How to buy best in a superheated market
Australia’s red hot markets mean due diligence is more important than ever for investors - here are some expert insights on how to make sure you don't pay too much as property sales and price growth go into overdrive.
It’s not an exaggeration to say that Australia’s property market has never been hotter.
Low levels of advertised homes and droves of keen buyers have combined to push prices up to new highs, while transactions are running hot despite the challenges of lockdown - making buying an investment property a tricky proposition.
Data released by CoreLogic this month showed there were nearly 598,000 house and unit sales recorded over the year to August 31, the highest level of annual sales since 2004 and a 42 per cent lift on the previous year.
The biggest rises were recorded in markets playing catch-up in Western Australia and the Northern Territory, where home sales were up by 62 per cent and 59 per cent, respectively.
Queensland recorded a 54 per cent lift in sales year-on-year, New South Wales’ home sales were up 38.9 per cent, while transactions were 34 per cent higher in Victoria over the period, CoreLogic said.
The number of transactions rose substantially in every state and territory other than Tasmania, which recorded an increase of 10 per cent.
At the same time, data from the Australian Bureau of Statistics showed price growth in Australian residential property was the strongest on record in the June quarter.
The ABS said the 6.7 per cent gain in residential property prices over the three months to the end of June was the strongest quarterly growth since it began tracking the data in September 2003.
Canberra recorded the largest quarterly rise of all capitals in the June quarter, at 8.2 per cent, with Sydney close behind at 8.1 per cent.
Hobart property prices were up 6.3 per cent. Melbourne’s 6.1 per cent and Birsbane’s rose by 5.7 per cent, the ABS said.
On a 12-month basis, capital city house prices were up 16.8 per cent, pushing the total value of Australian residential property to a new record of $8.92 billion, with a mean price of $835,700.
Against that backdrop, investors would be well-served by paying close attention to valuations, according to property research analyst Chris Mears, who leads the research division at alternative investment platform and private debt specialist AltX.
Mr Mears said while there were certain standards in place for valuing property for loan security purposes, the process can sometimes get a “little murky.”
He said that was because there were several different ways to measure the value of a particular property.
“An ‘as is’ valuation is based on the current state of the property, not taking into consideration any future developments to the building,” Mr Mears said.
“An ‘as if complete’ valuation on the other hand, assesses an asset’s value based on what it will be worth when it is renovated, rebuilt or finished.”
Those two distinct approaches could result in wildly different valuations, Mr Mears said, with a four-bedroom house in Coogee, Sydney potentially being valued at $5 million by one party, and $6.5 million by another.
Mr Mears said a valuation was only the first step in assessing a property’s worth, with several other factors at play, with council records in particular providing a good insight into what investors might be getting into.
“Development applications and consents indicate if approvals have lapsed, or if there are any illegal buildings on the property,” he said.
Another good source of local knowledge are real estate agents, Mr Mears said.
“Real estate agents are often at the coal face of the particular asset you are looking at and can provide some useful advice on the market - including insights that might not be publicly available,” he said.
“They can give you insights into accurate pricing, and the underlying drivers of the specific market, such as the target buying segment, best or worst streets, time on market, and new developments.
“Agents are also good at helping with comparable sales evidence, and might see or know things specific to the area that valuers might miss.
“But you also need to read between the lines, as they like to talk up prices.”
Buyer’s agent Kate Hill, founder of Adviseable, said the widening chasm between supply and demand was resulting in some investors overpaying for properties, as they fear they may miss out.
“Emotion is never a good thing when it comes to savvy property investment decisions, because people run the real risk of overpaying,” Ms Hill said.
“However, it is still possible for purchasers to buy successfully in a hot market."
Ms Hill said she had 7 tips for buying success in a hot market:
- Think laterally
Ms Hill said to aim for the “sweet spot” owner occupier resale market with a slight twist, including considering an adjacent suburb, a property with renovation potential and, for investors, those with a long-term lease in place.
- Be proactive
Buyers need to be proactive during their property search including getting into the habit of asking agents what else they have on the books or coming up pre-market, she said.
- Understand the contract
“Be sure to have a thorough understanding of the offer and acceptance and contractual process of the respective state, as well as the expectations of the local market, so that you can move quickly, yet as safely as possible,” Ms Hill said.
- Ignore list prices
Ms Hill said being armed with the ability to determine fair market value is arguably the top advantage, particularly when buying in a rapidly moving market when list prices are a starting point at best.
- Review the contract early
“Ask the agent for the contract early and have it reviewed by your legal representative before you enter negotiations, so that you can make an informed decision,” Ms Hill said.
- Don’t play it too cool
Let the selling agent know you mean business, such as being the first bidder at auction or even the first to submit an offer pre-auction, Ms Hill said.
- Contact the agent
“Don’t be afraid to chase up the agent after the first inspection as you could be one of 50-plus groups that visited the property and you may not be as memorable as you think you were,” Ms Hill said.