Everyone knows that property prices move in cycles, and of course it would be great to sell at the top of the cycle, or buy at the bottom. The trouble is, it’s very hard to pick the top and bottom of the market, even for the experts. If you’re looking to move from one house to another at the same time, it may not matter quite as much, because in general terms house prices may all move up or down together. However, that assumes you are buying in the same area, and in a similar price bracket.
That’s not to say that some people don’t make a lot of money, either by good management or good fortune. If you can buy cheaply at the bottom of a cycle, and sell at the top of a later cycle, you can do very well. Or you may sell at the top of a cycle, rent for a year or two, and get more for your money in a buyer’s market later.
On the other hand, things can change pretty fast in the market, and it is unwise to gamble with the family home. In the past, many families have sold up in Sydney, and moved to Queensland for a better life. After a few years when things haven’t worked out, they have wanted to return. But they have often found they couldn’t afford to buy back into the Sydney market. The same thing can happen to you while you rent.
The Sydney market may have been quiet for the past few years, and you may read that we are in for a period of low inflation. However, Sydney is still the leading real estate market in Australia, and is notorious for a sudden burst of price rises when conditions are right. If you are caught renting at the wrong time, it could be very, very costly.
You may think that it is fairly easy to pick the top and bottom of a cycle. Simply read the papers, keep an eye on things, and it will be obvious. I don’t think so (we would all be rich otherwise), and I think it is getting more difficult as Sydney becomes larger and more cosmopolitan. Here are some factors that I think you should bear in mind:
- There are more and more “markets” within the Sydney region. Prices for inner city units may be booming, while houses in the south-west may be static. Even in the same area, houses above $500,000.00 may be selling well, while houses under $250,000.00 may be selling slowly.
- There is a greater range of housing. The standard quarter acre block has given way to a multitude of villas, townhouses, units and so on. Again, this means you need to be more careful when assessing price movements.
- Remember that all markets are affected by supply and demand. Your local agent may say that sales in the last few months have been great, but this doesn’t mean that prices have been increasing at all. Conversely, if the local agent is quiet because he or she simply doesn’t have any decent houses to show you at all, this may be a signal that supply is tight, and prices will rise if the demand it there.
- The information age in which we live means that there is a wealth of information, statistics and other material being produced all the time. The trouble is that statistics can be interpreted and manipulated forever, and at any one time there will be numerous economists, consultants, real estate experts and others predicting rising prices, and at the same time there will be others predicting quite the reverse.
The best advice is to remember that real estate should be a long term investment, not a short term gamble. It is true that prices tend to rise with inflation over time, but don’t ignore the fact that property values can also fall. The costs of buying and selling property mean that short-term “gain” is often illusory. Look at this simple example, where someone plans to buy a bargain for $600,000.00, and sell it quickly for $675,000.00, obtaining a loan of $500,000.00. For the sake of simplicity, assume it is too difficult to rent the property in the proposed time frame of 4 months.
Price: $ 600,000.00
Stamp duty house: 20,510.00
Loan fees: 350.00
Valuation fees etc. 600.00
Legal costs: 1,600.00
Building/pest report: 500.00
Interest on loan @
8% for 6 months: 20,000.00
TOTAL: $ 643,560.00
Price: $ 675,000.00
Agent’s selling fee
@ 2.5%: 16,875.00
Auction expenses: 1,500.00
Discharge of loan fee: 650.00
Legal expenses: 1,500.00
Purchase costs: (643,560.00)
“PROFIT”: $ 10,915.00
The above example is, of course, over simplified, but time and time again people get caught into thinking that properties will sell faster and easier than they do in practice, and it is the holding costs that are the killer. You may say a $10,000.00 gain is better than nothing, but remember there may also be capital gains tax, renovation costs and time and effort spent on the property. It all adds up to taking a major risk for little or no return.
MY TIP: BE VERY CAUTIOUS ABOUT TRYING TO PICK THE TOP OR BOTTOM OF THE REAL ESTATE CYCLE AND LOOK AT THE LONG TERM
Sebastian Trouncer is the founding partner of Trouncer Legal and has over 35 years experience in property law. Contact Sebastian today to discuss your sale or purchase by phoning (02) 9481 9800, emailing firstname.lastname@example.org or filling out our contact form here.