Are you finding it difficult to find a property to buy?

What’s happening with the property market these days?

If you want my lay opinion, the property market in Sydney is hot right now – and I suspect it’s because of the relatively low interest rates.

From my perspective as a prospective investment property buyer and from my experience in providing conveyancing services – I can see that there’s been an upturn in enquiries and transactions that I’m dealing with on a daily basis compared to what it was, say 6 months ago. I don’t know what it means in terms of property prices, and aside from saying that property prices and housing affordability in Sydney is ‘crazy’, I’m sure you can probably find all the statistics in the media or other research sources.

Time after time I’ve had clients tell me that they’re needing to sign and exchange contracts to avoid their target properties from being snapped up by other would-be buyers. In fact, the situation at times seems even desperate to the fact that they ‘just have to get something’, and there’s a fear that if they don’t act now, then property prices will continue to skyrocket and they’ll miss their opportunity.

In many ways, these are sentiments that bring back memories of the first home buyers market around 2008 when interest rates were also low (maybe not as low as today) but there was also a higher and wider benefit for first home buyers (ie, up to $21,000 and no stamp duty). Back in those days, clients were offering well above the seller’s asking prices even to the extent that the agreed purchase price couldn’t be supported by valuations used for lending purposes – often leading to the banks refusing to loan and buyers, especially first home buyers, having to pull out during their cooling off period and forfeit their part deposit.

About 6-12 months ago, I had previously mentioned to colleages in the banking and home loan industry that although interest rates were low and comparable to 2008, the property market was still struggling perhaps because the government had pulled back the first home buyer benefits. If the government really wanted to stimulate the property market, it should bring back some of the first home benefits to recreate the same enviroment that existed in 2008 and attract the first home buyers back to the property market (this is obviously speaking without addressing any budgetery issues).

Today, it seems the even lower interest rates have addressed this issue, but instead of first home buyers back to the market, my experience is that there’s an influx of investment buyers. I still have first home buyers buying property, especially off-the-plan property, but not as many as there were back in 2008 and not as many as there are investor buyers at the moment.

I believe as property prices continue to skyrocket and housing affordability falls, the pressures on the rental market will see rents continue to rise which only makes it more attractive while we continue to enjoy relatively low interest rates. The only question then is whether investors will keep a calm head on their shoulders and continue to buy conservatively, or will they adopt the approach of the first home buyers half a decade ago and continue to pressure the property market upwards with inflated offers.

So far, some of the stories that I’ve heard through colleagues in the real estate industry suggest that there have been some buyers so desperate to secure a property that they’ve offered in excess of 25% on top of the asking price. Properties originally intended to go to auction have been snapped up before auction at record breaking purchase prices just because buyers don’t want to risk losing the property to other potential bidders. Good for sellers, maybe not so good for buyers depending on their perspective.

Provided buyers are buying the properties that they really want, the only real risk of inflated offers is whether they can secure their finance (if they require finance). I’m sure there are others who could potentially explain this better than me, but when obtaining finance to buy property, banks generally assess loans and properties used as security for those loans according to a Loan to Valuation Ratio also called ‘the LVR’.

So if you’re buying a property and obtaining a loan at an 80% LVR, then the bank will lend you 80% of the valuation of the property. If the purchase price is equal to the valuation, then you’ll need to come up with the 20% of the purchase price yourself. However, if you’ve made an inflated offer and you’re paying MORE than the market price or the valuation determined by your bank, either your LVR will increase or you’ll end up paying more than 20% of the purchase price. It’s for that reason, especially when buyers don’t have enough of their own capital to contribute to the purchase, that many of these transactions run the risk of falling over. In those situations, the buyer will likely be the defaulting party and therefore also be exposed to consequences under the contract for pulling out (hopefully only within the cooling off period) or being in breach for not being able to complete.

In short, what this really means is regardless of whether you’re finding it difficult to find a property to buy (because there are so many other motivated buyers in the market) bid or offer within your budget (and be reasonable about this), don’t get overly emotional or caught up in the buying process, and if you’re relying on finance, make sure you’re confident about what your bank is willing to do for you and what  you’re willing and able to contribute to complete. Following those basic points will help you act, rather than react to the market, and avoid the pitfalls of succumbing to the apparent peer pressure that seems to have afflicted so many buyers in recent months.

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Ern Phang

Ern Phang
Director - Property Lawyer

This website is supported by Phang Legal, a law firm in Parramatta providing fixed fee conveyancing services across Sydney and New South Wales. Ern Phang is the solicitor director of Phang Legal.