Beware of overpaying in the regions

Property buyers should be wary of overpaying, particularly for low-grade properties at this stage in the market cycle, according to Pete Wargent, co-founder of Australia’s first national network of property buyer’s agents, BuyersBuyers.

“It may seem hard to imagine in the current market conditions, but even in prime markets such as Noosa, we saw half a decade of poor property price performance following the onset of the financial crisis,” Mr Wargent said.

“Many units bought off the plan in the Sydney and Melbourne construction frenzy of around seven to 10 years ago have failed to produce meaningful capital gains. The same could be said of some Perth property investments made around 2006.

“Many regional markets have experienced a huge boom in prices over the past 18 months, and buyers need to recognise that these conditions can’t be sustained once the borders reopen and as new migrants inevitably gravitate towards the capital cities.”

“Investors this time around have been less drawn into regional markets for the yield due to lower mortgage rates and lower out of pocket expenses, but still this is not a time to be tempted by apparently high yielding regional investments, which usually come with a commensurate level of risk.”

Doron Peleg, the founder of property market research house RiskWise Property Research, said that buyers should beware of the risk of overbidding, especially when buying lower quality property.

“As the market was booming over the past year with sizeable percentage price increases, the combination of overbidding and purchasing lower-quality assets had few adverse consequences, as the market tide took almost every property up,” he said.

“Even if you were too excited and overpaid 10 per cent a year ago in Sydney, you still made a profit of more than 10 per cent, as the market has been delivering more than 20 per cent price growth.

“Due to a lack of stock on the market, there were buyers interested in almost every property, regardless of its quality

“Now, with decelerated price growth in 2022, and potentially a stagnant market, or even small price reductions, in 2023, the consequences of overbidding will be more significant.

“So naturally, properties with sub-optimal qualities will experience lower demand as the market cycle moves on and will be more sensitive to price reductions in such conditions.”

 

Mr Wargent pointed to CoreLogic’s Pain and Gain report as a reason for buyers to beware.

“That report has consistently shown that even when the market is booming, perhaps five to 10 per cent of properties can still be sold at a nominal loss,” he said

“And that’s held true even at a time when at the national level property price growth has been the fastest in over 30 years.

“Buyers need to remember that the tide will go out eventually. So keep a cool head, research thoroughly, and pay the right price. If you can’t afford to buy a AAA property, then try to focus on location while ticking as many boxes as possible within your designated budget.”