People in the process of buying or selling property at the moment are understandably worried about what affect the Coronavirus pandemic will have on property prices in Sydney and across the country, particularly in light of the impact it is expected to have on the economy as a whole. Of course, these circumstances are unprecedented, so nobody really knows exactly what will happen. But there are some things we know to be true.
This too shall pass…
“Yeah, yeah, yeah”, I hear you say, “but what damage will be done in the meantime and will I lose money?”
In this article I’m going to cover three things that I believe will keep property buyers and sellers in good stead in these times of uncertainty. Firstly, remember that property decisions need to be made with a long term focus. Secondly, turbulent times can offer opportunities as long as we remain clear on investment fundamentals. Thirdly, the price you pay has never been more important.
Keep your eye on the prize.
We never recommend buying property with a short term focus. Nor do we recommend knee-jerk selling. If we cast our minds back to the GFC I’m sure we can all recall anecdotes of people who bailed in a panic (I have friends who left Sydney in a mad rush and then realised too late that they could never get back into the market).
When fear takes hold, smart, sane people fall for catastrophic thinking, “that’s it, now the market’s going to plummet 40%”. Property bears have been trotting this figure out whenever there’s been a bad sign for the last couple of decades. But things never actually pan out in that way. People need homes, life as we know it may change a bit but it will go on.
Back to the GFC. Why can’t my friends afford to buy back into Sydney? Because, after an initial dip in prices, things got back to normal, we had a boom and then a bust and time fundamentally worked it’s magic. As you can see from the examples below, in blue chip suburbs, even buyers who bought at the peak of the market have enjoyed significant growth over the following eleven and a half years.
Median house price
Increase since GFC
What does this tell us? There is variability between suburbs (who could have predicted that Paddington would be the worst performer in this group?). Yet they all experienced short term volatility and, after prices stabilised, each suburb has enjoyed substantial long term growth.
If you want and/or need a home to live in, my advice is to keep actively looking for the right property. And as we know only too well, it’s not easy to find the right place! Good property is always scarce and if would-be vendors stop listing their properties for sale, or take them off the market, they will become even scarcer. There has been a noticeable reduction in stock levels in inner Sydney suburbs since 2016 and we did not see a flood of distressed listings with the 2017 market downturn. Anybody who had to sell probably sold then, so we won’t be expecting a rush of new stock to hit the market now.
If there is a market downturn, it would pay to remember that it will come back at some point – as each “unprecedented” event since 911 has demonstrated. So I’m seeking to reassure you that if the property is right, the time is right, as long as you have a secure job and a borrowing strategy that factors in buffers, you’ll be right.
Fortune favours the brave.
Up until only a week or so ago I’d been regularly having conversations with buyers who had failed to capitalise on the market downturn and buy in 2018. Every single person expressed regret for failing to act when they were in the box seat. This is like groundhog day to me, it happens every time after a market bounces back.
There can be opportunities in transitional markets. Some people do need to sell, for example vendors who have committed elsewhere. Some owners will freak out. Bring it on, I’d love to take advantage if they’re foolish enough to panic-sell a good asset. Only the prepared buyer will recognize these opportunities and only the brave will take action.
When the GFC hit there were some cashed up buyers who took a punt that things would ultimately return to normal. They were right. Some of them realised incredible gains within a very short turn around.
The Annandale house had been freshened up with not much more than a lick of paint between sales. What an amazing gain in less than eighteen months.
Balmain East house
You can read more background on the above examples here: https://gooddeeds.com.au/sydney-property-market/a-slowing-market-means-time-to-buy/
No improvements had been made to the Balmain East property between the first and second sale. Interestingly, the 2010 buyer subsequently spent quite a lot of money turning the top floor into a luxurious master suite and renovating the family bathroom. They on-sold the property in June 2015, right in the middle of the boom, for $3,340,000. If we assume the renovation cost at least $200,000, the growth they experienced over this 5 year period was around 40%, which is actually lower than a lot of other properties in the area would have experienced over the same period.
What does this tell us? That if it all goes to hell in a handbasket, cashed up speculators can really benefit. It also tells us that the market in these areas has the potential to turn around quickly, leaving many buyers behind.
Price is what you pay, value is what you get.
Of course, nobody wants to pay more than they need to when buying a property. There’s the feel-good factor of getting a “bargain” and the oh-so-real aspect of needing to preserve hard earned equity, particularly in turbulent times. Paying the right price is never more important than when there’s a chance the property could be worth less tomorrow.
Paying the right price can only be achieved if you understand market value. Our price research and recommendation process is rigorous. It takes into account, amongst other things, recent sales, market conditions and exactly how good the subject property is in the context of its location. We don’t factor in premiums when we make a recommendation, however we always have the discussion about whether or not a premium price is possible or justified.
In a hot market, when a property gets to auction, a premium is more often than not paid by the highest bidder, even for non A-grade property. This is where ill-informed buyers can be in danger of paying too much and losing money if they need to sell within a short period of time. When things slow down, we see B- and C-grade properties struggle at auction and lower premiums being paid for A-grade properties.
The Sydney property boom at the turn of the last century ended in September 2003. Prices fell then flatlined until early 2007. Some properties lost value over that period, some made money. There’s a case study of two houses in Lilyfield that illustrates the point perfectly. The differentiator was whether or not the owner paid too much at the peak of the market.
Median house price
I can guarantee that the sale price of Property A in 2003 exceeded what we would have recommended had we undertaken the price research process we use today. You can read the background to why I know this here:
Right now there is no hard evidence that demand is slowing in our core markets but there are some inconsistencies starting to materialise. Some open homes were crowded on the weekend, some quieter. Only yesterday a property we had evaluated sold for over $100,000 more than our recommendation. The Sydney auction clearance rate for the first weekend of March was 80.4% and 74.5% for the second weekend. Yes, that’s a fall, but over 70% is an indication of a seller’s market. The share market has tanked and while this can mean some property buyers now have less money to play with, it can also mean investors turn to property as a safer bet.
That all said, agents are reporting that potential sellers have been canceling appraisal appointments and buyers have been canceling private inspections. We could end up having a Mexican standoff.
When we move to negotiate on any property we seek to avoid vendors who are not motivated to sell and are holding out for their dream price. In a hot market sometimes these people get what they want. In an uncertain market, they won’t, so it’s worthwhile to stand our ground.
So, how will the Coronavirus affect property prices in Sydney? The bottom line.
Remember, if you buy the right property you’re unlikely to need to sell in the short term. If you pay the right price you’ll minimise the downside if you do need to sell in the short term. And if you buy an A-grade property (scarce and desirable) you’re giving yourself an insurance policy against prolonged market downturns. Our experience has demonstrated that there is always an underlying demand for quality property in the inner ring of Sydney.
Keep calm and carry on.
Some further reading:
© Copyright 2020 Good Deeds Property Buyers
First published: 18 March 2020
DISCLAIMER: Good Deeds buyers tips are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.