by Neil Jenman
Reading time: 15 minutes apx
Pity today’s property-buyers. Especially those battling to buy their first home. If they want to buy in one of the Eastern capitals – especially Melbourne and Sydney – they face multiple obstacles, the worst being rapidly rising prices.
Another obstacle is fierce competition. No matter how much a buyer offers, there always seems to be another buyer who offers more. Sometimes multiple buyers making ever-increasing offers in the battle to buy the same property.
And then there’s the cruelty of auctions. Even in sedate property markets, agents lie to buyers about their chances of buying at an auction. But today, in addition to the usual lies, buyers are also battling escalating prices. They now have ten times the chance of missing out on a home.
The reason today’s market – especially with auctions – is so cruel is that many buyers get their hearts set on a home. The agents tell the buyers they have a great chance of being the successful bidder. This makes them fall more in love with the home. These star-struck buyers fork out hundreds – often thousands – of dollars in inspection reports and legal fees.
Come the day of the auction – after a near-sleepless night – the auction battle begins. Thousands of hopeful buyers are outbid by tens or even hundreds of thousands of dollars. They get their hearts broken and their wallets walloped. Disconsolate buyers shuffle away from auctions, arms around each other and tears often streaming down their faces.
And get this: The agents call this a “success”.
And media reports say: “Home Sells $250,000 Above Reserve,” which paints agents as heroes.
The truth is cruelly different. The buyers have lost money and had their hearts broken (often multiple buyers at the same property) and the sellers, while seeming to get a great price, have short-sold their homes – because that’s what happens at most auctions. Especially in a boom when the enormous price paid still falls well short of the “insane” price that the winning bidders are prepared to pay.
If real estate consumers spent more time researching and thinking – before they jumped into the real estate market, they would all be better off. Sellers would avoid methods where offers on their homes are revealed to other buyers – such as auctions. And buyers would learn how to better battle this booming property market.
As I said recently, all property booms end. But when they end and at what price they stop booming, no one knows.
WHAT CAN YOU DO?
This week, I got a text from someone about to start looking for a home. Here is what he wrote:
“I know you have your finger on the pulse, but to give you an indication of how INSANE (his caps) the market is, and why I am stressed about every dollar; in the past 6 weeks, prices in [Whoop-Whoop] have gone up approx. $400K. A cottage sold for $1.4m (which we could afford); but now, six weeks later, the same sort of cottage, two doors down, went for $1.7m. A 3-bed townhouse was advertised last week for $800k (which I felt was about the right price), but it sold for $1.2m on Saturday. INSANE!!!”
Many buyers are giving up, some think the boom will soon end. And, of course, many pundits, including so-called respected experts, have been making such predictions for 25 years. No one can predict the future. That’s the first lesson all home-buyers need to learn.
Stop trying to predict the market.
So, what do you do?
If you refuse to match the huge offers being made for properties – either because you can’t afford to do so or you don’t want to do so – and you think you’ll wait until prices drop, you are trying to predict the market.
Last week, I asked one of Sydney’s best agents, John Haidar from Kore Property Group: “Are some buyers refusing to battle with other buyers but then, a few weeks later, they are forced to pay a far higher price for the same sort of property?”
His answer was: “It’s happening all the time.”
I know what he means. Years ago, people coming into my real estate office telling me their budget was X dollars. They either couldn’t find a home for their budget, or they refused to buy a lesser quality home.
And so, they waited.
Two years later, when prices had risen further, they were back in my office – looking to buy the same sort of home that now cost tens of thousands of dollars more.
Today, those “tens of thousands of dollars” have turned into hundreds of thousands of dollars – even millions of dollars in the most sought-after suburbs.
Take Sydney’s Mosman where, according to some reports, prices have risen by 40 per cent in the past year. Buyers who were looking to buy a home for up to, say, $7 million in 2020 are now having to pay $9.8 million for the same type of home.
But it’s getting worse. Or, according to the media, it’s getting better if you’re selling.
The research boffins at Westpac reckon Sydney prices are going to rise another 27 per cent in the next 12 months. If so, that $7 million home in Mosman will be $12,446,000.
So, there you have it – at the top end, on the exclusive homes, prices rising by more than $5 million per home.
But, whatever the price and whatever your price bracket or budget, there’s no denying it’s a battle trying to buy a home in what can rightly be called “insanely” booming areas.
WHO BENEFITS IN A BOOM?
