How To Avoid Getting Carried Away With Property FOMO

fomo

Would you like to purchase the property of your dreams, without getting carried away with FOMO, paying too much or buying the wrong home? Learn factors contributing to FOMO, and how to protect yourself.

A National Property Boom

Unless you have been living under a rock for the past 2 months, you will have noticed the “Property boom” constantly being announced in the media. Unusually, prices have been going up almost everywhere in Australia, rather than in 1-3 cities as in recent booms.

A year ago, there was terrible doom and gloom, with house prices about to take a dramatic tumble, wiping out household wealth nationwide.

A core logic article days ago confirmed the final drop in Sydney’s home value index of 3% before the turn around.

Now the media are telling us that house prices are booming, with national prices tipped to increase by 9% in 2021. Months ago, CBA said prices could fall by 30%. These predictions, in my opinion, should be taken with a spoon bucket load of salt. [Don’t actually consume that amount of salt, we all eat too much].

Auction clearance rates (ACR) indicates the percentage of properties auctioned that were successfully sold. It is a commonly used property data point used to indicate the condition of the property market.

Clearance rates of over 80% indicate a high demand / hot market. It means you are more likely to miss out to other buyers when trying to purchase your property.

Every state / territory (no data for Tasmania) had an ACF of 80% or more this week, with ACT at 97%.

Data from Realestate.com.au

Reasons for the Property Boom

As we are now aware, the COVID-19 shutdowns have disproportionally affected young people, especially those working in hospitality.

For many other households, COVID-19 has had an unexpected side effect – increased savings. Essential services workers may have found themselves increasingly asked to work more. During shutdowns there was very little to spend money on, as we weren’t going out to eat, drink and socialise.

Beyond the lockdowns, booking a flight is still a dicey prospect, with the risk of borders shutting. If Australian’s have holidayed in the last 12 months, it has been domestic, far closer to home than usual and consequently cheaper.

Those struggling to save for a home deposit have a silver lining from this terrible pandemic – a boost to their savings. Many are now trying to get into the market. A similar surge is being seen in 1st time stock market investors.

Add to that the government incentives of the first home owners grants, first home loan deposit schemes and home builder grants and stamp duty discounts, home buyers are scrambling to take advantage of the assistance.

New home loan commitments are at 10 year highs.

It’s a Partly Artificial Boom

What tends to happen when government incentives increase, is that benefits are quickly swallowed up by a matching increase in prices. House and land packages in my area, I noticed way back when I was looking to buy a first home, immediately increased prices to completely consume an increase in first home owners grant.

All these incentives, grants and discounts are being factored in by buyers, who can now afford a little more than they could 3 months ago. They can bid that bid higher, as can you.

Government incentives, pent up demand from would-be buyers last year who delayed purchasing, and record low interest rates should all increase prices.

Potential sellers have also been sitting out, waiting for the doom and gloom to pass. A low number of properties being listed for sale has contributed to competition and consequent price rises.

Once these sellers are encouraged enough by the property boom media coverage, more properties will come to market. With more choice, competition will be less fierce and price rises may not continue as steeply as predicted.

Property FOMO in a Boom

The effect is a lot of FOMO – Fear of missing out, fuelled by sky high auction clearance rate, prices and media hype.

Wannabe property purchasers are frustrated by bidding for and missing out on property after property. First home buyers, especially, are itching to finally get into their own home.

Media reports of purchasers buying properties in lifestyle locations unseen during lockdown suggests some pretty impulsive decision making based on a short-term situation.

Purchasers are putting offers in without buildings and pest inspections to try and gain an upper hand in the bidding war. A buildings and pest inspection does not eliminate the risk of investing, but reduces it, and in my opinion is foolish to go without.

Risks of getting carried away with FOMO in a hot property market include:

  • Paying a silly price > 110% of true value, only to find property prices cool once more properties are listed for sale
  • Buying a property you later regret, just desperate to buy, longer term goals get forgotten.
  • Buying without a building and pest report and then finding a MAJOR structural issue that will cost $10,000+ to remedy
  • Overstretching financially so mortgage payments cause financial stress

How to Resist Property FOMO

1. Work out your Goals and Priorities

What would you like to buy? Where is the property? A house or apartment? How many bedrooms? What features (e.g. off street parking). Start with the ideal purchase, although unfortunately pretty much no-one can afford their ideal home.

