotto. Particularly if they selling up to leave town. Just as first home buyers could be well advised to hold off on purchasing at present, last time sellers should give considered thought to exiting the market whilst times are good. We may not be in the midst of a full boom as we were in 2015, but is anyone going to really suggest that house prices are currently anything but high?

Knowing what you now know, you may decide to act ahead of time or delay transacting until the market environment suits your agenda. There are winners and losers in all markets. If you plan intelligently and sensibly, you increase the chances of being on the right side of the ledger.

*Extracted from Peter O’Malley’s latest publication, Inside Real Estate –  Buy, sell and profit in any property market.

Inside Real Estate is available now at all good bookstores or online via Dymocks.

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