And here’s the great catch which means that, other than the feel-good factor, booming prices do not benefit many home-owners. The reason is simple: Unless you sell your home and go and live on a park bench, you will need another home. And, given that in our gimme-more society, most of us want to go upwards not backwards. We sell our home and make a massive profit.
And then what?
The delight soon turns to despair when you realise that, hey, it’s not just your home that’s gone up in value, it’s everyone else’s home too. Especially in those areas you’ve been eyeing off for years. And especially the sort of home you’ve always wanted. Sure, you might have made a $600,000 profit selling your home in Quaker’s Hill but the owners of those homes in Balmain are making twice that amount.
And so, your $600,000 windfall is soon erased by a $1.2 million downfall.
Here’s what’s frustrating so many buyers these days. The longer they stop to think about what they are going to do – where they want to buy and what they want to pay – the more the prices keep rising. The property boom, in most cases does not help most people because they are all forced to pay more.
DETERMINE YOUR GOAL.
Here’s a prediction you can make with some certainty: Predict what you want.
Where do you want to end up?
What is your goal?
Now, unfortunately, unless you have almost unlimited income prospects (like real estate agents whose commissions have quadruped twice in the past 16 years. That’s eight times!), you are limited by your ability to repay a loan. The amount you can repay determines the amount you can borrow. And the price you can pay.
Let’s look at first home buyers.
To predict your future, you must consider your alternatives.
Please do not give up. Sure, those clinical cold calculator types may tell you that you’re better off renting. But they are missing the most important point about home-ownership. It’s not the money, it’s the feeling.
Having your own home – even with a large loan – feels good, it really does. And then, one day, when (not “if”) you pay it off, well, that’s a feeling like no other. It will be one of the best days of your life.
So, provided you know what you can safely afford and provided you allow for a possible interest rate rise and provided you can afford the repayments, then, you really don’t want to gamble with your family’s property future. You are not an investor; you are a family home buyer. Big difference.
The rules for investors are different to the rules for home buyers.
One of the best and most important rules for investors is buy in gloom, sell in boom. Right now, shrewd investors are selling in the insanely booming areas. And investors who are buying are looking for gloom areas with potential on the upside or they are buying in areas where the ‘wave’ of the property boom seems to still have strength. I have some strong thoughts on these topics, including areas. But that’s for another article another time.
HELP FOR HOME-BUYERS.
Now, my focus is helping family home-buyers. Because, when you think hard about it, the best time to buy yourself a family home is when you find a family home you can afford. Booming or not, it doesn’t matter if it’s a family home you’re buying. Sure, it’s good to buy in a flat market and then ride the wave of a future boom. Or is it? Don’t worry what the market is doing, worry about what you are doing – and what you can do. Buy within your limits. What else can you do? You are not going to be real estate’s King Canute.
It all depends on your situation and your circumstances. If you are wanting to buy a family home, the right time to buy is when you find a home you like at a price you can afford. It’s no good complaining that the home you are buying today could have been bought for $200,000 a year ago. You can’t undo the past.
But you can set yourself up for the future.
Provided you always ask that wonderful seven-word question: What is the worst that can happen? If you don’t like the answer, don’t buy. If you don’t mind the answer, go ahead, and buy.
Home ownership is such a sought-after goal, especially among Australians. Although home-ownership is at its lowest level in more than 50 years (apx 65%), it’s not because people don’t want to buy a home, it’s because they can’t afford to buy. At least not in their preferred areas.
And so, sick of being outbid, gazumped, being lied to, losing thousands of dollars on inspections fees, they say, “Enough! I can’t stand it anymore.”
They surrender. For them, it’s a life of renting.
In my opinion this is a big mistake. Who really wants to be an elderly pensioner whose rental payments take up 80 per cent (yes EIGHT-ZERO per cent) of their pension? Please, no.
A WONDERFUL THREE-LETTER WORD.
So, if you cannot afford to buy in the areas where you’d like to buy, then I’d like to introduce you to a little three-letter-word that can change your life. This three-letter word needs to be added to the end of any sentence where you are telling yourself – rightly or wrongly – that you are not able to do something.
That little word is ‘Y-E-T’ – yet.
Look how it works.
You say to yourself and your family: “We cannot afford to live in Balmain.”
Now, you bring in the three-letter word and drop it at the end of the sentence:
“We cannot afford to live in Balmain – yet.”
See what a difference it makes? Suddenly your life goes from despair (which always happens when you use that horrible word “can’t”) to hope.
I can’t buy a home where I want to buy a home. Or: I can’t buy a home there – yet.
