Worried about overpaying for your property? How to buy a home and get value

Image: House values rising
Image: Getty

Buying a home can have pitfalls and perhaps the biggest is misreading the property’s value. If you misread value, you’re likely to over pay and your home loan can end up being much bigger than it should be.

You might also run the risk of your ‘over-valued’ property later dropping in value and your equity (the difference between the home’s market value and your remaining mortgage) falling into the negative - commonly known as negative equity.

One of the key things to therefore focus on to make a smarter purchase is how your prospective home compares with other similar properties.

How do you compare properties?

Firstly, think about the physical property itself - how big is it? What are its main features? What condition is it in?

In short, compare:

Then there’s home data to compare, which is readily available from a range of sources such as Domain, Corelogic or SQM Research.

Simple data comparisons include:

  • Days on the market (before selling) 
  • Median price of the area 
  • Auction clearance rates in the city/suburb
  • Typical discount percentages 

These data points can be very useful but different property types usually produce different numbers. So knowing how and why houses and units differ in value is also very important.

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How to compare houses and units

House prices are typically much higher than units, and the growth in value (capital growth) has increasingly favoured house owners, too. 

However, for many would-be buyers house prices aren’t really a feasible option to begin with. And because they are usually fewer in number, the competition for them tends to be more fierce and their true value can at times be inflated. 

Of course, competition and market value will differ from city to city and even in suburb to suburb. 

Unit prices tend to be lower because they’re usually smaller than houses, they don’t have built in land value as part of a building and in most cases they are easy to compare with similar units which helps produce a clear picture of their true value. The same can’t always be said of comparing houses. 

As Corelogic’s head of research, Eliza Owen explains, some of these factors also contribute to the much higher profitability levels of house sellers, which is often why many prospective buyers are tempted to buy a house over a unit. 

“Underlying land value, scarcity factor and desire for more space through the pandemic has led to a substantially larger rise in house values relative to unit values over the past four years,” Owen says.

“[But] the relatively large premium on house values has put them out of reach for many, particularly first home buyers and lower-income households. As units become increasingly attractive to buyers, the price gap between detached housing and medium to high density options will close and the profitability of units will improve.”

Higher profitability is great, but should potential future value (profit) factor into your home buying?

Home buying priority #1: Finding value

Good home buying does include understanding the value of a prospective home, its ongoing appeal, and how this might grow over time. 

Buyers’ agent, Michelle May says that while the land component does play a role in giving value to a house, a buyer needs to take into consideration other factors when considering future growth, such as location, views, a home’s internal light, its aspect, walkability to amenities, public transport and so on.

“Ultimately it depends on the individual property. But the assumption that a house is always a better investment than a unit is no longer true,” says May.  

“A good apartment will outperform a bad house percentage-wise any day of the week. Though an over-the-curve on capital growth apartment will do better than a below the curve house.” 

She says that true value can take up to 10 years or even more to define. It will depend on the quality of the home and how it lines up against other similar homes in the area. 

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What type of home are you prepared to pay for?

The other side of this is that buyers have budgets and ideal price points, and so what a buyer is willing to pay for a property will often help define its value. It will also importantly help determine the size of the home loan!

“Value is what is attributed to what a buyer is prepared to pay, and the deeper the buyer pool for a particular asset, the higher the price rises,” says May. “This is why auctions are so popular in areas where demand is high and supply is low.”

And yet, demand isn’t fixed. It can shift over time, so you need to keep tabs on demand in your preferred area and whether there’s interest in various types of properties. 

For example, where many homebuyers are being priced out of the house market, as in many parts of Sydney, there are suburbs that are seeing renewed demand for units.

“One could attribute the fact that units are rising faster in value due to affordability factors but also simply to a cultural change within the population,” says May. “It is becoming far more acceptable to raise a family in a unit than ever before.”

Know what you’re buying 

Yes, there are pros and cons to both houses and units. However, pricing can often override your pro-con list. This is fine, but at day’s end your property decision, just as it is for your home loan decision, should be well-informed. That is, if you want to get value for money.

To do this, think beyond the current market. 

Ask yourself:

  • Does this property have broad appeal and will it continue to do so 5 or 10 years down the track?
  • Does it have unique attributes such as a handy location, a good view, excellent lighting or is it well built?
  • Is it suitably valued against other similar properties? Or is it a bit higher priced with no clear explanation?
  • Is there continued or growing demand for this type of property in its area? In other words, is it likely to increase in value?

These aren’t easy questions to answer and some will require advice from a financial advisor. But make a start, do some comparison work yourself, including pricing and the likely size of a home loan for a given price. This will set your property buying journey off on the right foot!

Next step: Try our home loan borrowing calculator

Find out how much you can afford to borrow