The best, and worst, downturn property deals

This is a highly-treacherous residential property market for unwary buyers. Yet the same market holds some of the best knock-out bargains in years for cashed-up and highly informed buyers.

The biggest traps lie at the bottom and the top of the market. Properties going for $500,000 and less may only be artificially propped up by the Federal Government’s temporary assistance for new home buyers, which is due to end next month. And high-end properties are still falling in price.

Further, the lowest interest rates in 49 years, and expectations for escalating unemployment, provide additional nasty traps. Once the economy enters its recovery phase, interest rates will inevitably begin their march upwards – leaving many homeowners with properties they cannot really afford.

So here is SmartCompany’s seven-strategy guide to the best and worst property deals in the midst of the world economic crisis:

ONE. Stay away from properties up to $500,000

Sydney buyers’ agent Patrick Bright, chief executive of EPS Property Search, says this end of the market has been “pumped up by the Government-induced frenzy” and astute buyers should stay right away from it.

Bright is referring to the Federal Government’s short-lived grants for first home buyers – $14,000 for buyers of established homes and $21,000 for those building new homes – in addition to existing state government grants.

The federal grants were introduced to run from 14 October last year to 30 June this year. And there seems little likelihood of their extension.

Bright is convinced that these grants have inflated property prices selling for up to $500,000, the cutoff point for eligibility. He says the grants have gone straight into the pockets of vendors and builders who had lifted their prices in response.

Louis Christopher, head of property research for investment researcher Adviser Edge, agrees with Bright that prices of properties selling for up to $500,000 could be hit once the federal grant is removed. And Christopher urges would-be buyers to be really cautious at this end of the market.

TWO. Quickly sell properties priced up to $500,000

If you own a property in this segment of the market and were intending to sell anyway, Bright has some straightforward advice: “Get on with selling it now, before the Federal Government’s first home buyer grant runs out.”

This tip is based on his believe that prices in this segment are likely to fall in value without the federal assistance (see above.) Keep in mind that you don’t have much time before the federal grant is withdrawn.

THREE. Upgrade your home

Bright describes trading-up to a more expensive home in the $1 million-plus market as a “brilliant thing to do” in this market. (In lower-priced states such as South Australia and Queensland, he is referring to trading-up to the $800,000-plus properties.)

Bright says that while you may have to accept a lower price for your existing home than once obtainable, you will be buying into a price segment that has experienced larger price falls. You’ll save on price, and your transaction costs such as stamp duty and agent’s fees will be lower than a few months ago.

“I have a lot of clients doing this right now,” he says. For instance, one of his clients recently sold a property on Sydney’s North Shore for $1.38 million – about 10% less than obtainable before prices fell – and is looking for a property for up to $2.2 million. In short, the client is buying into a segment of the market that has taken a much bigger hit.

“This client is now cashed-up and ready to negotiate a real bargain,” Bright says.

“If you were intending to upgrade over the next 12 to 18 months, I would do it right now,” he suggests. Bright points out that the higher the price, the more prices have fallen.

Christopher agrees that now could be the right time for buyers to trade-up to a more costly home, but suggests that they aim to negotiate prices that allow for further possible downwards revaluations.

He says you might be fortunate to have been in a lower-cost segment of the market that has been flat or has risen in value, yet now trading-up to a segment that has significantly fallen in price.

Cameron Kusher, research analyst with property researcher RP Data, also supports a strategy of upgrading to a more expensive home. But he too warns that such buyers should be prepared for more possible falls.

Kusher says buyers wanting to upgrade to $1 million-plus properties (or $800,000-plus in Adelaide and Brisbane) could be rewarded in the inner-city suburbs, for example, that have access to good transport and are considered desirable places to live.

And the really top-end also offers some tremendous buys but, of course, with the risk of further price falls. As examples Kusher points to the exclusive Sydney suburbs of Palm Beach, Mosman and Vaucluse, where prices have really taken a beating.

FOUR. Buy a bargain beach house

There has probably never been a better time to pick up a quality beach house with magnificent views in sought-after locations.

Kusher points out that the mix is right for bargain buying – sales volumes are right down, prices are slashed and there is an abundance of properties on the market. Many buyers under financial pressure have been dumping their non-core assets, and that includes their beach houses.