Why this is the ideal time to purchase a house for end-uses and for those looking to invest in the property market
Although there is much talked about correction of the real estate market in Australia with experts projecting a much bigger price correction, a cursory look at average property prices in various markets of Australia reveals that overall there isn’t too much variation in sale prices as compared to the previous years. Also, property prices differ in each city and vary hugely as per the location and its inherent growth drivers.
One of the prime culprits of the so-called correction in property market is because there is tighter credit from banks in the market. This is not just because the Royal Commission is clamping banks with new compliances, the future cost of money (and interest rate) is also going up in Australia, following closely with the US markets. Then there is a potential Labor government policy planning to wipe out the negative gearing incentive for investors, which is expected to impact market adversely. And on top of this, we are experiencing a great foreign buyer exodus from the market. According to a data, Chinese FIRB applications have halved in 2018 than 2016, which has impacted the market so badly that some developers with too much market exposure are thinking about defaults on settlements as they are unable to dispose-off all the stock.
However, one unspoken aspect in the industry is that most of this price correction is because of over-supply of apartments as compared to their demand in various markets. On other housing typologies and markets, a deep-dive assessment of market conditions reveals that a pseudo-price correction has come in the form of freebies, discounts, offers or schemes. Although developers and builders are not in favour of visibly reducing the prices as it transmits negative sentiments in the market, there are some discounts being offered to serious buyers who are ready with their purchase decisions.
The problem in the Australian housing market is visible as we are witnessing comparatively lower demand as most of overseas investments are drying up and huge unsold, under development, planned inventory is piling up in almost every state and territory. Some of the high growth areas like Melbourne CBD and outer markets, suburban regions of Brisbane including Gold Coast and Ipswich, and north-western and south-western suburbs of Sydney are presently dealing with this issue of more supply compared to actual demand over short span of time. Most of the developers and builders are battling with huge unsold inventory and are keen to offload the same at the earliest, creating pressure on real estate pricing.
Although prices have fallen for 11 months in a row across Australia, economists are of the view that the seemingly steep fall in house prices comes after a long and epic boom in property prices, and over a long period, the market will witness growth. Moreover, the decline in prices is not as steep as was the growth in prices. For instance, Corelogic Research shows that in Sydney, average prices are down 5.6% over the year, and in Melbourne, it’s down only 2% in the past three months—the worst drop since 2011. It wasn’t too long ago that prices surged 11% in one year nationally and 20% in Sydney.
Eventually, this is turning out be the ideal time to purchase a house for end-uses and for investors looking to invest in the property market. The market is totally purchaser-friendly at present, and builders / sellers are taking out time to discuss in details with purchasers for their home buying requirements. If one has good financial planning and feels that the future is safe, it is the right time to purchase a house and seal the deal. With pressure on inflation rates, house financing is likely to harden in future. Therefore, for end-users and investors, it is the right time to avail the home loan at best possible rates as there are good deals available in the market with fixed interest rate plans.
First home buyers may also see a window appearing after annual double-digit percentage price growth in Sydney and Melbourne had them sidelined for years. With changes to bank lending standards putting pressure on investors and interest-only borrowers, the possibility of distress selling could prove a first-home buyer hunting ground.
A home purchase is a long-term investment, and for properties at good locations and with the right configuration and amenities, there will always be good demand and should appreciate over long term period. However, it is important to understand that the fundamentals of location, connectivity and amenities of the project are essential for price growth to happen. The projects which are closer to or well connected with transport nodes, business centres, retail areas and job markets (present and future) have more potential for price appreciation and sound rental returns in the long run.
Also, in an established market, investors and buyers generally keep a minimum horizon of 2-4 years before putting the property on the market again. At the end of a sufficiently long period, prices for the right type of properties should appreciate, and in the meanwhile, if the home is not for personal use, it can earn rental income as well.
The best way for homebuyers to address a property purchase is to think like an end-user and focus on buying a home that meets one’s own needs. This way, they should be able to appreciate the right project with good amenities and automatically pick properties which have the right attributes such as connectivity to workplace hubs, availability of public transport, hospitals, schools and shopping, and is resultantly investing in a property which can certainly appreciate in future.
Price corrections tend to happen in projects and locations which are bereft of the right fundamentals and amenities. Areas which have not taken off because of lack of the requisite infrastructure, and located away from job markets, public transport, schools, hospitals and retail areas, are bound to see price corrections as demand will flow to areas and projects which have the right attributes.
Although prices in locations and projects that tick all the right boxes may remain stagnant for a while, their inherent advantages will safeguard against any serious short-to-mid-term corrections. Also, these areas would be the first ones to witness price appreciation as and when there is any price increase in property market. Therefore, it is a perfect opportunity for investors and owner-occupiers to pick up the right property at right prices. For the intelligently chosen properties, the inevitable law of demand vs supply should gradually bring in capital value appreciation.
Finally, one should remember that every asset class witnesses fluctuations, but homes in Australia are also ‘performing assets’ which one can live in or rent out till the time you don’t put it in the market again for the capital price gain.
Manish Kumar is an experienced real estate agent with more than 18 years’ experience in real estate sale and purchase, property development planning, investment advisory and project sales. Manish now heads Blue Hill Advisor Real Estate, a real estate advisory firm focusing on advising clients and owner occupiers on right property purchase and negotiation strategies in Australian, Indian and European markets. For more details about Blue Hill Advisors, please visit www.bluehill.net.au