Mark Armstrong sagely comments
“The Sydney property market’s median price is set to double in the next 10 years, recent reports suggest, and while that appears to be good news for investors who are already in the market, it is a concern for those still trying to get a foothold.
As the property market continues to grow it is important investors understand how to value property to increase their chance of success.
Many people value property based on what they think it is worth. However, the value of property is determined purely by what the market is prepared to pay.
To get a clear understanding of the market, it is not only essential to know what similar properties in a particular area have been selling for but also how many under-bidders there were and at what level they stopped competing.
The buyers who missed out on the last property will be your competitors for the next one and will drive price growth
Let’s look at an example of investors who find their perfect property. They have not been looking for long and have no idea what the market value for long and have no idea what the market value for the property is. They base the value on what they think is a fair price. The property is due to be auctioned and they wisely decide on an upper limit before the auction, in this case $600,000.
As the auction progresses they soon realise they are others who are prepared to pay more than them and the property sells for $610,000.
A couple of months and countless inspections go by before they find another comparable property. They reason that because the last one sold for $610,000, this one will be worth the same. However, they fail to understand this sale is now a couple of months old and the market has moved on. Once again they fail to secure the property as this time it sells for $620,000.
These investors are now falling into the trap of chasing the market. They are basing their purchase price limit on what happened in the past and in a growing market they will continually miss out.
While it is never a good idea to overpay for property, always being under the market can result in significant opportunity costs.
The Sydney market showed double-digit growth last year and I expect that trend will continue for the next 12 months to two years as more investors return.
When investors compete in this kind of market, the longer it takes you to get in, the more it will cost you.
Source: Sunday, March 28, 2000 Domain (The Sun Herald)