Then work out your priorities. Is this your forever home? Or do you need it to grow in value in order to trade up in a few times? Are you rentvesting, or utilizing other advanced strategies. In the case of just getting on the ladder, this should be a decision heavily influenced by growth potential and be looked at as mostly a financial decision.

Are you happy to move out a suburb or two in order to get the extra bedroom? Buy a “do-er upper” that you can live in and renovate as you save more cash?

Write down your goals and priorities to refer back to prior to offering on a property.

If your goals turn out to be unrealistic, you will need to revisit. But make sure you do this whilst consciously reprioritizing, not just buying any property you can. Property purchasing is an expensive business. Holding a property for a short period of time is often worse financially than renting.

2. Stop Comparing

“Comparison is the thief of joy”

Theodore Roosevelt

It is completely irrelevant what your friend, sister or colleague has just bought, and how it compares to your purchase. Mind your own business! Stop worrying about what everybody else is doing and focus on your own goals and priorities

3. Don’t be seduced by government grants

Again, these are largely factored into prices. Don’t buy or build because there is an incentive. Saving a few thousand dollars now can end up losing you hundreds of thousands dollars over the long-term.

Any incentives should be cherries on the cake if they are available, and certainly not influence your decision making. The government is offering these to stimulate the economy as a whole, not because it is in your best interest.

3.  Know How Much the Property is Worth

This is getting hard, in a fast moving market. But when you have found a property you like, you need to work out how much you will pay for it.

Automated valuation tools you can find online are notoriously inaccurate at the best of times, and next to useless in a hot market.

Price guides and for sale prices can be completely unrelated to final sale prices as buyers are bidding well over asking price / reserve.

The “sold” section of Realestate.com.au is a good place to start. You really need a number of comparable properties that have sold in recent weeks to get an idea. Land size and number of bedrooms are easy data to use in comparisons. But there are other factors that are more tricky, such as position on street, natural light and finish quality.

A buyers agent can offer value here. In a slower market, a buyers agent offers access to “off market deals” before they are even advertised for sale. Real estate agents are having no difficulty selling property right now, so have no incentive to offer buyers agents off market deals. The more competition they create, the better for the agents final commission.

But a buyers agent should have plenty of experience in the area you are buying, and help guide you on limiting offers to reasonable prices. They are also expert negotiators, often able to identify the sellers priorities, and making you as attractive purchaser as possible.

4. Make Yourself an Attractive Buyer

There is no point in offering on property at the moment (arguably ever) without a loan pre-approval in place. Find your lender and get this organised 1st. Get pre-approval for more than you think you will buy for, to allow some flexibility.

There are factors other than price that will influence a seller’s decision on who to seel to, particularly in a non-auction situation. A settlement period that is short (if they are in a hurry) or long (if they haven’t found their new home yet) may be preferred.

A “No chain” buyer, ie first home buyer, who isn’t reliant on their own property settling as planned will often be more attractive.

An option to rent the home back to the seller for a few months while they continue looking for their forever home may be appealing.

Having the buildings and pest inspection scheduled immediately, so the offer can go unconditional quickly may appeal to the buyer.

5. Maintain Perspective

No matter if you have lost out on 1, 2, or 3 properties, this property is not the last chance. The market may cool better properties may come onto the market. Yes, property prices may continue to rise, but not by a massive amount each month. There is no point in buying the wrong property. Take your time if you need to and get it right.

6. Be Decisive

Once you have found a property that meets your goals and priorities, you have worked out a value and you have a pre-approval, it’s time to make an offer. Be decisive, there is no time for dilly dallying.

7. Don’t Get into Financial Stress

Ensure you can really afford repayments on the amount you are going to offer on a home. I’m not just talking about the bank approving you. Buyers need to take responsibility for loan commitments.

There are rules of thumb such as not dedicating more than 30% of household income to mortgage repayments. A far better technique is to form an accurate budget or track spending and work out how much you can borrow based on the repayment you can afford.

Remember to calculate mortgage payments presuming interest rates are at least 2% higher. If using a fixed rate mortgage, will you be able to afford repayments if interest rates jump once your fixed rate ends?

Don’t spend all your savings, allow some to be kept as a buffer in case maintenance issues arise. What if the water heater dies a week after moving in?

Good luck with your property search. Keep a cool head and stick to these rules to pay reasonable prices and buying property successfully in a hot market. Read about the Victorian residential tenancy act changes.

Are you trying to buy a property at the moment? Comment below to describe your experiences, and share any tips you have picked up.

Aussie Doc Freedom is not a financial adviser and does need offer any advise.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

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