It’s a boom! It’s a housing bubble! It’s a buyer’s market. It’s a seller’s market. It’s all a bit overwhelming! If you’re confused by the terminology used in the real estate industry, take it easy on yourself.
With so many property reporters out there sprinkling their property articles with buzz words and industry jargon, it can be enough to make your head spin! Read on to find out some of the most commonly confused property terms and what it all means.
Show some appreciation!
Real estate terminology sometimes becomes confusing when a word we use in general speech has a completely different meaning in the context of property. Take the word ‘appreciate’ for example. In common use the word appreciate means to have a high opinion of something. In real estate jargon it refers to a shift in value.
Appreciation: This term refers to an increase in value of the property. It does not refer to how much you like the property or the real estate agent. Appreciation occurs due to a rise in the value of property in general, or when you do something to add value to a property – like adding a new kitchen or bathroom.
Depreciation: The correct definition describes depreciation as an ‘accumulated effect on the value of an asset due to physical, functional, technological and economic obsolescence’. In other words, its wear and tear, it’s what happens to the value of an item when it gets old and has lost its value.
Is it a Boom or a Bubble? How can you tell?
There’s a lot of speculation at the moment about whether we’re experiencing a housing boom or a housing price bubble. But what’s a boom and what’s a bubble and what’s the difference?
Boom: A property boom is a period of time where the property market experiences rapid growth. During a boom property prices increase rapidly and auction clearance rates remain high despite the increase in prices. A property boom is a sustainable upturn in the property market.
Bubble: A property bubble is also a period of time where the property market experiences rapid growth, with the rider that the bubble will inevitably deflate or burst. This results is a downward correction in prices which ultimately stabilises the market.
Some experts believe that we are in a property bubble at present but in our time as brokers (for over 10 years!) we are yet to see it burst…
Buyer’s Market vs. Seller’s Markets
Property Market commentators will often describe real estate trends as either favourable towards buyers and investors or to those selling property. The labelling of these trends is often simple and dictated by supply and demand in the market and property clearance rates.
Clearance rates are essentially the percentage of properties up for sale on a particular weekend that get sold. Currently in Victoria, clearance rates indicate the following:
Seller’s Market = Clearance rate > 68%
Buyer’s Market = Clearance rate < 62%
Neutral Market = Clearant rate 62-68%
Buyer’s Market: This occurs when there are more people selling homes than there are potential buyers. Buyers typically have a wide range of properties to choose from and less competition. This is often a great time for first-home buyers as it’s possible to find a dream home at a lower price because sellers who are in a hurry to sell are more open to negotiate.
Seller’s market: This occurs when there are more people looking to purchase property than there are listings for sale. There is more competition and those that come on the market often sell quickly and for a higher price. Interested buyers are willing to pay more to secure the property they want.
There also exists a neutral/balanced market when economies cool down, rates and growth remain constant and the market doesn’t favour the buyer or seller.
Rental Yield: A measure of the amount of rental income generated by an investment property shown as a percentage. Calculated by taking annual rent (income) and dividing it by the value of the property.
Positive gearing: A tax related term. This occurs when investment income (rent received) exceeds interest expense (loan) and other deductions associated with the property such as agent fees, insurance, repairs & maintenance and depreciation. i.e. your incomings exceed your outgoings and the difference will be subject to income tax as you have made a profit.
Negative gearing: Is the reverse of positive gearing. The outgoings (tax related expenses and deductions) on the property exceed the income generated. The shortfall can be claimed as a loss and offset against other taxable income and therefore reduce the amount of tax you pay for the period.
Cash flow and taxes are not to be confused as one and the same. A property could have positive or neutral cash flow but be negatively geared and vice versa.
When it comes to gearing and properties, it can get rather complicated especially if you’re new to world of property investment. It’s crucial to know the ins and outs of the tax system and we recommended seeking advice from a tax professional.
However, there’s no need to be confused about property jargon, or to feel silly if you’re not exactly sure what something means. We are happy to help and there really are no such things as stupid questions. We’ve been assisting first home buyers and seasoned property investors for almost a decade and we can help you too. Why not give us a call to discuss your plans? Our services are both cost and obligation free.
For more info on property jargon see our Glossary of Terms.