If you are looking to upgrade your property, don’t let the doom and gloom sentiment get you down. It is actually easier and financially better to upgrade when prices are falling. Conversely, it’s better to downgrade when prices are rising for the same reason.
As an example, using round numbers:
If you own a $1 million apartment and decide to upgrade to a $2 million house, the raw change over cost is $1 million plus expenses.
When the market rises 10%, the value of the $1million apartment you are selling rises to $1,100,000. However, the $2 million house also rises by 10% to $2,200,000, leaving you $100,000 worse off on the raw numbers. Let’s keep in mind some of the transaction costs, such as stamp duty & agent’s fees, also increase by 10%, pushing the cost of transacting up even higher.
When the market is falling, the $1 million apartment you are selling drops to $900,000. However, the $2 million house you wish to purchase also drops by 10% to $1,800,000, leaving you $100,000 better off on the raw numbers. The transaction costs, being stamp duty and selling fees, also decrease by about 10%, diluting the changeover cost further.
In a rising market, if you are buying and selling, it makes sense to buy first, sell second. For a period of time, where you own two properties, they are both rising in value. If you sell first in a rising market, if the market continues to rise, your cash loses purchasing power.
In a falling market, if you are buying and selling, it makes sense to sell before buying. Going to cash by securing a sale before buying makes sense in the current market.
For a period of time, you may have sold your existing property and need to purchase a new one. Due to having sold your existing property, as the market continues to fall, your purchasing power is improving.
A lot of people mistake selling with moving out. Selling is when you contractually agree terms with a purchaser, which is secured by a non-refundable deposit. Moving out or settling the sale is when the buyer gets the property and the seller gets the money.
If you sell first, you can always negotiate a delayed settlement in the order of 10 to 15 weeks to enable you enough time to purchase the next property.
When you upgrade in a down market, you can live in the property you want to live in and wait for it to increase in value, when the next cycle occurs.
This article first appeared in Harris Partners.
