With low interest rates, accelerated demand and rising prices, Sydney and Melbourne residents are facing competitive conditions in today’s property market. Australia’s housing market is estimated to be valued at around $6T, and as housing affordability becomes a pressing issue, we’ve invited the experts to share their tips to guide first home buyers and property investors.
The first home buyer
For first home buyers, breaking into the property market isn’t easy and realistically, the cost of paying off a home can be greater than the actual sale price. A recent survey by homeloans.com.au found that on average, first home buyers are aged 28, and 40% of first-time purchasers, spend more than two years saving for their deposit.
Ray White agent and expert in Sydney’s upper north shore property market, Thomas Merriman, says purchasers should get their financial affairs in order before they start the search for a first home.
“You should know what you can afford. The market should not dictate your purchase price. Rather, your ability to borrow and repay a mortgage should drive the type of property you look for. Most properties are sold even before auction day and when the market conditions are favourable, it will be beneficial if you have your money ready to go,” says Thomas.
Determine your budget:
- Take into consideration your upfront costs including stamp duty and deposits.
- Account for any ongoing costs such as council rates, maintenance fees and potential changes in interest rates.
- Determine the type of property you need and the rate of your repayments.
- Always note hidden costs such as establishment or settlement fees that can be attached to your loan.
Consider government benefits and incentives:
- The NSW government offers a First Home Owners Grant (FHOG) of $15,000 for new homes under $650,000 signed before 30 June 2014, or up to $750,000 for contracts signed from 1 July 2014.
- From 1 January 2016, the NSW FHOG grant will be reduced to $10,000.
- In VIC, first home buyers can access a $10,000 grant for the purchase of new homes up to $750,000 and claim a 40% reduction in stamp duty.
- It is important to check if you are eligible to apply for the FHOG as the benefits are only available to Australian citizens who have lived in a new home for at least 6 months.
When you can determine what you can afford, start your search by knowing your lifestyle needs and your wants. Identify the area you’d like to live in and the type of property you require. Be open to the idea of moving outside of your comfort zone and researching areas you haven’t considered before.
Thomas Merriman says that the biggest mistake made by home buyers is to look for the ‘perfect’ property. It is no longer practical or common to wait for a perfect home to hold onto for more than twenty years. Instead, first home buyers should look to buy a property with compromises within the intended price range.
“Don’t buy with your heart, buy with your brain. You can renovate with your heart but you shouldn’t buy with it, you’ll miss good opportunities. Research is king so research the developer, walk through other sites and try to look at the data of sales in comparable builds from the same company. You can never do enough research and you will never feel comfortable unless you know what you have said yes to,” says Thomas.
Buying to Invest
In July, the median price of a house in Sydney reached the $1M mark. Oliver Quach from Service First Property Group (SFPG), says that ten years ago, $1M guaranteed a purchase in any Sydney suburb including a 3 bedroom house in Bondi beach or a 4 bedroom house in Annandale.
“With the current market conditions, there appears to be a stabilisation of property prices in Sydney. As this happens, rental return becomes an important factor in purchasing. Property investors should be chasing yield returns and looking in suburbs such as Surry Hills, Arncliffe, Kensington, Gordon and Revesby that are undervalued, compared to surrounding suburbs.”
Typically, properties close to shopping centres, railway stations and big infrastructure, like the airport, can experience growing demand, but property investors should commit to a property for at least 10 years and be prepared for possible shifts in the market.
Thomas Merriman says apartments are always a good option for people trying to maximise their return on investment. He reminds homebuyers to look out for potential areas for improvements as apartments in major cities like Sydney and Melbourne climb every 3-5 years and properties that can accommodate small cosmetic touches, can drive up the market value. If you can always improve, you can always make money.
“Apartments don’t rise dramatically but won’t dip as steeply as houses in changed market conditions. Typically they’re lower in price for purchasing and although strata fees can seem quite high, it will minimise personal expenses such as land upkeep, drainage, aesthetics and maintenance on a property,” says Thomas.
The average construction of a 3 bedroom full brick home in Australia ranges between $1100- $1700 per m2, making Australia one of the most expensive property markets to build and buy. Oliver Quach from SFPG says high labour costs and regulation fees equate to a large construction cost, which is ultimately paid for by the home buyer.
“For existing investors, the best way to add value to your investment property is to renovate. One of our clients’ property before renovation was valued at $525,000 and its rental yield was 3.57% pa, but after a renovation, the new rental yield was 4.61% and the return on renovation was around 19.16%,” explains Oliver.
Bradley Beer, CEO of BMT Tax Depreciation, says that all investment properties can attract depreciation deductions for their owners but newer properties have higher depreciation deductions, as seen in the table below.
Most property investors understand that completing a renovation will add value to a property but renovators are often unaware of the additional tax deductions available.
“It is particularly important to claim depreciation during a renovation. Assets removed during a renovation project can be worth thousands of dollars, and replacing them can be expensive and the owner may be entitled to claim a deduction for any depreciable assets that are removed and disposed of during a renovation,” says Bradley.