Some Buying Considerations In Tougher Times

In tougher economic times, aspirant home buyers need to consider the future costs that will come with the type of home they buy, as well as the implication surrounding the fact that home values can decline.

One of the big myths surrounding the residential property market is that house prices always go up is absolutely not true. However with a significant general inflation rate with regard to consumer prices and wages, house prices, over time should go up more than they go down.

National “corrections” in real terms, where prices still inflate but at a lower rate than consumer price inflation, are more common occurrences. Downward corrections either in “real” terms only, or in all-out nominal terms, should not be seen as a bad thing.

Ideally, asset prices should reflect the economic fundamentals of the country and of specific regions or areas. If those fundamentals, such as economic performance, deteriorate, asset prices should correct accordingly. This is what a healthy well-functioning market looks like and is a healthy situation to have.

However, when homeowners are not prepared for an event such as a home value decline, often because they make their buying decision based on the fallacy that the value can never drop, they can become “over–committed” financially. Homebuyers should cover when tough financial times arrive and that the household should be able to service the loan and not a pure assumption that the home’s value will hold, and even increase in time..

And all though the home could easily be sold and the home loan debt settled, the problem arises when home values fall. It is easy to think “it will never happen to me,” even in these current low interest rate times, 13% of sellers are selling in order to “downscale due to financial pressure.

When home values fall, it limits the financially pressure household’s ability to “trade out” of their properties. This situation is known as “negative equity” – a situation where the household owes more on the bond than what the home is worth, because the home’s value has dropped.

The home can still be sold, but if it can only fetch a lower price, it can mean that there is still some bond debt outstanding.

The House Price Index is still rising year-on-year but in reality the index’s pace of inflation has been gradually slowing for over a year-and-a-half, which is the natural response to a weakening economic growth rate over the past few years as well as rising interest rates.

It is important that home buyers understand the risks and understand the risks and act accordingly. The usual advice in such times normally goes about limiting your borrowing or spending commitment and this is a good place to start.

Consumers should go further than that, they should also consider how certain credit driven purchases can impact on non-credit driven spending commitments.

One can do this by considering limiting the size and value of one’s home. The house is the one item that influences spending commitments more than any other single item. The implications extend to home maintenance, the rates and tariffs bill, insurance, and of course all of the furniture, fittings and appliances that we fill our homes up with.

If you consider the smaller home, you will see that because there is less space there is also less space for “stuff” and it could quite possibly also mean less electricity consumption.

Buying within your means and being able to afford a “sizeable deposit” would ensure something of an extra safeguard should home values decline.

People often ask “is now the time to buy or not? It is an impossible question to answer. People don’t buy homes purely to maximize financial gain. The majority buy homes because they want a place to live in, and don’t necessarily want to wait for years for the market to be exactly “right”.

Is a more conservative approach starting to happen yet?

For some, the answer would appear, yes. A recent decline in the percentage of sellers selling to upgrade to “better” properties, and a rising percentage of sellers selling in order to downscale “due to life stage”.”

In addition, we have seen some decline in the percentage of buyers deemed to be 1st time buyers, as well as in single-status buyers. These often younger buyers can remain in the rental market for a bit longer if need be, or in their family homes. Of the sellers downscaling due to financial pressure, the agents are also starting to indicate that more will “rent down” as opposed to “buying down”.

Such an apparent recent shift in home buying/selling patterns towards greater conservatism comes at a time when consumer confidence has plummeted. Such a shift currently seems entirely appropriate.

PROPERTY LAUNCHES & INVESTMENTS

Property Launches & Investments

Some Buying Considerations In Tougher Times

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