Buyers are staying on the sideline as markets stall. Picture: Glenn Campbell
ANALYSIS
In TV’s greatest sitcom Seinfeld, there is an episode where unlucky-in-life character George Costanza has an epiphany. To turn his fortunes around, he should do the opposite of what his instincts tell him to do in every situation.
Immediately, the plan gets results. He scores a dream job, begins attracting women and is able to move out of his parents’ home.
In the real estate world, and in other investment fields, it can also pay to act in a different way to the accepted norm. It’s how the world’s great investors, like Warren Buffett, have made their fortune.
The key is not to be swept up in market sentiment, but rather use it to your advantage.
See, market sentiment can be the difference between striking it rich or breaking the bank when it comes to buying property.
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Whether house prices are rising or falling, sentiment can amplify a minor data trend into a full blown boom or bust.
Auction clearance rates have plummeted since the budget tax changes. Picture: Damian Shaw
A 1 per cent house price rise may push a $1 million home up by $10,000 in value on paper, but if that home goes to auction in a strong seller’s market, with 10 enthusiastic bidders, the difference can be hundreds of thousands of dollars.
The same is true in reverse.
Now that markets have stalled across the nation, values have begun to decline. The falls are relatively minor, for the most part, but market sentiment amplifies them.
A 0.5 per cent monthly fall in Sydney and Perth (according to PropTrack’s latest Home Price Index) turns into a 6 per cent annual decline if the trend continues.
And while the trend does continue, market sentiment exaggerates the effects to make it sound as if the sky is falling.
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Auction clearance rates are at rock bottom as buyers bail out of the market, kept away by rising interest rates, falling borrowing power, global economic uncertainty and, of course, the federal government’s much-discussed and oft-maligned tax changes for investors.
Property listings are up 6 per cent year on year according to SQM Research, as more people look to sell for one reason or another.
It is clearly a buyer’s market, but there appears to be a shortage of buyers who either can or will make the most of it.
It represents a great opportunity for those who can, as property cycles have moved the same way for a long time. A growth surge, followed by a plateau, a small fall in values, a recovery to the previous peak and finally the next growth surge.
We have entered a correction phase and, like the others before it, it is likely not to last too long.
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Angus Raine believes it’s a great time to upgrade for homebuyers. Picture: James Croucher
The biggest opportunity in the market right now is for potential upgraders, according to Angus Raine, executive chairman of Raine and Horne.
“Since the federal budget was handed down we have seen residential values nationally fall by 0.4 per cent,” Mr Raine said. “This is a modest fall in the context of today’s property values, and it is giving upgraders a rare opportunity to narrow the gap between the sale price received for their existing home, and the price they pay for their next property.”
Mr Raine uses the example of a homeowner with a current residence valued at $1 million, who is looking to upgrade to a $1.5 million home. If both properties declined in value by 5 per cent, they will receive $50,000 less for their current home, but pay $75,000 less for the upgrade home, leaving them $25,000 better off.
Of course, that $25,000 is only a starting point. The following market recovery means you earn instant equity on your home and the following growth period boosts your equity once again.
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“Successful property buyers think in terms of decades, not weeks or months,” Mr Raine said. “The long term fundamentals that underpin Australian real estate have not changed.
“We continue to experience strong population growth driven by overseas migration, coupled with a chronic undersupply of new housing. This will put a floor under any price falls and continue to drive values higher over the long term.”
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