When To Buy?
Here are two very relevant questions to consider; they came from two buyers I will call Couple A-North and Couple B-South, not very original, but easy to remember.
Couple A-North: “After almost 12-months looking, we’ve found our ideal home and we’re sick of paying rent, we’ve been doing that for almost three years and now mum and dad have agreed to chip in but, despite the fact we have a good deposit and jobs, should we buy today or wait? After all, aren’t prices going to fall even more?”
Couple B-South: “Last week we attended an auction of what I think is our ideal home and location, there’s potential to renovate with room for when we have our first child. The home was passed in, there was only a vendor’s bid and that was below the reserve. We are still very interested, as possibly are two other parties, our finances look OK, but in six months’ time we don’t like the idea of looking back and discover we paid too much!”
Talk about two questions that are both full of emotion and a fair bit of anxiety, presenting so many different but interesting options that all relate to today’s residential market.
However, these are exactly the type of questions I’m asked almost on a daily basis, and while the circumstances are similar, I think these two questions help to highlight and accentuate just some of the residential markets’ complexity in 2019.
While there’s no easy answer, I’m going to work through the various issues raised in the questions, as I see them and give some constructive and I hope helpful observations. However, first a very brief precis of today’s market.
Current Cycle Matures
After recovering from the GFC we have seen five-six years of solid and at times what was labelled ‘alarming’ growth, both in terms of prices and supply. Now in many, but not all areas, prices are falling, and the finance environment has shifted, because of tighter financial regulation and the findings of the banking royal commission.
In Sydney, prices are down and, in some areas, reaching lows not seen since 2011. This trend is in stark contrast to previous years where many cities saw growth of 10% plus, or even as high as 20% in some parts of Sydney.
While it may not be a crash, it seems that the biggest concern now among buyers and indeed vendors is, when will prices stabilise, level-out and even start to rise again? Which brings me right back to the two questions outlined at the start of this conversation.
But while today’s market looks like bad news for some, it is good news for others trying to buy their first home or in the case of my two questions, people looking to trade up and move from a rental and an apartment into a new and bigger family home. Where once the market was driven upwards by buyers’ fear of missing out, now the question is how long can we afford to wait and see?
The Risk of Waiting for Rock Bottom
There will be buyers out there who have a plan and expectation of only entering the market when they can ‘grab a bargain’ when the market hits rock bottom.
However, there’s a risk in that approach and that’s missing out altogether.
Considering both the questions here, the two potential buyers have each found what they describe as ‘their ideal homes’. In each case, these two couples have only found their possible new homes because the market has now moved from being frantic to a more measured pace, and this has been a positive, that helps answer the question ‘should I buy now?’.
When talking to the first couple (A-North) they describe their find as ‘a home I could immediately see my kids playing in the big family room, I could picture myself lying in bed just looking at the great views, and there’s ample room for mum and dad to visit. I could easily imagine this as our forever-home where we grow old.’
No less a glowing assessment from the second couple (B-South) and to quote ‘when we pulled up outside the home, we could not imagine a more beautiful home. It was a quiet street just 10-minutes from the beach, there’s a really big backyard where you could build a work studio and many of the nearby homes have been extended, so there’s loads of potential.’
These two quotes are important as they help illustrate one key point and that’s the reality that every home is unique, with features that cannot be duplicated, and so buyers will understandably make an emotional connection to the homes. They’ll respond with their ‘hearts’ and that’s human nature and is what motivates a majority of buyers.
Waiting for prices to fall and keep falling might just mean you never have the same opportunity again, and anytime you drive past what could have been your ‘ideal home’ there’s a feeling of regret.
True it’s an emotional factor, but when taken into account with a few other simple steps I suggest that even if prices did fall, our buyers would have secured their forever homes, and it’s hard to put a price on that!
Emotion will always play its part, but that’s not to suggest that anyone’s heart should over rule their heads, it’s a matter of balance between hearts, heads and the financial ability to buy.
The Paper Napkin Test
When buying a home, finance is a topic that most of us cannot avoid, and a closer examination of the facts here is helpful. But it’s not all bad news, and a sensible approach, along with some basic research can help answer the question of when to buy.
Leading to the royal commission, the banks had already been ordered to do more rigorous checks of borrowers’ income and expenses to make sure they could afford the loans.
These rules have been reported as a bit tricky however, while that’s true, they have mainly affected investors and speculators, and that has helped on the up side to take some of the anxiety from an overheated housing market.
Now that the royal commission has handed down its recommendations the prospect of a credit crunch has narrowed and while the average home buyer has seen an impact on how much they can borrow, I always suggest ‘the serviette test’ as a good starting point.
Looking to help guide the two couples here the serviette test is a simple checklist of essentials the banks look for and includes stable employment, an immediate deposit (both 20% plus), a cost saving from rent, or rental income from an existing apartment and a safety net with some money still in the bank after paying the deposit and stamp duty.
With the serviette test done and past, to me that’s another tick in the buying process and I’d encourage both buyers to move and try to secure a purchase and so that brings us to the question: at what price?
In both cases there’s some urgency assumed on behalf of the vendors, as both properties being considered were now vacant, the current owners having moved on with their own new living arrangements.
It’s this point, the vendors position, that I suggest is very important when trying to establish price, the same rules if you like also to apply to development projects when there’s current stock available on the market. Off-the-plan is a topic for a different discussion.
Do Your Homework
You’re ready to buy, finance looks OK, the property is ideal, you don’t want to miss the opportunity, but there’s still the question of price, what you’re willing to pay, a price that represents value to you but won’t short change the vendor. It’s not an easy question, but it is one that’s made much easier with a little homework.
One of the properties here had already gone to auction and was passed in, that’s a pretty solid test of value, so my suggestion is start with the vendor’s bid and see, by working with the agent what’s the possible gap, and always be ready to pay the immediate deposit and settle in no more than 6-weeks.
With the second property, this home had been on the market for almost 6-months and that’s not the best starting point for any vendor, and the price had already been reduced and that could make the final price a little harder to agree. Because, just like buyers many vendors have a baseline below which they do not want to drop.
A key part of the answer is to establish some clear facts about prices in the area, base any offer on facts, try not to be emotional and deal with the estate agent in an open honest manner. Silly low offers really just make any form of negotiation that much more difficult or even impossible for all parties.
Many people would describe today’s residential market as ‘a buyer’s market’ which it is however, this does not mean that prices will simply keep falling. For a variety of reasons, they will not, vendors might withdraw their properties and some very limited ‘distress sales’ will not become the norm, and soon supply will start to slow.
It’s true that no two properties are the same, and for a majority of buyer’s home is a place of security and a foundation of financial stability, but it’s also very much a lifestyle consideration and a medium to long-term purchase. It’s not a speculative investment.
There are a lot of variables to consider, it’s wise to be cautious but often there’s a slight risk involved to secure your ideal home, there’s ample guidance available to navigate the market.
Today we might no longer have ‘eye watering high-prices’ but nor do we have a market in free-fall, on balance ‘when to buy’ will always be a matter of personal and financial judgement with a careful mix of optimism and planning for the future.
I was once quoted that buyers always think they pay too much and vendors accept too little however, in 2019 I don’t think that’s so, I think that both parties remain cautious but optimistic.
2019 does look an opportune market for buyers, however, even those who do act now and perhaps pay a little more should consider the longer-term view. Predictions are that from 2020/21 onwards a combination of rationalised prices, a forecast undersupplied market and a stable economic outlook, should see stable prices with the reasonable likelihood of cautious prices rises beyond 2020/21.