After a challenging two years, there are now great opportunities for upsizers and upgraders.
Time to upsize
Real estate market upgraders or upsizers can save up to six figures or more if they know how to leverage the market conditions and upgrade their property. Owner-occupiers who have wanted to move up on the property ladder have been struggling to do so over the past two years, due to the fierce competition and substantial amount of funds that they’ve needed to kick in, in order to upgrade.
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The cost, time, and stress involved due to the market conditions over the past couple of years prevented many from upgrading. Often there simply wasn’t the suitable stock available for upsizers to move into, and many were fearful of selling in case they couldn’t get back into the market. However, stock listings are now on the rise, and more opportunities are coming onto the market as vendors list more properties for sale.
When the market is softer, traditionally it’s been an excellent opportunity for owner-occupiers to move up in the property ladder, as the amount of money that they need to bridge the gap is lower. A simple stylized example shows that if housing prices decline by, say, 5 to 10 per cent, then a couple upgrading from a $1 million property to a $2 million property, may be able to secure the new purchase for a price of around $1.9 million, or even $1.8 million.
Even if they have to take an equivalent percentage hit on the sale of their existing property, this can still work out well for them, although there are always the stamp duty and other buying and selling costs to factor in. Of course, in a declining market, the stamp duty on the new purchase should also fall accordingly. Market timing and asset selection are of course key variables in the outcome.
The best buying opportunities often arise for upsizers or upgraders at this stage in the market cycle as the higher end of the market tends to be less liquid and more volatile. Moving up on the property ladder usually means either buying a larger property in a similar area or buying a property in a superior or more expensive location. The premium or top end of the market provides strong opportunities for upgraders, as this market is thinner, can be more volatile, and is also often more impacted by interest rate changes.
We’ve seen the upper quartile of the market outperform since the pandemic lows, but this sector of the market will likely now underperform as mortgage rates rise.
In softer market conditions, upgraders often have the luxury of more time and being more considered – perhaps selling first, and only then buying later, as more opportunities arise.
Opportunities in today’s market
The opportunities are likely to arise soonest for upgraders in Sydney and Melbourne, where interest rate changes will be felt keenly first. Most homeowners in Sydney and Melbourne have built up some equity over recent years, as prices have increased, and there is a backlog of young professionals and families wanting to upgrade in the market to gain access to more space.
Initially, there will be opportunities for upgraders wanting to buy homes in suburban Sydney as house prices come off their highs. Prices also appear to be cooling in parts of suburban Melbourne, so the same will also likely apply in parts of the Victorian capital in the second half of 2022.
The temptation in a falling market can be to sell the family home and rent, but sometimes owners can come unstuck with that approach if the market begins to rise again. Overall, a well-executed upgrade in a softer or declining market can prove to be a financially astute move.
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