investment-guides

Power to the buyer

By Staff Reporter

First time buyers now have the upper hand when it comes to price negotiation, writes Cameron Kusher.

 

For first property buyers, 2009 was certainly a very attractive time to get into the housing market. After price falls through 2008, followed by consistent rental growth over the following period, the differential in the cost associated with renting and buying narrowed significantly.

Clearly the first home owner’s grant (FHOG) boost and the lowest interest rates in 49 years dramatically helped. Negotiating conditions for buyers were not in their favour however with significant competition for most available properties.

The tables have now turned with first home buyer activity dropping off since the FHOG reverted back to its usual level of $7,000. Standard variable interest rates are also 160 basis points higher than they were at their lowest point last year.

For vendors trying to sell properties attractive to first time buyers (usually below $600,000), the consequence of the above is that there are fewer buyers in the market.

The rate of property value growth is also slowing (particularly within the more affordable suburbs) and servicing housing debt is more expensive.

As a result the negotiation power within the more affordable markets lies well and truly with those few buyers in a position to be purchasing affordable property.

For the first time investor the situation may or may not be similar depending on the type of property they are targeting.

If the investor is focusing on quality inner city housing, the likelihood is that the vendor (seller) will still have some level of power in the negotiation. If the investor is targeting outer areas (which are typically more affordable housing markets) they are likely to hold a much greater level of negotiation.

Other markets that may appeal to first time investors include coastal markets, tree-change markets or resource towns. Coastal and tree-change markets have begun to improve in recent months and have started to see some level of price growth, yet in most instances they remain well below their peaks, and buyers are still tentative.

Given this, for someone looking to invest in one of these markets they are likely to have quite a lot of leverage.

Resource towns on the other hand generally remain strong despite the uncertainty surrounding the Resources Super Profits Tax (RSPT). Resource towns are certainly what you would deem a high risk, high reward investment.

Get it right and the results can be very lucrative in terms of price growth and rental return; get it wrong and the property can end up being virtually worthless.

Overall, the property market appears to be transitioning from a period of strong property value growth to moderate value growth. The balance of power in market negotiation is also shifting. Overall, sellers have held much of the power since early 2009 however that is now swinging as the volume of willing buyers wanes.

The change in the balance of power is reflected by vendor discounting levels, which nationally sat at -4.8 per cent for houses in December 2009 and have increased to -5.4 per cent as at April 2010. We would expect that the level of vendor discounting will climb further in the coming months as the market conditions tilt in further in favour of the buyer. Cameron Kusher is RR Data's senior research analyst

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