The last few years have been a rollercoaster for house prices. In the giddy heights of the post-COVID boom in early 2022, house prices surged 40% higher than they had been two years earlier, only to fall 15% over the following 18 months. Since that time prices have plateaued. Much of this change has been driven by interest rates.
First home buyers who rushed in with their 20% deposit at the peak have now lost most of their equity and given that these are average numbers, there are no doubt some whose mortgage is greater than the value of their house.
Does this mean it was a mistake to have bought at the peak of the market? Now that interest rates are falling, is now the time to buy?
Ask a property investor when is the right time to buy a house, and they will likely say ‘ten years ago’. If you are not in the business of trading properties (buying, renovating and selling in a short time frame), there is no wrong time to buy property providing you keep to some important principles:
- You have an expectation that you will remain invested in property (not necessarily the same one) for a period of at least ten years in order to significantly reduce the probability of making a loss
- You have planned to be able to cover the running costs of your property out of your income, after allowing a buffer for unexpected additional costs or reduced income.
- You leave some ‘wriggle room’ with your mortgage – that is, you make sure you still have some borrowing capacity left if things don’t go according to plan and you need more money.
The two key reasons why people lose money from property are that they panic and sell when the market falls or they simply don’t have enough cashflow to cover the expenses. There is no doubt that buying property involves significant risk and so you need to do your homework first. That means being really clear about what the costs will be, and thinking about how you would handle unexpected changes to your costs or income.
Perhaps you are thinking about selling your present home and buying another. The key point to remember is that you are selling and buying in the same market. Some people refuse to sell at a low point in the market, thinking they might be best to wait for a better price. However, the price of the houses you might want to buy will also be higher then.
When house prices fall, there is usually little activity. It can take a while to sell, and it can also take a while to buy again as there are fewer listings on the market. However, once you have sold, being in position to buy without an offer conditional on selling will give you additional bargaining power. On the other hand, when prices are rising fast and houses are selling rapidly, you have a conundrum. Do you sell and hope you can find a house you want at a reasonable price? If you miss out, the elapsed time may see prices rise even further. For the smoothest ride, pick a time when the market is not too heated and not too slow.
If you are wanting to move to a more expensive home, trading up while the market is flat can bring about some savings, while if you are downsizing you may want to get top dollar for your home in a buoyant market before buying something cheaper.
There is speculation about what will happen in the property market now that interest rates are on the way down. Certainly, the lower rates are a welcome reprieve for mortgage holders. However, while interest rates have a big impact on house prices, there are other factors at play – principally the net migration rate, which affects the demand for housing, and the supply of houses.
The property market will always go through cycles as these various factors come into play. Trying to time the market so you buy at a low point is difficult, because you can never see turning points in the market until well after they have passed.
The most important thing is to aim to own a mortgage free property by the time you retire. Over the long term, the price you initially paid for the property will seem insignificant. So long as you can cover the outgoings on the property you will have made a good decision.
