Buying in a booming market has different implications depending on the type of property you're investing in.
Leaving aside the question of how to buy into a booming market, many people question whether it is a wise decision to buy into a property boom at all. As always, there is no one-size-fits-all answer, as whether you should or should not buy will depend almost entirely on your circumstances.
Let's take a look at four common types of property buyers and the considerations unique to each of them in deciding whether to buy during a property boom:
The first homebuyer
First homebuyers tend to be the most price-conscious, because they often don't have any equity to use for a property purchase and are usually reliant on deposit savings. According to Ray Ellis, CEO of the First National Real Estate franchise, it comes down to buying when you can afford to.
"Many a first homebuyer has delayed their purchase in the hope that the market is about to adjust downwards. Unfortunately, the reverse seems frequently the case and delaying a purchase on a rising market [often] only costs more in the long run," Ellis says.
"Property investment is for the long-term, so the important thing is to save hard for a larger deposit and avoid mortgage insurance, if possible. Then, aim to buy a property in a good position where you can add value over time."
A sea-change or a tree-change?
According to the ABS, most people move to another property in their local area. However, many people look to escape the hustle and bustle of urban areas for life in quieter surrounds by the beach, among the trees or on a farm.
Making a successful sea-change or tree-change will depend on how familiar you are with that new market, as well as the state of the market in which you are selling.
"Strong selling conditions [in some cities, such as Sydney and Melbourne] mean it's the perfect time to sell for those considering a lifestyle change. Usually, prices are lower in regional areas, so selling in the city and moving to the country right now means your purchasing power will be maximised," Ellis says.
Greg Shilson-Hughes, who recently moved from Sydney's Inner West to the Blue Mountains, agrees: "It was all part of our big plan to escape to the country. I just love the bush; I like looking out my window and seeing something other than a fence," says Shilson-Hughes.
"The way we looked at it, we can get a bigger and better property with more privacy, and be near mortgage free, which would also improve our lifestyle, just to trade off with a bit more of a commute to work. But due to the nature of my work, I can make the train trip a productive part of my day, so we decided to take the money and buy a property almost outright that gives us a better lifestyle."
It is arguably the downsizer who is best placed to buy their next home in a booming market. Like an upgrader, they tend to be selling at the same time. However, the downsizer's home tends to be worth more than the one they are buying.
"Strong demand means an almost certainly smooth sale and maximisation of your sale price. With boom-like conditions helping to assure a strong result, retirees are more likely to be in a position to put some money in the bank and buy a less expensive retirement property," Ellis says.
It can be tricky though, if you plan on downsizing into a retirement village, since retirement living is often more a lifestyle choice than a financial decision.
Regardless of what state the market is in, every property investor needs to ensure the sums stack up before taking the plunge. In a rapidly rising market, that means keeping a level head and not getting swept up in the auction fever.
"Now is the perfect time to re-finance at historic low rates and lock in for the long term. With Australia's population growth among the highest in the OECD, demand will continue to be strong for rental properties near transport hubs and employment centres," Ellis suggests.
First time investor Gleidson Moreira initially scouted for property in booming Sydney before shifting his attention to Brisbane.
"It was difficult [in Sydney], because all the properties would get snapped up very quickly. If the open home was on Saturday, more often than not it will sell that day. You have to be ready to make an offer and to offer above asking price to have a chance even to be considered," he explains.
"For any given property I looked at – and I looked at quite a lot of them – when I took the purchase price and ran it against all the costs in holding, the rent would not cover the expenses. To make sense in buying such negatively geared properties, investors would have to be very confident prices would continue to go up as they did in the past year and not stagnate or go down."
One of the main factors influencing your decision of whether to buy in a booming market will be whether you will also be selling in a booming market, since capitalising on demand for your existing property will boost the cash you have available to fund your next purchase. Consider your circumstances and consult a financial advisor to help make the right decision.