Real estate: Pam Walkley
Buying at the top of the market can prove costly if you need to sell earlier than planned
Many people believe you can’t lose money buying residential property, but that’s not the case. Just ask those who have suffered losses from buying and selling homes and units in boom-bust markets such as Perth, Darwin and the Gold Coast. And real estate losers are not confined to those places – anyone buying at or near the top of a cycle and selling at or near the bottom is likely to lose money, regardless of the location.
A friend’s son lost more than $100,000 as a result of bad timing in Perth, thanks to his bank-based financial adviser suggesting a residential investment in Australia’s westernmost capital when the market was hot because of the mining boom. But homes in Perth were one of the biggest casualties of the boom’s end in mid-2014. Prices fell almost instantly and kept declining for six years, with the average Perth value plunging from $564,000 in June 2014 to $490,000 in December 2020, according to CoreLogic.
My friend’s son sold because the rental income from his investment property had halved, and he could no longer afford the mortgage repayments. Those who believe you can never lose from residential property will say if he had held on, he would be okay – and, yes, Perth prices are rising again – but not everyone’s circumstances enable them to hang on.
Booming prices are defying those pundits who predicted a fall in the wake of the Covid-19 pandemic, so it may be time for buyers to exercise caution. The median price across all capital cities rose 10.6% to $634,355 in the year to May 2021.
Tim Lawless, CoreLogic’s research director, says growth conditions remain broad-based both geographically and across housing types. “Values were up by more than 1% across every capital city over the month, with both house and unit values lifting across the board. Of the 334 sub-regions analysed by CoreLogic, 97% have recorded a lift in housing values over the past three months. Such a synchronised upswing is an absolute rarity across Australia’s diverse array of housing markets.”
Price rises are mainly due to low interest rates but also, ironically, partly to the pandemic, which has meant people are using money they may have spent on overseas travel to buy property. Investors are well and truly back in the market after a period when first home buyers dominated new borrowing for houses.
Anyone buying in the current conditions, especially investors, has to ask themselves whether they are doing it at or near the top of the market. Sure, many commentators predict rises will continue and probably accelerate, but can you be certain they are right? At the very least this is a time to pay heed to the saying “let the buyer beware”.
In April, 25.94% of all real estate investors were stressed (income from rent is not sufficient to recover the costs of owning and letting their properties), according to Digital Finance Analytics. NSW had the highest number of stressed investors (36.18%), followed by the ACT (35.38%), Victoria (24.13%), Queensland (24.07%), Western Australia (23.49%), South Australia (15.89%), Tasmania (15.32%) and the Northern Territory (14.05%).
Being very selective in what and where you buy is the key to your new property purchase not ending in tears.
If you are buying a home to live in (it is cheaper to buy than rent around 57% of dwellings across Australia, according to the findings of the REA Insights Buy or Rent Report 2021) timing the market is not so critical, but being certain you will be able to pay your mortgage comfortably when interest rates rise is very important. You don’t want to be forced to sell in a slower market because you can’t afford the repayments, especially if you bought near the top.
With the average mortgage above $500,000, even a small rate rise could put you in mortgage stress. According to the website moneysmart.gov.au, 2.35% was the average interest rate for new mortgages in April. On that rate a $500,000 mortgage over 30 years would require repayments of $1937 a month. If rates rose by just 1% to 3.35%, repayments would rise $267 to $2204.
Even with low rates, more than 230,000 households across the country are in “mortgage crisis” and people risk losing their homes, according to data released by the consumer organisation Choice in late May.
If you’re an investor, timing is more critical. If the area you want to buy in has experienced a big price jump recently, look around for nearby places with similar characteristics where rises have been more modest. Buying into really hot markets, especially at auction, often means you end up overpaying; maybe it’s better to wait until things cool a little.