Upgrading in a fragmented market - the time is now
Property markets in NSW are becoming increasingly fragmented as economic pressures hit some segments harder than others. According to some experts1, this is creating a golden opportunity for people hoping to upgrade to a larger home or better neighbourhood.
Here, we dive into what this means for you and look at what you need to consider before you decide to upgrade.
What is a fragmented market?
We often talk about the property market as if there were a single market for all properties within a geographical area, but this is inaccurate. Most property markets are made up of many smaller market segments, which can be defined by concepts like price point, location, property type, or buyer profile.
These segments can (and do) respond very differently to economic pressures and cycles, creating significant contrasts throughout the wider market. More segmentation means a more fragmented market.
Throughout the pandemic, we saw a fairly generalised upward trend, with property prices almost everywhere soaring. However, in many areas houses outperformed units, and premium properties outperformed entry-price properties, creating a significant price gap that made upgrading very challenging.
The boom came to a grinding halt in the second half of 2022, due partly to the natural turn of the property cycle and partly to inflationary pressures that saw the RBA hike interest rates to slow the economy.
What’s interesting for upgraders is that the tables have turned slightly, with units and entry-level properties holding their value better than many premium price point homes.
Units to houses: closing the gap
The CoreLogic Hedonic Value Indices from July 2022 and January 2023 show that unit values have been falling more slowly than house values, meaning that the gap between these two sectors is shrinking, making upgrading from a unit to a house more accessible for many people.
In fact, the difference between the median price for a house and a unit has effectively decreased by just over $112,000 in Sydney and close to $40,000 in regional NSW over the past six months2.
From first home to forever home?
In addition to the diminishing gap between house and unit process, affordability issues, first-home buyer incentives, and decreasing borrowing power have meant that demand for more affordable housing options has remained relatively stable throughout the current downturn.
CoreLogic data reflects this, showing that property values in some higher-end markets have declined more steeply than entry-level properties and outer-ring suburbs, ’many of which have proven resilient in the current downturn.
This imbalance in the markets means that upgrading to a prestige area or property has become a more realistic possibility for some buyers, including downsizers3.
Downsizing to upgrade
There is always an active market for family-sized homes and selling a large property with the significant capital gains of the past few years can provide empty-nesters with the perfect opportunity to buy low-maintenance, high-end homes in the area that best suits their lifestyle.
In short, they upgrade by downsizing and as they do, they provide opportunities for growing families to move into a larger home.
So, with the fragmented market creating some fantastic opportunities for different sectors of the population, 2023 looks like a good year to consider upgrading. But, there are some important factors to consider before you do.
Things to consider before you upgrade
Moving a larger, more expensive home gives you and your family the room you need to grow and enjoy life to the full, but finding the best property and dealing with higher costs or refinancing can all present challenges to the unwary.
The property
Take the time to draw up a list of must-haves, would-likes, and definitely-don’t-wants before you start looking for your new home. Take into account the size and type of the property, how many bedrooms you will need in the next 10-15 years, the location and proximity to schools and shops, and other preferences, such as gardens, pools, garages, or the potential for extension and renovation.
Your real estate agent will be able to help you find the perfect property and advise you on its potential and any work it may need.
The costs
A larger home will almost inevitably mean a larger mortgage, which might mean having to refinance. In the current climate, this will probably mean a reassessment by your lender, so it’s important to have your finances in order.
Remember, too, that a bigger house usually means higher energy bills and council rates. It could also mean a lot more maintenance and cleaning to be done and paid for.
You might also need to think about hoe much work will need to be done to the property before you can comfortably move in.
Another cost that people sometimes forget to factor in is the new furniture and fittings you may need to fill your new home.
A finance check with your accountant or financial advisor is the best way to ensure you are in the right position to meet your new obligations.
Summing up
Property experts across the board are touting 2023 as the year for upgraders. Whether you are making a move from a unit to a house, your first home to your forever home, or one area to the next, careful planning and good advice from qualified professionals will make it far easier for you to make the most of the unique opportunities that the current markets offer.
Speak to your real estate agent and financial advisors to find the best opportunities for your new home.
Sources
[1] See Nicola Powell: https://static.domain.com.au/content/marketing/Domain+End+Of+Year+Wrap+2022.pdf and Michael Yardney: https://propertyupdate.com.au/australian-property-market-predictions/
[2] Data taken from: https://www.corelogic.com.au/__data/assets/pdf_file/0021/12954/CoreLogic-home-value-index-Jan-23-FINAL.pdf and https://www.corelogic.com.au/__data/assets/pdf_file/0007/11500/CoreLogic-home-value-index-July-2022-FINAL.pdf
[3] https://www.corelogic.com.au/news-research/reports/best-of-the-best
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