This is where buyers should beware the risk of overpaying

Property buyers should be wary of overpaying in some popular areas in Sydney, particularly for low-grade properties at this stage in the market cycle.

History leaves clues

Firstly, as Napoleon once observed, the moment of greatest danger occurs at the moment of victory. Complacency occurs when things appear to be going well and can lead to a lack of discipline. People tend to lose sight of the bigger picture. As we have seen at the peak of previous market cycles, a property boom cannot dispel the risk of capital losses.

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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.

Many units bought off the plan in the Sydney and Melbourne construction frenzy of around 7 to 10 years ago have failed to produce meaningful capital gains. The same could be said of some Perth property investments made around 2006.

Popular markets in prime locations in Sydney have experienced a surge in prices over the past 18 months. Still, buyers must recognise that the market cannot sustain these frenzied conditions once price growth decelerates and there are ‘normal’ market conditions.

The market cannot sustain these frenzied conditions once price growth decelerates and there are ‘normal’ market conditions.

Regulatory moves to limit borrowing capacity will also have an impact on house prices in Sydney.

SA4Area nameProperty typeMedian price ($)12m price growth (%)
Sydney – Eastern SuburbsBondi Beach – North BondiHouse$4,077,89045.0%
Sydney – Eastern SuburbsDover HeightsHouse$4,941,54944.6%
Sydney – Eastern SuburbsMaroubra – SouthHouse$2,812,27149.6%
Sydney – Inner WestStrathfield SouthHouse$1,958,49555.7%
Sydney – North Sydney and HornsbyMosmanHouse$5,319,28341.8%
Sydney – North Sydney and HornsbyNeutral Bay – KirribilliHouse$3,539,33552.2%
Sydney – Northern BeachesBalgowlah – Clontarf – SeaforthHouse$3,828,32951.6%
Sydney – Northern BeachesManly – FairlightHouse$4,061,23551.7%
Sydney – Northern BeachesAvalon – Palm BeachHouse$3,291,01261.0%
Figure 1 – Property boom Sydney locations in 2021

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Secondly, in the words of fund manager Raymond DeVoe Jr, “more money has been lost reaching yield than at the barrel of a gun.” In the preceding property market cycle, high-yielding mining towns gave rise to the largest financial losses.

Investors this time around have been less drawn by yield due to lower mortgage rates and lower out of pocket expenses. However, still, this is not a time to be tempted by high yielding niche or regional investments, which usually come with a commensurate level of risk.

Many regional markets have also experienced a huge surge in prices over the past 18 months. Buyers need to recognise that these gains won’t be sustained once the borders reopen and new migrants inevitably gravitate towards the capital cities.

StateSA4Area nameProperty typeMedian price ($)12m price growth (%)
NSWCentral CoastAvoca Beach – CopacabanaHouse$1,567,37151.6%
NSWRichmond – TweedByron BayHouse$2,304,30169.2%
NSWRichmond – TweedLennox Head – Skennars HeadHouse$1,485,60146.3%
QLDGold CoastBurleigh WatersHouse$1,269,10443.9%
QLDGold CoastMiamiHouse$1,253,87051.8%
QLDGold CoastCoolangattaHouse$1,385,04960.8%
QLDSunshine CoastNoosa HeadsHouse$1,820,06044.7%
QLDSunshine CoastSunshine BeachHouse$1,815,45747.1%
VICMornington PeninsulaFlindersHouse$2,785,16775.2%
VICMornington PeninsulaPoint NepeanHouse$1,234,59854.6%
Figure 2 – Property boom regional locations in 2021

Price growth set to decelerate

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.

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

Due to a lack of stock on the market, buyers were interested in almost every property, regardless of its quality.
Now with decelerated price growth in 2022 and the prospect of a potentially stagnant market (or even small price reductions) in 2023, the consequences of overbidding will be more significant.

Now with decelerated price growth in 2022 and a stagnant market the consequences of overbidding will be more significant.

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.

Buyers should keep a cool head

CoreLogic’s excellent Pain and Gain report has consistently shown that 5-10% of properties sell at a nominal loss even when the market is booming. And that’s held 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.

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. You can change many things about a real estate investment, but the one thing you can never change is the location, which will always remain fixed in place.

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