November 2009: What Not to Buy and Market Update

Welcome to your November edition of propertybuyer’s market update.

In this edition we will look at…

1. What Not to Buy
2. Client Stories
3. Market update
4. Hot investment property stock
5. Inspiration Corner - Thoughts of the Month

1. WHAT NOT TO BUY –By Rich Harvey

We are asked everyday of the week “What is a good property investment and where should I buy?”
To shed some light on this question, let’s have a look at some of the fundamental mistakes that investors sometimes make and ten things you should avoid.

1. Areas with poor rental demand. There are some suburbs with an over-abundance of investment properties and a distinct lack of owner occupiers. We like to buy for our investor clients in suburbs that generally have around 70% owner-occupied stock for a few reasons. Home owners typically take more pride in the appearance of their homes which makes the streetscape more attractive. Home owners are less likely to sell during a market downturn, thereby putting more of a floor under prices for an area. And thirdly, there is more demand for rental property due to constricted supply, which means rents are higher.

2. Generic, standardised units in massive high rises, in outer areas. Don’t buy a clone property. Look for properties that have some uniqueness value. This is critical to achieving the right balance of capital growth and solid rental yield. While there are some excellent high rise apartment blocks close to the CBD, be wary of developers or marketers selling you the “dream” apartment in areas that are just too far from the city or there are simply too many of the same type of apartment in the block. Some large blocks being promoted in Parramatta, Liverpool and Blacktown are very boxy, have boring architecture and are primarily sold at a higher price to unsuspecting investors.

3. The bargain property: Be wary of waiting to buy until you find that bargain property. If the property is being marketed as a “bargain” there needs to be a compelling reason. Perhaps it is located on the corner of a busy intersection, or the petrol station next door has leaked contaminating chemicals, or the neighbours were recently busted for drugs. On the other hand, if the vendor is selling under duress because of financial problems or divorce then it could be a genuine bargain. You need to ask the right questions and research thoroughly to get the answers.

4. Buying at twice the median price. Consider your exit strategy when you buy. Who will buy the property after you? If the median price is say $800k, then how many people are prepared to buy at $1.6m? Probably only around 5% of the market, whereas over 90% of the market are targeting the median price segment. However, there is an exception to this rule – some properties are so unique that they command a price three or four times the median price!

5. Industrial zones. Buying next to a panel beater, metal works or an abattoir is not attractive to tenants. While the properties are usually cheaper, this is for a very good reason! While you can get a house or unit on main roads cheaper, they will always be discounted in the future. This will constrain your capital growth and rental returns. It’s generally noisier and harder to get out of your driveway every day.

7. Stigmatised houses. Houses where there has been a suicide, murder or other dramatic event get the unfortunate title of being “stigmatised”. Hedonic pricing analysis has shown that this can reduce the value of the property by 20% to 30% in some cases. Under revised legislation, selling agents are obliged to reveal all “material facts” about a property. While you may net a bargain, it may be hard to off-load to the next buyer. Same thing applies to high crime areas.

8. Power lines, mobile phone towers and stanchions. While health studies on the effects of electro-magnetic radiation from power lines and phone towers shows inconclusive evidence, there is still a very strong perception that these things are bad. And it is perception that drives price at the end of the day!

9. Miles from everything. Being close to shops, transport and good schools is highly sought after by home buyers and tenants. Don’t be fooled by cheaper prices to buy in the new subdivision 60km from the CBD but in an area that lacks basic infrastructure and soul.

10. Schizophrenic floorplans. Properties that have poor aspect, squashy bedrooms, strange features, lack an outdoor living area and a generally dysfunctional floorplan are best avoided. Renovating to fix the problems with the layout will quickly surpass the discount you may have got when buying the property.

2. CLIENT STORIES

This month we have helped a wide range of home buyers and investors secure some excellent quality property around Australia. We have assisted several premium buyers in Sydney in the $2m to $5m range. We are starting to see some recovery in the prestige market but there is still some way to go to make up for lost value from the GFC. There are good pickings for expats, and those upgrading looking to get a foothold in this market. Family homes in the range $800k to $2m are in high demand and the healthy competition from other buyers means you need to be quick. We have also assisted many investors and first home buyers in the range $350k to $600k+ range. The lower end of the market is likely to continue to show strong demand as more investors return to the market as the FHOG is scaled back.

Below is a small sample of our most recent buys.

(a) Off market deal saves client over $700k.

