A very narrow gap between gross rental yields and mortgage interest rates is a buy signal for investors.
How to buy property when stock levels are low
The colder months are supposed to be quieter for residential property activity, but winter 2019 is turning into the big freeze, activity-wise. Capital city auction numbers and new listing volumes are both around 25 per cent down so far this winter compared to 12 months ago, based on CoreLogic data.
These thin volumes have tempered the excitement of buyers emerging in recent weeks to take advantage of lower prices and the 50 basis points cut in interest rates. Restricted choice sees auction clearance percentage rates shooting up to the high 60s and even 70s in Sydney and Melbourne.
And with a number of properties selling several tens of thousands above the top of quote ranges, there are pockets of our capitals that fit the sellers’ market description. Although that’s an expression that feels odd to use so early in a market recovery, for now it reflects the power balance between vendors and buyers.
Of course, all may change come spring. Solid winter results should be a signal for more vendors to enter the market and even matters up.
In the meantime, how should buyers behave to avoid costly mistakes? First off, they shouldn’t be disheartened. A buying campaign is usually a marathon, and prospective buyers accrue valuable knowledge of the market and their requirements along the way.
Patience is a vital quality. The temptation in this market is to compromise and buy something that isn’t quite right. That only leads to buyer’s remorse down the track. Buyers need to trust that more supply will arrive in spring and remain discerning in the interim.
Saying that, if the right property presents itself today, a buyer should still know how to pounce.
The challenge then becomes about paying a fair price. Typically, finding recent comparable sales are the key to establishing fair value. Which is of course quite difficult at the moment because of a paucity of fresh transaction data.
Where there is a dearth of data, the buyer needs to cast the net wider: look further afield and back in time. On occasions, this requires some lateral thinking. For instance, if there are few recent sales of a property type in the subject suburb or adjacent location, consider suburbs four or five kilometres away that have a similar buyer profile, property type and distance from the CBD.
Indeed, this necessity of expanding the search area can also be a virtue, particularly for investors. Some investors are initially determined only to buy in a specific suburb or two, which makes them vulnerable when choice is low. Becoming enlightened about new ‘comparable’ suburbs reduces the risk of overpaying.
There are a couple of other factors to bear in mind, given the likely elongation of the buying process. First, buyers should be mindful of the expiry date on their mortgage pre-approval. A three-month limit is not unusual, which is easily exceeded in today’s slow-motion conditions. A bureaucratic nuisance, the silver lining is that better terms may be extracted from the bank given the improved lending environment of recent weeks.
Second, those who are looking to move home and trade properties in the usual order – sell first and buy second – may want to avoid short settlement periods to reduce the heightened risk of failing to find a replacement property and being forced to take up a short-term rental lease.