House prices surge, but buyers don’t panic: There’s a light at the end of the tunnel

GUEST OBSERVATION

If you’ve been following the news this week, you would have seen all the commotion about the latest housing price data to hit the market. Speculation of a housing bubble reached new heights with RP Data’s March figures revealing the biggest monthly gain in 18 years.

Melbourne led the surge, recording the strongest growth out of all the capital cities (5.4% for the first quarter of this year). As a buyer, it can be easy to get swept up in the media headlines. Naturally, concerns about housing affordability and whether buying now is a good idea come to the forefront. But before we hit the panic button, let’s take a closer look at what this really means for buyers.

Let’s put things in perspective

Just like any situation, it’s all about putting things into perspective.

Yes, March saw some significant gains – but let’s not forget the gains are off the back of a lull in 2011 and 2012 when we saw the first major correction to the market since the ’90s. 2013 was a year of consolidation, so the latest data actually represents a recovery or upswing from lower than normal levels of activity.

We need to tune out the white noise and fears of a property bubble and keep in mind that the long-term fundamentals of the market are still strong. Our population is booming (expected to reach 40 million by 2060), interest rates are at a record low and with the mining boom over, the construction industry is tipped to be the next economic driver – spurred by an undersupply of new housing nationwide.

Adjust your expectations

If you’re a first home buyer, this piece of advice will be most relevant for you as affordability is likely to be your biggest barrier. Remember that property is a cyclical asset and should be always viewed as a long term investment.

The first home you buy is not going to be the house you live in for the rest of your life. Buy in an area where you can afford to get your foot in the door. Once you’ve done this, you can put plans in place to reap a return on your investment and use it as a stepping stone for your next purchase.

Buying where you can afford will allow you to pay down your debt and when you’re ready, sell that first home and use the tax free profit to buy your next home. If necessary, repeat this process until you are in a position to purchase the home that you want to live in for the next 20 years.

The other option to consider is buying an investment property that’s likely to reap strong capital growth and renting in an area you want to live in, and using the rental income from your investment property to help pay down the mortgage.

The housing market is made up of several sub-markets

This is probably one of the most important things to remember about the housing market. To an extent, we need to take the March data for what it really is; a short-term growth spurt. Don’t get caught up in the media hype.

While the data is good for providing a pulse on the market as a whole, it doesn’t provide a more holistic perspective on the various sub-markets that exist within the entire real estate market.

Each suburb is unique and has its own laws of supply and demand at play. For example, there’s still a lot of opportunity to purchase affordable housing in suburbs within 8 kilometres from the capital cities, or areas that have not yet seen huge price spikes.

In Melbourne, there are suburbs such as Footscray where the median unit price is $385,000 (nearly $100,000 less than the statewide median of $481,000) and Essendon where a number of new housing developments are driving the area’s growth potential and offering first home buyers affordable homes. 

As a buyer, you need to ensure you do your research on the area you’re looking to buy in before taking the plunge – there’s a wealth of resources online such as RP Data and propertyDATA.com.au.

Speak to the experts

Finally, if you really are serious about getting into the property market and want to do it right from the get-go, then getting advice from the people who do it on a daily basis is a great start.

Property advisory firms are a great source of advice for the housing market - similar to a financial planner for the share market. Property advisors can talk through the nuances of the sub-markets and help you understand the micro and macro trends influencing house prices and their direction. They can also take the emotion out of buying and save the time you would have had to otherwise invest into researching your purchase.

Most of all, they can save you money by presenting the best valued properties - whether you’re an investor looking to enhance returns on your property portfolio or a first home buyer trying to get a foot on the property ladder.

Sophorn En is managing director of Riveren Property, a specialist investment group offering a broad range of property investment and advisory services to assist clients build their long-term wealth through astute property investment.