Seven Facts About Home Upgrading

There is a bit of talk in the media about the current conditions being opportune for home buyers who are upgrading, but the process of buying, selling, packing, moving, settling is a lot more challenging than the headlines suggest.

Not all markets are equal, and the recent headlines generalise about the metropolitan Melbourne market in particular, but there is indeed some truth to the claim that many home upgraders are getting a great advantage.

Here are seven facts that may surprise, but should definitely help equip buyers and sellers alike as they navigate their upgrade.

1. House price falls in Melbourne have been far greater than unit price falls.

While dwelling values have moderated across both units and houses, it is a startling differential when we contrast the two figures.

The stamina of unit prices can be attributed to two causes; first home buyer incentives and tighter credit.

After increasing stamp duty discounts for eligible first home buyers up to $600,000, our State Government increased the concession from 50% to a fully subsidised 100% in mid 2017.

Since this time, this already-stimulated segment of the market surged forward and quickly recorded a six year high in November 2018.

In tandem with investor lending cooling, the stimulus for First Home Buyers certainly segmented the market in favour of our new home buyers.

In addition to the Stamp Duty Concession, eligible First Home Buyers are also incentivised to buy and/or build new dwellings.

It is little wonder that the unit market and the lower-priced suburbs have remained somewhat insulated from the price falls.

This buyer contingent have placed a firmer floor under their desired markets.

The tightening of credit from our banks has most definitely been the direct cause of our house price falls. This chart below shows the impact of APRA’s intervention and our lenders’ tougher credit policies on both investors and owner-occupiers.

APRA warned the banks back in 2014 that credit tightening would need to ensue, particularly for investor loan approvals in an effort to minimise the chances of a property bubble impacting our Australian property market.

Policy changes were applied to the various elements of investor lending as follows;
– reduction on maximum LVRs
– higher servicing buffers across all loan commitments
– tougher limits on equity releases
– higher interest rates for investors
– tighter limits on Interest Only loans, and higher interest rates for those applicants who qualify for I/O

The impact on investor activity was particularly marked in our eastern states as shown above.

It is unsurprising that price falls followed when we consider the magnitude of the reduction of loans in real dollar terms.

2. The more affluent areas with higher median house prices have experienced a harsher decline than the more affordable markets

As shown in the chart below, the increased market volatility of the higher priced Victorian suburbs is more evident.

Since our market corrected early last year, some suburbs have remained stronger than others. This heat map below shows the vulnerability of some of the higher median price suburbs.

For some buyers, the ‘gap’ between their current unit value and an aspirational suburb (in warmer colours) has significantly reduced.

3. We have less million dollar suburbs now than we did in 2017’s market peak

Further to point 2 above, the decrease in the number of million dollar suburbs has bought some of these desirable suburbs even closer to aspiring buyer’s budgets.

Once precluded from such postcodes, many buyers are taking advantage of the changed conditions and actively pursuing home ownership in their chosen neighbourhoods.

Between Jan 2018 and Jan 2019, 92 suburbs nation-wide slipped off the million dollar club list.

Over the last twelve months we have helped several buyers pursue what they’d considered impossible in 2017.

4. Loan approval numbers for bridging finance are significantly lower

This is something that upgraders need to be acutely aware of.

Gone are the days of assuming that bridging is an option.

Bridging loans are generally interest-only, short term loans that enable an upgrader or downsizer to buy and settle before they have sold and settled. Expensive to take on, challenging to arrange and now a limited product, buyers cannot assume that they will be eligible for such a loan.

Limitations to bridging finance eligibility hinge around an applicant’s ability to service (ie. pay for) the loan, and their degree of leveraging. Higher LVR’s have disadvantaged buyers, particularly in the face of weakening house prices further driving up borrower LVRs.

The chart below shows the decrease in the number of approved loans above 90% LVR.

The risks that buyers face if they can’t bridge and can’t merge settlements range from penalty interest to rescission and loss of deposit entirely.

Being mindful of the challenges of buying and selling at the same time is imperative.

5. Difficulties that vendors face are more challenging now than they were two years’ ago

Longer ‘days on market’ and increased discounting is the hallmark for Melbourne vendors in this current climate. Upgraders need to factor in the difficulty in selling, particularly if their property is compromised, presented poorly or advertised badly.

This is not the time to skimp on quality agent’s fees.

6. Stock numbers are lower

“Vendors seem to have got the message that it isn’t a great time to sell, with fewer new listings being added to the market than over recent years, while total advertised stock levels are tracking much higher, due to a slower rate of absorption.” – CoreLogic

This does pose a challenge for buyers who have decided to sell first and buy second. An extended shopping period to find the right home needs to be provisioned for. This may spell a longer and flexible sale-settlement, or may require the seller finds a short-term solution such as renting or staying with family during the sell-buy period.

7. There are some houses and floor plans that are significantly more expensive to enhance than others

While this last point isn’t about economic drivers, it can make the difference between a financially advantageous upgrade and an expensive one. Buyers who are cognisant of the cost of their planned improvements to their upgrade will be able to minimise the financial ‘gap’ (or net cost) of their upgrade. Ignoring invisible issues such as plumbing, roofing and electricals can be a nasty shock when issues arise.

Likewise, seeking the help of a qualified design/building professional before buying a renovator can optimise the end value of their home. Knowing which walls can be moved, how an existing floor plan can work well with a new design, and recognising the design ideas that can risk over-capitalisation are all skillsets a good draftsman, architect and/or builder can assist with.

For any local upgraders who are keen to attend a free Home Upgrader Evening on all of these topics, please register your attendance for the event being held on Wednesday 8th May at Jas Stephens. Aside from my presentation, Chadwick Architects and Aqua Financial services will also be presenting, and John Galea from Jas Stephens hosting the event. Seats are limited, and refreshments will be provided.

To register please email John Galea on jgalea@jasstephens.com.au