Obviously, the ‘yet’ version makes you feel better. It now leads to another question: What am I going to do? How do I get what I want to get?
The answer is: One step at a time.
If buying a home in your preferred area is your dream goal then surely the one goal you do not want in your life – your nightmare, perhaps – is to never buy in your dream area or, indeed, in any area. To give up completely.
To me, that makes no sense.
BUY THE BEST YOU CAN FOR YOU.
If you can’t have the best right now, why not have second best?
Oh, okay if you can’t afford your second-best choice – yet (always add ‘yet’), then what can you afford to buy?
Surely, buying something is better than buying nothing? Of course it is.
I could write on this topic for hours – so if you want to keep reading more thoughts on buying a family home, make sure you subscribe to our website where we try to email you worthwhile information (hopefully, such as this) at least four times a month.
For now – and given that so many people want their answers fast and short (which is very hard, if not impossible to do), let me tell you about two home-buyers with whom I have spoken in the past few days.
Both are in their mid-30s.
Both are currently living in Sydney – renting.
Both cannot afford to buy a home in their preferred area of Sydney – yet.
But, by gee, if they both stick with me, I will do all I humanly can to make their one-time great dream come true.
In the meantime, I must work with what they have got.
One of them, let’s called her Buyer A is a single woman. She is fed up with being out-bid and out-offered on Sydney properties. We are not talking salubrious mansions. No, she has been looking at one-bedroom units – almost bachelor pads – in areas like Willoughby or Artarmon.
A few weeks ago, she got her hopes dashed again – as well as losing several hundred dollars on legal fees – when she bid on a one-bedroom unit. The agent assured her she had a “great chance” of buying it within her price range of $770,000.
It sold for just under $900,000.
In despair, her mother told her: “Call Neil Jenman.”
We spent an hour on the phone. And it can be hard in these politically correct times to find out what to suggest unless you get to know a person. So, as delicately as possible I wondered if she really wanted to be the owner of a one-bedroom unit in Sydney that she had probably bought at the top of the boom?
Let’s say she did find one for under $800,000. When you ask the seven-word question – what is the worst that can happen? – the answer is that she may be stuck with it for several years when the market cools. If the market crashed, she could be in real trouble. If she wanted to have a family, what’s likely to happen? The rent will not cover her mortgage costs.
We talked about getting out of Sydney. Buying in regional centres.
Here’s an amazing real estate fact: Many of Australia’s regional centres have better long-term capital appreciation than trendy city locations. Do your own research, I told this lady.
I then started to mention towns that were familiar to me – places we drive through when we head north out of Sydney: Singleton, Muswellbrook.
Take Singleton for example. It has around half the average home price ($420,000) of the state of NSW ($840,000) and a third of the cost of a Sydney home. And the yields on homes are more than double city yields. We had a very long talk, most of which centred around taking the time to check out these places.
I had to add: “There are some beautiful towns in regional New South Wales.” She could buy two lovely family homes in regional centres for the price of a tiny flat in Sydney.
If there’s one forecast that looks certain considering the recent pandemic, it’s that regional centres are going to be far more popular. Some of these towns have great futures.
And, sure many of them have already started to boom. Prices have grown strongly over the past year but, unlike some of the city areas, these properties feel as if they have a lot more growth potential.
And, when you apply the seven word “worst question” test, there’s little downside risk.
All this of course requires doing stacks of research – and please beware of buyers’ agents who promise to “source” you the best properties. Sadly, some property researchers are knowingly touting unethical buyers’ agents as “ethical”. It breaks my heart to see how the dollar corrupts so easily.
Buy from local agents and you can’t go far wrong. Like Peter Dunn in Singleton. A good and decent and, to my knowledge, a highly ethical agent, part of a long-term family in the area. Read the books of Margaret Lomas especially the one called ’20 Must Ask Questions for Every Property Investor’. Margaret does not collude with buyers’ agents. She is not corrupt.
Now sure, we have taken this young lady from being a home buyer to being an investor. But imagine what may happen to her in the years ahead. Maybe the same as has happened with my children. At a young age, I helped or encouraged all of them to buy properties, mostly in regional centres. All have done well, some fabulously so.
One of my sons bought a home in Ballarat in 2018 for $435,000. He borrowed $335,000. The rent more than covers the repayments and all of it goes to pay off the home. Today, it’s worth somewhere north of $550,000 – and climbing.
By the time we finished our hour, Buyer A was excited.
