John McGrath - Things To Consider When Buying In A Boom
Every buyer in the market today knows they’re buying in boom conditions. House prices have increased by a national average of 20% over the past 12 months and that’s in both metro and regional markets, according to latest CoreLogic data.
That isn’t normal – in fact, it’s about 4x what we would consider typical annual growth.
Buying in this sort of market has advantages and disadvantages. The biggest advantage is the immediate capital growth you may get to enjoy if market growth continues post-purchase.
For example, say you buy a $2 million home for your family today, when growth is averaging about 1.6% per month. By the time you settle in six weeks’ time, you will have made $48,000. Fun, right?
The disadvantage of buying in a boom is, of course, you might pay more than you planned. On top of that, no one can ever pick the top or bottom of a market cycle, so inevitably there will be a group of buyers who get caught buying at the top.
Let’s address these key concerns first.
The truth of the matter is buyers in today’s buoyant market are going to have to pay a premium for high quality homes. There’s no away around that. We’re in a boom. The question is, does it matter? The answer to this question is, it depends on how long you plan to live in the next home you buy.
If you are buying a family home that you intend to live in for the next 20 years, then paying a premium today is not going to matter in the long run (as long as you can afford the loan). Prices considered premium today will look like good value in 20 years’ time.
The great news is that many buyers are doing exactly that in today’s boom. They’re buying a property that they can stay in – and grow into – over the long term.
This is because so many of us can now work from home. It means the long-held priority of buying a home close to the CBD, where property is most expensive, has been removed.
Young couples are heading to the outskirts of our big cities, or to regional areas, where they are able to buy large, affordable family homes that they can live in for 20 years, no matter how much their family grows.
When your outlook is that far ahead, you should feel more comfortable paying a premium today.
My advice is the same if you happen to end up buying at the top of the cycle, too. Consider this. The last ‘top’ of the market was around November 2017, after a magnificent five-year run of growth.
At that time, median house prices were $1,070,000 in Sydney, $830,000 in Melbourne, $670,000 in Canberra and $530,000 in Brisbane. Buyers who bought at this level would have felt disappointed at the time as prices began to fall. But guess what? Those buyers have since made significant capital gains.
Current median house prices are $1,295,000 in Sydney; $955,000 in Melbourne; $935,000 in Canberra and $690,000 in Brisbane. Those 2017 prices look cheap now, right?
I always recommend shopping around for the best home loan rate, but this is especially important when you’re buying in a bull market. You’re likely to pay a premium, so that means more debt.
On a million dollars of finance, a loan that is only 0.5% cheaper will save you $5,000 per year. It’s worth your time to research rates and consult a professional mortgage broker to get the best deal.
My last piece of advice. Don’t blow your budget just to secure the next property you can. Home ownership is a long term game, so don’t let short term FOMO turn into long term financial pressure by paying beyond your budget (which should also include a cash buffer).
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