Owning a Home in a Falling Market

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Currently there is a buyers’ market for properties. Yet many buyers are holding back, because they are afraid of paying too much in a falling market. Astute property investors would argue that the best time to buy is not the time when market prices have reached a low point but the time when there are the fewest buyers in the market. Good deals can be done when desperate sellers need to find a buyer. That’s when bargains can be found.

There are lots of reasons why sellers may be desperate for a sale. They may have overcommitted themselves with mortgages, they may be older people needing to move into a retirement village, couples going through a separation or families selling a deceased estate. While it might seem unethical to take advantage of a seller’s desperation, in fact it is not. Desperate sellers are grateful to have a buyer, even at a low price. As a home owner, it’s important not to become a desperate seller by making sure you avoid the situations that lead to desperation.

Is now a good time to buy? If you are buying a first home and you intend to remain a property owner for a long time then the key issue for you is not the price you pay for the house but your ability to service the mortgage. Over the long term, the price you pay becomes less relevant, because prices trend upwards over time. The key thing is not to have to sell because you can’t afford the mortgage payments. This would put you at risk of losing money.

There’s a lot of talk in the news right now about first home owners having negative equity in their homes. Negative equity occurs when the amount of money owing on the mortgage is greater than the value of the house. This means that if the house was sold, the sellers would walk away with nothing but a debt to the bank. Negative equity is not something to be afraid of so long as you are able to keep up the mortgage payments. Banks generally don’t take any action in a negative equity situation unless there is a problem with mortgage payments falling behind and only as a last resort. The best thing to do is to ride it out and eventually the house value will rise and the amount of mortgage will reduce. This is why affordability is so important when you first buy. When you take out a mortgage, try not to borrow the maximum you can afford. Leave some wriggle room so that if your income drops or interest rates rise you won’t be in trouble.

The percentage of households who own their own home has been dropping quite markedly. At the peak of home ownership in 1991 around 73.5 percent of households owned their own home; now that number is less than 65 percent. What we are seeing is increasing concentration of property ownership in the hands of a smaller number of people who own multiple properties. The rapid rise in property values over the last three years been a contributing factor. But its not the only factor. There has been a shift in views about property ownership.

Renters make the argument that being a tenant makes good economic sense. Rent is initially less than the cost of mortgage repayments. The landlord takes care of rates, house insurance and repair bills. Renting is more flexible – you can change location without incurring the huge costs of selling a property. It is hard to argue with these points if you take a short term perspective on the issue of renting versus owning.

Now let’s take a long term view. Over the long term, we know property prices increase, and along with that, rents go up. On the other hand, the amount of money borrowed to purchase a house either stays the same in nominal terms or reduces if the principal is repaid. The effect of inflation is to reduce the real value of the mortgage and the principal repayments over time. If house prices rise at higher percentage than the rate of interest on the mortgage, this effect is amplified. The sooner you buy a house, the more wealth you will create. Living in rental accommodation in retirement is not desirable. Rents increase over time and landlords cannot be relied upon to provide long term tenancies. Owning a debt free home leads to a much more comfortable retirement. The sooner you buy, the cheaper it will be and the more wealth you will create.

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