When is the right time to buy property?

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CoreLogic’s Tim Lawless explains what the latest property data means for you


The value of property in Australia’s capital cities rose by just 2.2% in the three months to 31 July 2017. That’s significantly lower than the 3.5% rate of growth property experienced in the first quarter of the year.

So is this the ‘soft landing’ that many economists had hoped for? And, if so, what does it mean for both home buyers and investors? CoreLogic’s Director of Research, Tim Lawless, explains.


1. The figures reveal a tale of two cities

While the 2.2% growth figure is an average across all Australia’s capitals, Lawless explains that the slowdown really comes down to two markets: Sydney, where the quarterly rate of growth has more than halved, and Melbourne, where values have been more resilient to a slowdown, rising by 4.1%.

“Over the past five years, Sydney property prices have grown by 77% at a time when household incomes have been stagnant and rental yields have been falling,” Lawless says.

Lawless believes that we could be seeing the end of Sydney’s long property boom, although he cautions against thinking the housing market may be heading for a crash.

“We’re now seeing a combination of factors – rising interest rates, tighter lending policies, market fatigue and changing consumer sentiment – that are leading people to think that the timing to buy a house in Sydney is probably not as good as it was a year ago,” he says.  

One trend that stands out to Lawless is that investors are no longer the same force in the market that they once were.

That said, he doesn’t see prices falling significantly either, which means the market will remain challenging for many.

In Melbourne, the market may have slowed too but Lawless doesn’t notice quite the same combination of factors at play as he does in Sydney. After all, Melbourne’s property boom has been milder than Sydney’s and the property market is still underpinned by three factors that could lead to further price rises: strong population growth, a growing economy and better affordability. The average house price in Melbourne is $740,000 compared to more than $1m in Sydney. 


2. Other capitals provide a diverse offering

With property prices in Sydney and Melbourne likely to remain high, Lawless sees value in other parts of the country, particularly Brisbane and Adelaide, where price growth has tended to stay in line with wages growth over the past five years.

“Rental yields are still healthy and the economies of both cities are gradually improving,” he explains. “This means their real estate markets are stable and there is room for property prices to grow.” 

Lawless also believes Canberra and Hobart are “on a decent upward trajectory”: the latter in part due to migration from less affordable parts of the country. Meanwhile, Lawless says prices in Perth and Darwin could remain soft for some time following the end of the mining construction boom and migration back to the eastern states.


3. Investors to make up less of market

One trend that stands out to Lawless is that investors are no longer the same force in the market that they once were. This should also help take some steam out of the Sydney property market, where investors accounted for 55% of all new loans in May 2017.

Lawless says that the lower number of investors in the market is due in part to rising interest rates: most lenders now charge more to investors than they do to owner/occupiers. It is also partly due to new measures from the Australian Prudential Regulation Authority (APRA) which aim at limiting growth in investor lending to 10% a year. This includes restricting interest only loans to 30% of a bank’s total loan portfolio.

Lawless says that the key to growing wealth through property is to get in as early as possible and start building equity.

Interest only loans are a popular option for investors hoping to take advantage of capital growth without needing to pay down the loan principal. However, Lawless notes that in recent years, interest only loans were more frequently being used by owner/occupiers too.

“Generally, the sensible approach for owner occupiers when rates are this low is to pay off as much of the principal as you can.”


4. What to do if you’re looking to invest in property

If you’re looking to invest, Lawless urges exercising caution about the Sydney property market; although he believes blue chip suburbs within a 10km radius of the city should continue to hold up, even if the rest of the market slows.

While he sees growth in Melbourne prices, this is unlikely to be across the board. Growth in house prices has outstripped growth in unit prices for some time and, with many more units set to come onto Melbourne’s market over the next 12 months, the city may face an apartment oversupply, especially in inner-city areas. This is a challenge that may also afflict Brisbane.  

Instead, Lawless sees South East Queensland as the area with most indicators working in its favour: a growing population, strengthening economy, affordable housing and decent rental yields. He also suggests looking to other traditional holiday areas such as the Sunshine Coast and Byron Bay, where “sea changers” are beginning to put upward pressure on house prices.

Even though Perth’s property market is showing no signs of growing any time soon, Lawless likes its long-term prospects for investors. After all, its different economic drivers also means that property prices are somewhat counter-cyclical to those in Sydney or Melbourne. That means the Perth market may offer something of an insurance policy to investors who have traditionally favoured the eastern states.

“Sharemarket investors are well versed in the concept of diversification,” he explains. “The same principles apply to property investing too.”

There is always the option of buying an investment property in a more affordable part of the country and renting it out.

If you’re looking to buy in another state or even another area, Lawless stresses the importance of doing thorough research, both online and through local agents. Otherwise, you risk making assumptions about the property that may not be true. This could have a profound effect on the long-term value of your investment.


5. The options for first home owners

While growth may be slowing, Lawless doesn’t see it becoming much easier for buyers looking to get on the Sydney and Melbourne property ladder for the first time. That’s especially true if they’re looking to buy a freestanding home. As he points out, purchasing a $1million home without lender’s mortgage insurance (LMI) will still require a $200,000 deposit as well as stamp duty and other costs. That represents an ambitious savings goal for most first time buyers.

Despite this, Lawless cautions against over-extending, especially as mortgage rates are set to rise. Instead, he suggests first home buyers take their time and weigh up their options carefully, especially if the market cools.

“When the property market is moving quickly a lot of buyers feel a sense of urgency,” he says. “But you should only ever buy into the marketplace after doing the fundamental research. Buying a home is a big financial commitment and you should always make your decision based on the best possible background material. So seek financial guidance first if you need it.”

Still, Lawless says that the key to growing wealth through property is to get in as early as possible and start building equity which can then be used to fund the next purchase. It’s something he wished he knew when he was just starting out in his career. The younger you start, the more time you have to take advantage of potential compounding market gains.

That means if you’re looking to be a first homeowner and you can’t crack the market just yet, there is always the option of buying an investment property in a more affordable part of the country and renting it out.


6. The metrics to watch

Finally, Lawless says that there are a few metrics that anyone looking to enter the property market should be watching. These will give them a feel for where prices are headed and how aggressive they should be in making an offer.

In Sydney and Melbourne, where most properties go to auction, the key metric to watch is the auction clearance rate. When this declines, as seems to be the case at the moment, it means a gap is growing between what sellers expect and what buyers are willing to pay. This tends to give buyers greater bargaining power and leads to discounting.

Meanwhile, in other capital cities, where private treaty sales are more common, the figure to watch is ‘time on the market’. When this narrows the property market tends to be heating up. When it widens, it tends to be cooling. In these cities you should also be paying attention to the ‘average discount’ which measures the difference between a property’s advertised price and what it actually sold for.


Want more?

If you’d like to know more about getting into the property market, a Macquarie home loan expert can let you know your options.

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