Buyer type: Home Buyer (full search) - Lower North Shore
The brief: Large 4 to 5 bed house in Mosman with large land size, view and pool
List price: $5,500,000 + (originally a silent-listing)
Purchase price: $4,800,000
Appraisal: Around $5.5m

Buyers’ agent comment:
Lynn and Boris were seeking a quality home in Mosman, Balmoral, Clifton Gardens or Cremorne that was a family friendly home, renovated, walk to parks or beach, had a nice aspect and low maintenance. They did not necessarily want a “show-piece” property, but a property that was functional for their family needs and hosting overseas guests. I contacted my network of agents to uncover a wide range of silent listings. Some of these where not quite suitable so we continued extensively searching the market for new listings. I eventually came across a quiet listing at Balmoral that backed onto Chinamans Beach and had all the features they were seeking. We negotiated a terrific price and they move in before Christmas.

What our clients say:
“We really appreciate all you have done for us. You certainly deserve the title “top buyer agent”. You have always been available and easy to communicate with. Rich was able to fully understand our needs then deliver a property that was just right. We would not have been able to do this on our own. Thanks for your dedication and great support.” Lynn & Boris

(b) We don’t have to spend all our clients’ budget

Buyer type: Home Buyer (full search) – Eastern suburbs
The brief: Seeking 4 bedroom home around Paddington, budget up to $4.5m
List price: Around $3.0m
Purchase price: $2.415m
Appraisal: Between $2.5m to $2.6m

Buyers’ agent comment:
In a clear tale of how we protect our clients, we do not need to spend their budget just because they have one. In one of our recent success stories, we were faced with looking for a unique property in a limited location where we believed that our best chance of securing a property would be through an off market search. Although we had a reasonable budget of $4m, our open minded approach allowed us to finally secure a property under $2.5m that was more than suitable for the clients current needs.

Building on a very established relationship with the agent, I was able to negotiate a price significantly lower than the original expectation of the vendor who was first looking at a price of up to $3m. Overall the cost per square metre for this level of finish in the eastern suburbs was much lower than comparable properties.

What our clients say:
"I would recommend the services of propertybuyer to anyone looking for a buyers agent to expedite the process of purchasing a property.
The services of propertybuyer undoubtedly led to a significant saving in the purchase price of my new home. I am thrilled that propertybuyer helped find me a new home that met all my purchasing criteria.
I would sincerely like to thank my agent Saul Rudnick for his knowledge and understanding of the property market and his ability to make the purchase process informed, easy and stress free."
Samantha (November 2009)

(c) Patience with negotiations secures silent sale

Buyer type: Investor (full search service)
The brief: Seeking a 3-4 bedroom house near Dee Why for less than $900,000
List price: $895k (silent-listing - direct negotiations with the vendor)
Purchase price: $845,000
Appraisal: Between $850k to $880k

Buyers’ agent comment:
Markoss and Kristina were looking for a neat and tidy, low maintenance investment property close to their home that could achieve a good rental return with minimum fuss. They wanted the flexibility of being able to move into it themselves if their personal or financial situation changed in the future. After searching the market and pulling out of previous property purchase because the house did not have full council approval, I came across a couple living in Cromer who were looking to relocate to Port Macquarie. After an independent appraisal and extensive negotiations with the vendors, I convinced them that without having to pay selling agent or advertising fees, our offer was very fair. I also negotiated an extended settlement of 3 months which suited the vendors, and more importantly, my client purchasers.

What our clients say:
“From the first briefing meeting through to the exchange of contracts, Matt has been an excellent partner in securing our first property. His advice kept us from making mistakes, his feedback kept us on track and helped us learn the ropes and his contacts provided access to the property we eventually bought - a private sale, something we would never have been able to do on our own! We are both pretty busy people and therefore appreciated the hassle-free total package which made the process seamless and kept us from having to organise inspections, lawyers and the like. We actually bought our house remotely from Europe where we were holidaying at the time with Matt keeping us up to date across time-zones, very professional, reliable and highly recommended. Thank you Matt for your support.”
Markoss and Kristina

We’d love to help you when you’re ready!
If you are considering buying and would like to get the upper hand with a professional buyers’ advocate representing just you (not the vendor), sourcing and negotiating the best opportunities throughout Sydney and Australia, then please call our team on +61 2 9975 3311 or email us for an obligation free chat.
Click here to send us your Wishlist…

3. MARKET UPDATE

The Reserve Bank Board lifted interest rates by 25 basis points on Melbourne Cup day in November. Standard variable home loan interest rates now sit at 6.3%. The interest rate futures market is now factoring in an increase in rates of more than 2% over the next 18 months. Despite the latest rise, the average standard variable rate remains well below the 10 year average of 7.26%.

Based on the latest RP Data – Rismark Home Value Index results for the month ending September, properties are selling faster and vendors are moving less on their asking price. The average level of discounting, which measures how much negotiation is taking place in the market, fell from 7.0 percent last year to just 5.4 percent suggesting that vendors are regaining some leverage as buyer demand increases. The average number of days on market has also fallen considerably compared with last year. The average Australian house is now taking just 41 days to sell compared to 53 days last year.

