There are few phrases more likely to induce panic than the words “don’t panic”.
But while falling property prices and rising interest rates can stimulate anything from a sinking feeling to sleepless nights, the prevailing wisdom in the property game seems to be that we should do nothing.
If you were feeling brave you could sell now and rent, then buy back in when the property market drops even further – but that would be gambling on the chances that prices will continue to fall for the next couple of years.
Or you could dive into the property market now, in the hope of benefiting when it goes back up. But once again, that’s a big gamble.
Buy when the market is still dropping and you are bound to lose, in the short term at least. Sell now and you’ll have to make sure you re-invest before the market takes off again.
There are, however, two areas highly relevant to apartment owners – upgrading and downsizing – where action may pay off, regardless of where the market goes next week, next month or next year. That said, they require more complex and subtle calculations.
The upgrade argument goes something like this: assume the market drops 10 per cent, so your flat that was worth $800,000 is now only worth $720,000 – notional loss, $80,000.
However, that $1.2 million apartment you were thinking of buying last year is now selling for only $1.08 million – notional gain, $120,000. Under these highly hypothetical figures, you have gained a notional $40,000 – that is, the difference before was $400,000 but it’s now $360,000.
Now selling and (especially) buying properties can be an expensive business but a 10 per cent lower purchase price means a roughly equivalent reduction in stamp duty when you buy, and less estate agent commission when you sell.
In short, a well-targeted upgrade could be financially astute in a falling market, especially since, generally speaking, larger, more expensive properties are losing value faster than smaller, cheaper ones.
If you are lucky enough to be selling in an area where prices have dropped less and want to buy into a sector where they have fallen more, upgrading now could be a shrewd move.
That same trend makes downsizing a trickier proposition. Martin North, the founder of research firm Digital Finance Analytics, says downsizers need to move before their larger properties lose too much value.
Noting that prices have been falling “more dramatically on the urban fringes”, North says the best places to buy that hold their value are likely to be cheaper properties close to city centres.
Otherwise, all said and done, there are a lot of compelling arguments for sitting tight, especially if you are an investor with multiple properties.
If the Liberal Coalition continues to self-destruct in Canberra and an incoming Labor government fulfills its promise (or threat) to cut back on negative gearing, you might want to benefit from the promised “grandfathering” clauses that would mean existing properties could continue to enjoy generous tax breaks until they were sold.
Of course, the proposed negative gearing changes are likely to further fuel the downward trend in property prices, so if you were thinking of bailing out of residential property investment completely, now might be the time.
Properties that shouldn’t be affected by proposed changes to negative gearing will probably include brand-new and off-the-plan apartments – but they represent a whole other minefield for the unwary property investor and home buyer.
And that’s why doing nothing is such an attractive proposition.