Market turnaround could see a negative turn into a positive | Ralph Lauren

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Over the past few years, Western Australia’s tanking house prices have seen many first-time buyers fall into a trap where they struggle to pay off a mortgage they can no longer afford.

However, with house prices expected to rise this year, REIWA President Damian Collins said there might be some relief coming to those who were stuck in this vicious cycle – commonly referred to as negative equity.

“Most negative equity isn’t caused by overpaying for property, it is caused by a decline in the overall market, and over the last five years we’ve seen the biggest decline in property prices in REIWA’s history,” he said.

“The good news is the market is currently doing well and I expect this will continue for the next couple of years. This should help those who are in negative equity get back into positive equity.”

While negative equity had a significant impact for a lot of people who had purchased homes in the last five years, Mr Collins said the majority of people falling into the trap were first homebuyers.

“Over the past five years, a number of first homebuyers in areas such as Baldivis, Byford and Ellenbrook were heavily geared from the start because they were borrowing around 95 per cent to secure their home, whilst being at risk of dealing with additional supply as new blocks became available and competed with the relatively new builds in the established market,” he said.

“While most of that oversupply has since gone, that gives you an example of areas that are more susceptible to negative equity.”

To limit the risk of acquiring negative equity, Mr Collins said it was worth taking a look at what the resale value of the property was likely to be.

“While it’s nice to get a brand new shiny home, you want to make sure you can sell that property for what it has cost you to buy and build,” he said.

“Make sure you buy into an area that will grow in value. If you are building new, make sure the value at the end is going to be worth what you paid for the house and land.”

For those considering purchasing an apartment, Mr Collins said this property type had become more volatile in recent years.

“You need to remember that property is all about supply and demand,” he said. “When you look at inner-city apartments, which are particularly targeted to investors, they tend to be more fickle. Whereas, apartments targeted towards owner-occupiers are going to be more stable than those with just investors. This is because owner-occupiers are less likely to pack up and leave when times get tough.

“If you are looking to purchase into an apartment building – even as an investor – I recommend looking for a place with a high owner-occupier percentage because they are less volatile and therefore less likely to have a massive amount of properties come on the market in the same area.”

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