Best buy is in the middle

Halfway through 2009 many investors are asking themselves what effect the extension of first homebuyer grants is having on their plans to invest in the property market. The answer is simple: this unrealistically high government handout has artificially boosted property prices under $500,000 in our major capital cities. If their finances allow, savvy investors should bypass the ‘affordable’ sector altogether, as there are more compelling prospects in the middle price sector of the market where prices are stable.

While some commentators talk of the ‘property market’ and ‘house prices’ as a homogenous entity, the market is now the most fragmented I’ve seen in 15 years. The doubling and trebling of the first homebuyer grants in late 2008 has led to a surge in demand for inner urban apartments, new houses in new estates and more recently, older houses in outer industrial suburbs.  First time buyers are competing vigorously to get into the market and established inner suburban apartments are their most popular option. With supply of apartments listed for sale 40% lower than at the start of 2008, investors are finding it difficult to buy at the right price in the affordable sector.

The segment above $1.5 million and coastal properties have seen significant price declines with the weakening economy, as a buyers’ drought means the value of  property in this sector is unlikely to improve anytime soon. Mining towns – the flavour of the month between 2005-2008 – are also in trouble now that the resources boom is at an end.

While the bottom sector is running hot and the top level weak, the middle market sector has, to date, been relatively resilient to the global downturn and unaffected by first homebuyer demand. You can see this phenomenon in RP Data’s comparison of sales activity between the March quarters of 2008 and 2009. March quarter activity in the lower end of the metropolitan and regional markets shows a sharp rise in 2009, while the top price tiers shows a decline.

 The middle of the market is showing the greatest stability. Middle sector house and apartment values, between $600,000 and $1 million in Sydney and Melbourne and $500,000 and $900,000 in other major cities have remained virtually untouched for the last year in most cities. That is, until now.

Buyers are calculating that buying a property in this sector looks a lot more feasible in 2009 when mortgages are at 5.6% not 9.25%, as they were a year ago. When investors add up cheaper funding, firm yields and a tight rental market, the narrowing gap between rents and mortgage repayments is an obvious attraction – and a sign of a sector about to improve. The price difference between the affordable and middle price sectors is also less of a barrier - it looks more like a window of opportunity.

If they can, investors should open this window soon.  Finding the right property will not be easy.  Right now, there is a paucity of these properties on the market and investors are unlikely to buy the right one for a song. The 5% of properties listed for sale which are of an acceptable investment grade and well positioned for prime capital growth are attracting plenty of enthusiasm from buyers.

But this is exactly as it should be and should not deter wealth creators. After all, the best properties should not only be positioned for growth, but should also see their value stand up, no matter what the market – or our politicians – throw at it.

Once the distortion of the boosted first homebuyer grant abates, there will be some recent buyers who will see their property values recede with the artificial tide. That’s the price of artificial stimulus. But in the years to come, those investors who purchased wisely especially in the middle price sector will look back on 2009 as a pivotal year.

So if you’re an investor, don’t try and defy the odds or buy on the cheap.  Do your research thoroughly or find a top notch adviser and get your property selection and price range right.