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Fundamental mistakes to avoid when building or buying your first home

Monday, 22nd Jun 2020

The new Federal and State building stimulus packages are providing a big incentive for first-home buyers looking to enter Perth’s property market. And with WA once again topping the ranks as Australia’s most affordable State to buy (REIA), there are plenty of reasons why now is a great time to be thinking about getting into your first home.

However, like any big purchase, buying or building a property doesn’t come without risks, especially when you’re new to the market and unfamiliar with the processes involved.

Your first home will likely hold key implications in getting you closer to your desired lifestyle, but importantly, it can also play a crucial role in helping you progress towards your future financial goals. Done right, and this first purchase could generate the equity you need to achieve your longer-term targets – whether that be upgrading into a bigger home further down the line or purchasing an investment property to start building that future nest egg.

However, while your first home can be a great foundation for these lifestyle and finance goals, in our time as property advisors, we’ve also seen many buyers whose first home has stagnated, or worse, dropped in value due to mistakes being made early on in the process, which has in turn impacted their ability to achieve their longer-term needs. So, what are some of the fundamental mistakes to avoid?

Buying in oversupplied areas

Like the value of any goods or services, property prices are largely driven by supply and demand. While many first-home buyers will consider demand when choosing a location (i.e. proximity to employment and local amenity), they will overlook the impact of local property supply on the price growth of a property over time.

Supply not evenly distributed

The supply of properties is never evenly distributed across the market. In every city, there are suburbs that are tightly held, where buyers are regularly competing to secure a property and there is limited new supply coming on stream. This regular buyer demand and competition is what places upwards pressure on prices over time, leading to growth in property values. By contrast, there are other locations, particularly outer suburbs, that often have a significant supply of new properties (such as from land estates nearby) and/or a regular resale of existing properties into the market. This means that when buyers come to sell in future, they will often be competing with a lot of similar stock. Not only this, but more often than not, there will  be  more supply to come in future from new developments in these areas, which means buyers will also be competing with an influx of newer houses. This can not only hold back their property’s value, but will often make these areas more vulnerable to price declines in a market downturn. As a result, those who buy in these oversupplied locations can find themselves waiting years for the next ‘boom’ to reach their goals instead of enjoying the steady capital growth they might achieve from areas where supply is more restricted.

Overlooking the importance of land value

Another common factor first-home buyers will overlook in selecting a property is the importance of land value. There are several components to consider here.

  1. Is new always best?

New properties look appealing, and hold potential for lower maintenance costs in the first few years of ownership, so it’s easy to see why many buyers are drawn to them. However, a newer property isn’t always the best play in terms of capital growth. This is because it’s the underlying land that’s the appreciating asset.

While houses slowly depreciate in value as they weather from wear and tear, well-located land can grow significantly in value over time. This improved land value is often what helps home owners sell at a gain and leverage the extra equity they need to upgrade their home or finance another property. This isn’t to say that buyers won’t be able to purchase or build a new property with a strong land value component. However, it does mean that the location in which they do it will be extremely important, and they may be paying a premium for the brand new asset.

  1. Size isn’t everything

The important thing to remember when it comes to land is that size doesn’t always correlate with value  – some buyers will think they’re making the right move by purchasing or building a house on a larger block in outer suburbs, when a smaller property or lot closer to the city might offer a better land value advantage. Depending on its location, a brand new house and land package will often have less than 50% of its value in the land, while a villa or townhouse closer to the city and in a similar price range will often have a land value component of 50-60% or higher, and hence will be a safer investment in the long run.

Listening to the wrong advice

There’s a lot of noise and information out there for first-home buyers, especially with the release of the new stimulus. Unfortunately, not all of this will be in your long-term interests. Many buyers will often rely on the information provided to them by selling agents and builders when making investment decisions. While not necessarily bad advice, it’s important to remember that these parties, by the nature of their role, aren’t representing you as a buyer, and as such they won’t necessarily be putting your financial and longer-term needs first in the information they provide.

As buyer’s agents, it’s our primary role to represent you as the buyer throughout the purchase process, whether that be by helping you research and identify the right areas and properties, providing you with unbiased advice, or representing you throughout the negotiation process to help you achieve the best possible value from your first-home purchase.

To help get you started on the right track, our team have put together some key advice on the best practices to follow when purchasing and financing your first home.

Register to download your free first-home buyer’s guide.