By John McGrath
"Will I pay too much?"
This is definitely a question on many buyers’ minds in Sydney today. After two boom years in 2013 and 2014, the rate of growth was expected to soften a bit this year. However that hasn’t happened yet – an interest rate cut in February and an unusually low level of stock has resulted in more price growth (Sydney median home values were up 5.8% in the March quarter, according to CoreLogic RPData) and many outstanding sale prices well above vendors’ reserves all over the city.
It’s understandable that buyers are concerned about paying “too much” but the fact is, in boom conditions like these, you are very likely to have to pay a premium if you want in. So how big a deal is this? Here are my thoughts.
- Property should always be a long-term hold. If you’re investing, you ideally want to go in thinking you’re never going to sell. If you’re buying a new home, you want to be looking ahead five years minimum. Property has too many costs associated with buying and selling (stamp duty, agents’ fees etc) to allow for trading more frequently than that.
- With interest rates as low as they are today, paying a premium right now is much more manageable because you can lock in your loan at an incredibly low, rock bottom, once-in-a-lifetime rate of less than 4%, which will help you pay off that premium faster than anything else!
- If you choose to wait the market out – which could be another year, especially if interest rates drop again and stock remains this low, then you need to think about the opportunity cost of that strategy. For example, delaying an investment purchase by a year, means losing a year of income and capital growth.
Market watchers (ie neighbours, unsuccessful bidders) will often claim that a buyer has paid “too much”. I question that line of thought. A property is worth what the market is willing to pay for it that day. And right now Sydney buyers are willing to pay a premium. If you want to get in, it’s best to accept it and prepare yourself to move forward.
Preparing to pay a premium
- If you’ve decided on a budget of $800,000, does that mean you couldn’t stretch to $810,000 if you needed to? Maybe you’d be willing to downgrade your car or delay your next holiday if it’s the difference between buying and not? In a boom market, you need to think about a budget, and then a stretch budget, well before auction day. You don’t want to be determining your stretch budget under the pressure of auction conditions.
- Focus more on repayments than purchase price. Buyers can really trip themselves up if they allow psychological limits on purchase prices to get in the way. For example, if you’ve decided that $800,000 – or anything with an 8 in front of it, is “too much” to pay, you might end up seeing a lot of homes sell in front of your eyes for $820,000. But what does an extra $20,000 do to your repayments over a 30-year loan? Yes, $20,000 is a lot of money, but when you’re paying it off in 360 monthly instalments, even with interest on top, it’s not a lot at all.
- Having said that, it is absolutely critical that you not go over your head with debt. It is never worth it. If homes in your target market are continually selling above your stretch budget, then it might be time to look at the next suburb over where homes might be selling for a bit less.
Looking forward, I believe the Sydney market will remain on an upwards growth trajectory. At some point, the rate of growth will taper, but the market will keep appreciating for some time yet. Sydney is well into the boom period of its current growth cycle, but after the boom, comes a period of more measured growth before any market softening begins.