Finding affordable homes in a property bubble

Our national obsession with real estate is reaching new heights. Every Sunday I read reports of fresh record prices being set in suburbs across capital cities and regional hotspots like Byron Bay. Auction reserves are being smashed, sometimes by millions of dollars.

This growth shows no signs of slowing, not just yet. Property markets around Australia continued to surge in May with CoreLogic’s national Home Value Index up 2.2% over the month.??This was a stronger result compared with April (1.8%), but weaker than the 32-year high recorded in March when values surged 2.8%.

Sydney has always been the jewel in the crown of Australian real estate. And while housing values are now rising the fastest once again in Sydney, at least in trend terms, the annual growth rate is generally higher across the smaller capitals, as well as Regional New South Wales and Regional Tasmania.?

CoreLogic data shows that Darwin cracked the 20% annual growth barrier in May, with values now 20.3% higher over the past 12 months. For Darwin dwellings, this is the strongest annual gain on record. Housing values across Regional New South Wales are up 18.6% while in Regional Tasmania values are 18.1% higher.?

We are in a property boom, no doubt about it. But it is important to remember that this rally is being driven by unnatural market conditions: ultra-low interest rates and post-COVID inflation.

Now, some economists may argue that rates have been low for so long that this is just the new normal. I would argue that’s a very dangerous philosophy, particularly for those about to take on their first mortgage.

One of the most popular conversations these days (and one I regularly engage in with my clients) is about affordability. How are we supposed to buy into this market when prices keep rising? is a question I am asked multiple times a day.

My answer, as it turns out, is also a question: Which market are you buying into?

In this environment it is important to remain cautious and not overstretch yourself to purchase the dream home in the dress circle of your desired suburb.

Instead, buyers should be keeping an open mind and considering areas that are not seeing the same level of demand.

The unit market is a perfect example. A quick look at the latest CoreLogic figures shows Sydney units prices increased 2.8% over the year to 31 May, significantly less than houses at 14.8%.

The only capital city where unit prices are outpacing houses is in Hobart, where apartment values jumped 16.6% per cent over the year and houses 16.5%. In every other capital city, the unit market is growing at a fraction of the rate of houses.

But there are also pockets of hope for Sydneysiders wanting to purchase a house. For many years, the central coast was the haven of affordability. COVID-19 and the onset of flexible working schedules has changed that market considerably.

But certain suburbs of the Blue Mountains still offer three-bedroom homes on decent land sizes for under $650,000. Hazelbrook and Springwood are two suburbs that still offer affordable houses within (almost) commuting distance to the Sydney CBD.

There are also affordable areas across the country. According to CoreLogic, the weakest housing markets over the past year have been in Regional Western Australia (0.0%), and Melbourne (5.0%) where the extended lockdown has created a more significant drag on the annual rate of growth.?

Affordable homes can always be found, even in a property boom. All it takes is an open mind and a willingness to avoid following the herd.?