2020 promised to be a bright year for the Australian property market.
There were strong signs of recovery after the 2019 market correction. Currently, the Reserve Bank of Australia holds the lowest rates in history, and the government reformulated their first home buyer grants to incentivise first home home buyers. All of this brought some confidence to the market.
Now…approaching the end of the first quarter we are experiencing one of the largest and most serious pandemics in modern history.
What is a pandemic?
A pandemic is an outbreak of a disease that occurs over a wide geographic area and affects an exceptionally high proportion of the population. This year will be remembered as the Covid-19 (Corona Virus) year, and this is just the beginning.
How will this pandemic affect the property market?
The new government restrictions on auctions, and open inspections, are already affecting the property market. Nobody knows the magnitude of how the real estate market will behave in response to the measures taken by the government, as well as the health impacts of the virus itself.
It is very important to understand that this is a health crisis and is effecting the world’s economy. The general feeling shifted from a strong and confident market to an uncertain market. This means that sellers and buyers will tend to hesitate in their transactions.
We can look back in history and identify similar periods, however, the technology and the potential of recovery is not the same as it was 100 years ago.
So, is this still a good time to buy property?
This is a time where you can find properties reasonably priced and possibly buy under market value. The reason being, the uncertainty that everyone is feeling at the moment. However, the first step in getting into the market is to review your financial situation, crunch some numbers and check if it makes sense financially.
The recovery may happen very quickly, but nothing is guaranteed. As we navigate through these uncertain times, the main factor is risk.
1. Understand the risk involved in buying a property in the current market.
Review your financial situation
Having a look at your cash position and identifying your ongoing costs is crucial before committing to purchasing a property.
CASH FLOW = NET INCOME – ONGOING EXPENSES
This simple formula might be enough to put you off. If your number starts with a minus, perhaps is time to look at your expenses and cut unnecessary costs that restrict your cashflow.
It might not be a bad idea to talk with a financial planner and ask how to restructure your finances to put yourself in a better cash position.
If your finances are looking healthy and you feel confident to take the plunge, create a plan that can support your purchase.
2. Create an Exit Strategy
Good entry in the market foresees a good exit.
When looking to buy a property, how long do you intend to hold on to it. Five, ten, or twenty years?
Would you financially be able to afford the repayments during that period? Consider all sorts of circumstances and scenarios (kids, illness, rise in interest rates, job loss etc.)
What if the property prices don’t go up in the next 5 to 10 years? Would you be ok with that? The property market conditions are completely out of your control. You can look at trends and key indicators to predict what the market will do in the coming months and years, but at the end of the day, you cannot be certain that the market will behave as you expect it to.
If you had to sell in a flat or declining market, how can you ensure that you don’t lose money? What are your backup plans to make sure that you can still get your money back?
There are a number of strategies you can apply to reduce the risk that you’ll loose money by selling your property during unfavourable market conditions.
Buy under market value.
Smart property investors know the age old saying that “you make your money when you buy, not when you sell”. This strategy alone can be enough to mitigate the losses if you had to sell your property during unfavourable market conditions. Finding great property deals is the name of our game. We can help you source, negotiate, and purchase under valued properties in Melbourne’s South Eastern Suburbs right down to the Mornington Peninsula.
Proactive equity creation strategies.
There are a number of things you can do to intrinsically increase the value of a property. Think renovations, subdivision, strata titling, construction and development. Applications of one or more of these strategies can go a long way in mitigating the risk involved should you have to sell in a flat or declining market.
What investment strategies can you apply to manufacture some capital in your property?
These are the type of questions that will help mitigate the risk in your purchase. By anticipating different types of scenarios and market conditions you will be better prepared, and able to making better decisions.
Anticipation is the key for good entry in any market.
The conservative property investor that anticipated an event like the coronavirus is now much better positioned than an investor that was taking high risks, chasing high rewards.
3. Include the risk factor in the property negotiation
If you are looking in an area that is showing signs of slowing down, for example, not many “sold” signs or properties that have been on the market for a while – you should definitely include the risk factor when approaching the real estate agent.
Your offer should reflect the market value minus the risk factor.
Do you mean a discount? Not necessarily. You should add and change conditions in the contract that helps you mitigate your risk.
Sometimes real estate agents and vendors don’t like to have the contracts altered, however if you explain the reasons why, they are more likely to understand.
At Bright Advocates we understand that buying real estate has it’s risks, but by mitigating those risks we can feel confident in going into the market.
If you are looking to buy a property in Melbourne or the Mornington Peninsula. We are a buyers advocate agency that can assist you in your property purchase.