We’re in a tricky market pre Easter 2012. One minute there’s spark of life, the next the puff has gone. As a buyer you may be feeling a little confused. How can I buy well in this market?
First, let’s think about what buying well means. If you think it means a guaranteed market outcome, forget it. We are not in a market of certainty. (In fact there’s never any absolute certainty about the property market.)
A better way of thinking about buying well is in terms of good financial and emotional outcomes for you.
In terms of financial outcomes, the best you can aim to do is to buy a home that has a real chance of outperforming the market. An outperforming home will not drop by as much as the average if prices go down and will go up more than the average on the next upswing.
Emotionally speaking, buying a home well is about meeting your family’s changing needs as you go through the cycles of life. There is no such thing as the perfect one-size-fits-all, long-term perfect home – (although in our opinion a well-positioned single-fronted, double-storey Edwardian or Victorian comes very close). But you should aim to buy a home that has five year flexibility to meet your changing foreseen and unforeseen needs.
The good news is that the same home can deliver both good emotional and financial outcomes.
What does a home that will have both long term demand and a restriction of supply look like?
We like to use the Three Ps Characteristics – Price, Property and Position to be describe what we think such a home is.
The most important P for financial outcomes is Position. Position is about a property’s location in relation to the CBD, shops, rail and good schools. If you can walk to these amenities the demand will be higher than if you have to drive. By logic the supply of these kinds of properties is restricted (they are making very few train stations or commercial centres). But position is not only area “big picture” – the minutiae and subtleties of one precinct over another is also an important consideration in emotional and financial outcomes of each family.
You might think there is great demand for new homes in outer areas and for high end apartments in the inner city. But in both cases there is no restriction of supply. They can always build more outer suburbs or Dockland apartments. That is why these homes have underperformed the market in the medium term.
The second P, Property, is both about land content and the floor plan. When buying well most of your money should be going into the dirt the property is built on rather than the bricks and mortar. Dirt goes up in value over time whereas buildings tend to lose value. Building in a fringe suburb is hard to stack up financially. If you’re buying land in the mid $1 millions to build on in Beaumaris, for instance, and expecting to sell it for mid $2 million to $3 million you are going to do your dough 9 times out of ten. The same applies to North Balwyn or Bentleigh East. Building new or major renovating can be emotionally satisfying but it can also seriously affect you land content to market value ratio – which is one of the more important ratios in long term financial outcomes. We like to see a ratio of at least 70% meaning the land is worth 70% of the market price (when completed).
The third P, Price, is important, because even in a great location it is possible to pay too much and so reduce your financial outcome. Be careful of false market prices created by marketing, skilled agents or unusual circumstances. Eg new developments, even within established suburbs, can often be false markets especially if what is on offer is well above the price of surrounding precinct types – at the very least it represents an elevated risk financially. A “real” market price has a historical basis and is currently determined by a number of other informed bidders.
So following these Three Ps of demand and supply characteristics, buying well is about buying into a good suburb with good land content and a good floorplan that does not require major work at a good price.
Want to know where you’ll find a property to this formula? Well, in Melbourne you can’t go past property near good schools in Bayside and the Inner East, which is why the long term trends for those suburbs consistently exceeds the Melbourne average (even if they go up and down in the short term).
As close as there is to such a thing, a good property in these areas will be the magic bullet that will allow you to buy well in this or any market.Email This Article to a Friend