It is important to note that in the lower price market segments there is very little discounting. In fact, many areas that traditionally used private treaty sale methods are now reverting to auction for increasing number sales.

Auction markets around the nation are still achieving strong clearance rates, although clearance rates have softened this week with a national weighted average clearance rate of 70%. The largest markets, Sydney and Melbourne, recorded clearance rates of 73.5% and 76.1% respectively.

With the RP Data-Rismark Home Value Index showing a slowdown in value growth during September, the First Home Buyers Grant Boost being wound back and two interest rate rises with the likelihood of more to come, will slower value growth mean rental growth is set to return?

The RP Data-Rismark Home value Index showed that during September 2009, property values recorded their slowest monthly rate of growth of any time this year at just 0.1%. Importantly, during September the First Home Buyers Grant Boost (FHBGB) was still in full swing and interest rates were still at 49 year lows. However, the FHBGB was into its last month in full and the prospect of interest rate rises were certainly being regularly mentioned within the media. These two factors are likely to be major contributors to the slowdown in value growth during the month.

The September Home Value Index results showed that property values fell over the month within Brisbane, Adelaide and Perth whilst the other capital cities saw value increases ranging from 0.8% in Sydney to 2.8% in Darwin.

Prior to the September slowdown in capital growth, national home values increased by 8.0 percent under unexpectedly strong market conditions. As capital growth surged ahead the rental market softened as many renters took advantage of the low interest rate environment and strong buying conditions.

With lower rents and higher property prices, rental yields have been eroded. The average gross yield on a house fell from 4.7 percent to 4.3 percent and the average gross rental yield for units fell from 5.4 percent to 5.0 percent.

With the inevitable end of the First Home Buyers Grant Boost at the end of 2009 and the cash rate futures market factoring in an increase in interest rates of more than 2 percent over the next 18 months it is anticipated that the rate of property value growth will slow as first detailed in this month’s results. Fundamentally, the Australian property market is still anticipated to see some value appreciation. This is due to the fact that demand is outweighing supply with record population growth and low levels of dwelling commencements. Along with this, the availability of finance for new development remains difficult to obtain for developers constraining supply, as does the generally long and arduous development application process and the excessive charges placed on new development by Local Governments.

We are now seeing the first evidence of the falls in rents and yields abating. With housing affordability likely to once again become an issue as interest rates climb and Government handouts are removed, the likelihood of further growth in rental rates and improvements in yields becomes more likely. The only potential saving grace is the return of investors to the market (investors introduce more rental supply), which has commenced as first home buyer activity abates. However, increasing demand as fewer first home buyers take the plunge into home ownership and vacancy rates remaining at very low levels suggests that it is more likely that rents and yields will improve.

The likelihood of increasing rental rates and yields for investment properties is good news for investors but not such good news for individuals that didn’t capitalise on property value falls during 2008, historic low interest rates and generous first home buyer incentives.
(Article supplied by RP Data)

4. HOT INVESTMENT PROPERTY STOCK

We are currently conducting research into a number of hot spot areas for our investor clients in well known places Queensland, South East QLD, regional NSW, Adelaide and a select range of suburbs in Sydney. We are targeting areas that have the best potential for both capital gain and strong rental yield to maximise returns for investors.

We are very excited about some new stock we will have available for current clients in the next two weeks. We have located a site where a developer is willing to sell land at a 30% discount to valuation. This will mean that we can source brand new house and land packages for between $400k to $590k and achieve rental yield from 5.7% to 6.9%.

We also have a range of NRAS stock for investors seeking this type of investments in the range of $350k to $500k that are cashflow neutral to cashflow positive depending on location and price point.

To find out more and get access to this type of stock, please contact our office on + 61 2 9975 3311 or email us to build your wealth through property investment – starting today!

5. INSPIRATION CORNER

“If you wake up in the morning and you want to sing – then you are a singer” Whoopi Goldberg

“Seek freedom and become captive of your desires. Seek discipline and find your liberty.”
Frank Herbert, Dune Chronicles

“If one does not know to which port one is sailing, no wind is favorable.”
Lucius Annaeus Seneca

Do more than belong: participate.
Do more than care: help.
Do more than believe: practice.
Do more than be fair: be kind.
Do more than forgive: forget.
Do more than dream: work.
Do more than you think you can: have passion

I hope you enjoyed your November update and we look forward to keeping you informed in the next edition.

If you would like to buy a property and have a professional buyers advocate on your side sourcing and negotiating the best opportunities throughout Sydney and Australia then please call +61 2 9975 3311 or email us your wishlist so you can find the easier way to buy property.

Warm regards

Rich Harvey
Managing Director
Tel: +61 2 9975 3311
www.propertybuyer.com.au

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Many thanks. Rich

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