4 min readThis is a guide on how to use the current lending environment to your advantage.
Every change in the market provides an opportunity and there are plenty of opportunities in the current environment for would-be home buyers. A famous quote from Warren Buffet, ‘We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful’.
To start off, it’s important to understand the reasons for the change in the housing market and why there is so much negative media attention around housing prices. A number of things built-up the market and it looks like the perfect storm to bring it to a screeching halt.
Here are a few reasons (not all) around why we had such an increase in property values.
Firstly, for a number of years Australia has been flooded with overseas investors buying into the property market, soaking up the supply and increasing demand. On top of this, many local investors were building their portfolios with interest only loans. Add to the mix cheap credit and an increasing population and, well, things are bound to get a bit crazy. Prices went through the roof and banks were the main driver, lending out more money to people than ever seen in Australia’s history.
Now, let’s look at what’s changed. Banks have made it harder for overseas investors, they have all but frozen interest only loans and have clamped down on investors with multiple properties. The royal commission has made banks a lot more cautious and they are now scrutinising customers incomes and expenses in a lot more detail before lending money.
This has been the main driving factor preventing people from being able to borrow as much as they previously could. But don’t worry, this can be a good thing and used to your advantage.
Currently, the housing market (especially in Sydney and Melbourne) is struggling. Many vendors are simply not getting the offers they want and auction clearance rates are falling; down to 48.1 per cent in Sydney and 46.1 per cent in Melbourne.
However, let me make one thing clear; auction clearance rates, or the lack thereof, don’t necessarily represent the number of buyers in the market, it simply represents the number of homes not selling above the vendor’s reserve price. For example, if you see ‘passed in’ it means that the vendor did, in fact, receive a bid or bids, they were simply below the reserve.
One of few Auctions making reserve
Image: Your Money Live
Two things need to change to improve this; either vendors need to accept lower prices or buyers need to put up more cash. In reality, it is unlikely the latter will eventuate.
So, if you have recently gone for a home loan and got approved for less than you hoped, don’t stress. Everyone is in the same boat, which makes the coming months and years the best time to pick up a bargain.
Your guide to picking up a bargain in a falling property market
Step 1: Get pre-approved
The first step is establishing your borrowing capacity and understanding what loans are available to you. You can get answers and compare different loans on Hero Broker. This online service allows you to become your own broker by reviewing and comparing loans from a variety of lenders while also allowing you to connect with a professional to assess your individual situation and the most suitable path to achieve your goal.
Step 2: Research
Before thinking of buying in another city, interstate or some booming mining town, it’s best to look in your own backyard. Generally, you already have a good understanding of your local area, the trends and its history. Do some extra research and you’ll soon become an expert on house prices in and around your area. Once you have a clear understanding of your local market, you will know what represents good value and what constitutes a strong and appropriate offer.
Step 3: Place your bid
Patience is a virtue. The key to getting a good price is to be a calm and controlled bidder. Try to take the emotion out of the purchase; easier said than done, I know. Right now, the market is filled with investors with many looking to sell. What’s more, due to changes in interest only loans, many more will be looking to exit the market in the future. Knowledge of this is critical.
Don’t be disillusioned by thinking you may miss out on a purchase by making a low offer.
You are now in a buyers’ market so don’t get pushed around by real estate agents. Go in low and don’t back down. As I said before, many people are in the same position when it comes to borrowing capacity, so there is a good chance others will overlook a property due to its asking price.
Step 4: Negotiate
Use the credit crunch to your advantage. When negotiating, remind the vendors of the market and the current lending environment. You need to get across that they will not be able to achieve 2017 prices when banks have tightened their belts and are lending much less in 2018/2019. A vendor can ask any price they like, the reality is that people can only offer the money they have. A property is only worth what someone is willing and able to pay.
Step 5: Don’t stress
You’ve done the research, you’ve crunched the numbers and you’re in the best position you can be. Now, take your time with buying your dream house. Once you have made your purchase sit back, relax and enjoy living in your new home. Use the doom and gloom to your advantage but don’t buy into it. Simply enjoy your property, focus on making it yours and paying down your mortgage as quickly as you can.
We hope these steps have given you some strategies on how to use the current lending environment to your advantage in your next property purchase.