The Upside to Buying in a Down Market
Property prices across many parts of Australia are falling, of that there is little doubt. The prevailing sentiment would have you believe that the falling prices are terrible for all concerned. Admittedly, the net result of those trading in a falling property market is probably to the downside. Make no mistake though, there are still plenty of people who manage to improve their position in a falling property market. Understanding and accepting where we are in the property cycle is crucial to trading better and smarter.
There are five trading opportunities to those prepared to act in the current market:
First Home Buyers
First home buyers were locked out of the property market during the boom. At one stage, baby boomers wondered if their children would ever be able to buy into the housing market. Now is the best buying opportunity for first home buyers since the GFC in 2008. Sure property prices were lower in 2008, but mortgage rates were significantly higher.
Every percentage point the market softens means the more first home buyers are able to climb aboard the property ladder. Whether they choose to do so is a secondary point. Some will, some won’t. The fact is first home buyers now have a choice of whether they do or don’t enter the property market - where as they were locked out during the latter stages of the boom. The dwellings that appeal most to first home buyers like inner city apartments and houses in new suburban estates are feeling the brunt of this downturn.
A lower purchase price means you pay the bank less each month in mortgage repayments. Most property booms are quelled by the RBA raising interest rates. This downturn has been brought on by tighter credit conditions. Interest rates are at near record lows and look set to remain there for some time to come. Therefore, those that qualify for a home loan can buy a home for less than they would have paid 12 months ago and still enjoy record low mortgage rates. A cheaper house, a smaller mortgage and still cheap money. The major challenge now is getting a bank to offer you a mortgage.
Wider Range of Stock
A frustrating symptom of a boom is the tight availability of dwellings on the market. The most desirable properties were the most contested too. Many home buyers found themselves securing a property during the boom that felt like a compromise. Winning the bidding war became success in and of itself – with the suitability of the dwelling a secondary consideration. The respective buyers were at least comforted by the fact their new home was ‘going up in value’.
Potential buyers now have a wide range of dwellings on the market to choose from. There are some excellent opportunities in the market and the buyer competition is nowhere near as fierce as what it was in the boom. To have a generous selection of quality listings to choose from - in a healthy economy with record low interest rates - is a buyer’s paradise.
Speculators Are Gone
The property boom went exponential in its last 12 months as speculators drove prices beyond all reason. Many a rational home buyer was blown out of the water by a cashed up fearless speculator. Speculators will be back in the market, but they are out of action for the time being, representing a more rational environment.
Home buyers will buy, even when prices are falling - we all need to live somewhere. A property boom starts with investors and ends with speculators. A property correction starts with speculators and ends with investors. Once the market bottoms out, speculators will be back. Markets run on fear and greed. Once the fear is done, the greed will return.
Upgrade in a Down Market
The best time to upgrade is when the price gap between your existing dwelling and your desired dwelling begins to narrow. During the boom, your $1 million home went to $1.35 million (woohoo) whilst the proposed $2 million purchase shot up to $2.7 million (damn). The changeover price went from $1 million to $1.35 million (ouch!) Upgraders should be loving this and taking advantage of this environment. Be careful of the risks in buying before selling though.
Bottom of the Market
Some buyers are waiting for the phone call or the email that announces the bottom of the market. Alas, the town hall bells won’t chime and there won’t be a public service announcement to call the official bottom of the property market. If you are looking for a home that will see you through the next 10 or 20 years, there will be periods of both price growth and decline. Buying in a falling market means you are closer to the next market upswing than if you had purchased during a boom. Economists continually assess the housing market as though it were exclusively an investment. This is why they have been largely wrong for 20 years in forecasting the property market. In the broader financial world, no one buys an investment they know is going to fall in price before it rises.
But make no mistake, home buyers who know the house will fall in price before it rises will still buy the dream home. Our friends who practice the dismal science (economists) continually overlook the emotion and delight of a home buyer who is buying their own home. Home first, investment distant second.
Source: Peter O’Malley, Author of Inside Real Estate