A booming market is brilliant news for most homeowners, but for those looking for an upgrade, runaway prices pose a challenge.
Even though upsizers might be able to get a great price for their own home in a seller’s market, they’re still paying top dollar for the property they buy next.
When all properties are increasing in value, the gap between their existing home and their dream home continues to grow, making the leap to the next level more difficult.
But flat or negative price growth can create an opportunity to upgrade if the value of your next property has decreased further than the value of your current home.
In some markets, the discount for upsizers is substantial.
Benefits of a buyer’s market
According to Domain Group data, the difference between median apartment prices and median house prices in Sydney’s inner-west was $930,000 this time last year.
Now, the gap has narrowed to $770,000, giving upsizers a relative discount of $160,000. In the city and east, the gap shrank by $186,500, and in the upper North Shore, it’s $220,000 cheaper to upgrade.
Softer market conditions could mean homeowners who have recently benefited from unprecedented price growth don’t need to save as long or borrow as much to take that next step up the property ladder.
The middle-of-the-road, mum-and-dad, suburban properties, don’t tend to get hit as hard. If you’re trying to upgrade into that prestige property, the gap has compressed.
When demand softens, upsizers don’t have to compete with as many other buyers. If prices aren’t rising faster than buyers can save, the fear of missing out no longer clouds a buyer’s judgment.
Instead, buyers can afford to be more picky, taking their time to choose the right property rather than settle for a home that’s not ideal. Now you have more choice and more time to do due diligence.
Reduced competition, lower clearance rates and more properties listed for sale rather than auction means savvy buyers can negotiate harder to get a property for the right price, as vendors accustomed to boom-time prices are forced to meet the market.
Steps for upsizers
Upsizers should also consider the changed lending environment when planning their next move.
Lenders are now taking a magnifying glass to buyers’ expenses and financial health instead of relying on the household expenditure measure (HEM) when assessing loans. Morgan Stanley research suggests a crackdown on debt-to-income ratios could mean the average new loan size will fall by 8 per cent.
For a home owner with a sizeable chunk of equity, a healthy income and expenses under control, the effect will be smaller, but those upgrading when finances are stretched may find the situation more challenging.
Don’t overestimate what you can sell your property for. Get that independent conservative view on it.
Upsizers must also be wary of apparent bargains in a flat or falling market. Those properties that need a bit of work and don’t present as well are getting heavily discounted, but if you don’t have the funds to do the renovation, the banks might not be lending as freely as they were.
It can be difficult to muster the conviction to trade properties when prices are falling. It’s a big decision to sell a property, and sometimes a lot of people have paralysis by analysis.
But for those concerned about further falls in the market, maintaining a long-term focus when investing in real estate can help smooth out any speed bumps.
The timeframe that you’re planning to hold the new property really negates the relative risk of the timing.
Is it time for you to upsize your property? Contact Cripps & Cripps on 9523 6511 for any questions you have around your situation and to get a valuation on your property.