As I keep saying, no one knows the future, but based on what has happened in the past – and especially with regional centres – investing wisely (staying away from “experts), has proven to be a great steppingstone for a re-entry back into the city in a few years.
If these homes do not appreciate but if the rent covers the repayments and they are paid off in 10 – 15 years, this means that, the owner will have unencumbered property worth about $840,000. If the property prices did not rise in the country areas, the same would likely apply in the city areas. But, as mentioned, regional centres traditionally rise more than the cities.
There are many wonderful regional centres.
If you can’t buy the home you want in the big city of your choice, I suggest looking for the next best thing that you can afford to buy.
When I tell people – as I have done in the past when buying outside their main goal area – “Even if prices drop, you will still profit from the equity you build” – they buy on that basis. I forecast that they may get no capital growth or even go backwards in price. I have been 100 per cent wrong.
Not only have they not dropped or even remained stagnant, but they have soared.
Think of what could happen with Buyer A. Two good homes in two prosperous regional centres – [please do not take the ones I nominate here as “sure things”, do your own research – and hold them for between seven and 15 years.]
There’s an excellent chance this lady will one day have her pick of where she wants to buy.
Her “yet” will have turned into her “now”.
ANOTHER BUYER WHO MUST BUY NOW.
Now, let’s look at Buyer B. Ironically, it was also his mother who suggested he contact Jenman. With a wife and three tiny children life in a rented apartment in Sydney is something they want to escape.
A few years ago, at the top of one of the Sydney prices surges, they bought a unit in a part of Sydney they didn’t want to live. Now, they weren’t expecting much of an increase in price. They just wanted to sell it, add their limited equity to their modest savings and buy near one of those big cities outside Sydney.
But, as you saw in his text, the prices had gone “insane” in the past 12 weeks. And yes, he was feeling despondent.
Until we did and considered two things: First, we helped him sell his unit for almost a hundred thousand dollars more than any other unit in the same block – and $50,000 more than most local agents estimated. WARNING, the boom is happening quicker than most agents realise. Often an “outsider” can have a better handle on prices. Something about a forest and trees, remember?
With an extra hundred thousand dollars more than they were planning, this family was starting to feel better.
Especially when we examined where he was planning to live.
And here’s what this young couple and their pragmatism dictated.
Sure, they seem to have been priced out of the area which was their first choice. But as I explained to them, booms often have a ripple effect. As the prices rise rapidly in the best area, they soon spread to the second-best area and then to other areas, many of which were once undesirable.
But now, through necessity, or fashion or changing trends, you can see these “lesser” areas start to rise in price just like their more prestigious neighbours.
Also, as this couple realised, there are many parts – including streets that are equally as attractive – of these cheaper areas that are just as good, to an outsider, as the dearer areas. The properties don’t know they are supposed to be prestige. When the owners go to bed at night, does it really matter which side of the highway is worth the most money.
No, of course not.
STEP ON TO THE LADDER.
The property ladder is often just like a ladder. You climb it by stepping on the first rung – and maybe stay there for a while – and then move, maybe, to another home on another rung. Perhaps you help yourself advance by renovating your home and increasing its value.
And sure, you may not like this area as much as your preferred area.
But a few suburbs along or a few towns away, come on, surely, it’s better than abandoning the dream of home-ownership.
This weekend with lockdowns lifted, this young couple and their family plan to take a “drive around” nearby cheaper suburbs.
To start, they won’t got to agents. They’ll do what smart buyers often do. Drive the streets. Avoid the madness of today’s crowds spreading into many areas. And behind the doors of many of the lovely homes in those areas are some rather nervous home-owners. They know the boom, like a financial tsunami, is coming their way.
And then, they get a note in their letter box. It’s from a young couple keen to move into their area. If they are thinking of selling, maybe the young couple can have a look before the agents have a look. Before the crowds arrive.
And maybe, just maybe, when the owners meet this young couple, they might do what an elderly couple recently did when they met a young couple who came without an agent. They sat down, talked, drank tea, and reached a fair deal between them all. Without an agent. And, best of all, without the insanity.
If you are looking to buy a home and the insanity of the cities is getting you down, let’s hope this article has been of some help to you.
Don’t try and start at the top, it seldom works, plus it comes with too much pressure. Go somewhere else and find a way to get your foot on that property ladder.
As I often said to buyers, “Sure you may not like this home as much or even this area as much as your preferred area, but you must like the situation. You are on the property ladder.”
Getting closer to that three-letter word – yet.
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