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Even though it might seem optimistic to seek value in a market that has been rising for two years, there are still opportunities galore in this low interest rate environment.
Blogger: Peter O'Malley, author, Real Estate Uncovered
Finding value in a real estate market that has been rising for two years seems optimistic. Value can be extracted in many more ways than just buying at a low price. Indeed, there are not too many (if any) sales happening at a low price in the Sydney or Melbourne markets.
Even though the market is fully priced, there are still opportunities galore in this low interest rate environment.
First home buyers
Many first home buyers are devastated at the way house prices have run away. It feels as though they are locked out of the Sydney market forever. Indeed, with most one-bedroom apartments close to the CBD now selling well above $500,000, is it any wonder that someone earning $80,000 feels as though they will never get there?
The situation for first home buyers requires patience. The mass development across Sydney and Melbourne will bring opportunities in the next few years. These opportunities will most likely come in one of two ways – savvy developers catering for the first home buyer market or distressed resales when a market correction occurs.
The best value for first home buyers is currently in the rental market. It is far cheaper to lease a property in Sydney than buy one. The rental market is where first home buyers will find the best value for money until the right opportunity arises.
If we define the prestige market as being over $2.5 million, then its fair to say that there is still some value in this market. This current boom started where all booms start, at the lower end of the market and has gradually worked its way higher in price.
The prestige market never really recovered after the Global Financial Crisis (GFC) like the lower and middle markets did. The post-GFC rally of 2009/2010 did not register in the prestige end of the market. You only need to look at the (low) auction clearance of the prestige market in comparison to the broader market in recent years to see the weakness.
2014 has been the first year that could be described as a good one for the prestige market. Unlike the broader market, it does not look fully priced either. Anyone looking to upgrade from the booming mainstream market to the prestige market should find the selling excellent and the buying reasonable in comparison.
When the GFC hit, the lifestyle markets got hit first and hardest. Boat salesmen probably did not set any sales records either! The lifestyle property markets are probably further behind the prestige market in their recovery. Quite simply, property is cheap in many of these markets. For many baby boomers looking to exit Sydney for the tree or a sea change, now could be the time. Sydney is looking fully priced whilst lifestyle markets are showing enormous value. Capital cities such as Hobart and Gold Coast are potentially showing some value. It’s worth noting that lifestyle markets tend to drop first and rise last, so any move into the space needs to be carefully considered.
Interstate and commercial markets
Local investors should note that even though the Sydney and Melbourne property markets have boomed in recent times, many other capital cities are yet to experience price growth. Many capital cities around the country are surprisingly flat in this low interest rate environment. If you are looking to invest, whilst it would be great to buy the house next door, that may not be practical. Unfashionable markets can often throw up the best value. Renowned market analyst Louis Christopher believes that Hobart may be one of the best buys in the country at present, whilstis clearly the most risky in his view.
Globally speaking, our commercial market is in huge demand. Domestically, we still cannot work out if foreigners are overpaying for our commercial real estate or we are selling it too cheaply. But make no mistake, overseas buying is infiltrating the commercial market as they eye off juicy net returns of 7 to 10 per cent. Be careful and do your research in this space though.
Rental prices have been stagnant to slightly declining in the past 18 months. As property values shot up, rents went down creating a value pocket. It would be speculative advice to suggest that someone sell their existing residence in this boom environment and rent until prices settle down. Make no mistake, some are doing just that though.
If you do find yourself having to rent for whatever reason, you can be comforted knowing that you are leasing a property well below the repayment rate had you purchased it. Renting temporarily does not mean that you have given up on the dream of ownership, it’s just a sensible place to be when prices reach heady levels.
Paying down debt in a boom seems rather boring and sensible. Maybe it is too. But it is easier paying down debt when interest rates are at record levels. If you are paying principal and interest you are creating equity in your home with each repayment. Now that may be sensible, but it’s definitely not boring. Whilst buying and selling seems exhilarating, the profit is often washed away by the transaction costs.
How would your finances look if interest rates rose two per cent? They probably won’t in the short term, but if they did, could you afford to maintain the mortgage? If so, consider paying the extra two per cent now whilst rates are low. The two per cent will compound in the next 10 years to make it a very wise (and profitable) decision.
There is no doubt there are many other pockets of value in the market if you are thinking laterally. If and when the market does correct at some stage, that will create another set of value opportunities to those that are looking hard enough for it.