12 Nov Understanding how Real Estate and Property Purchase is impacted by the Economic Cycle
After watching a recent episode of 60 minutes re- the doom and gloom of real estate and how the people of Australia are heading for a major crash and a fall in property prices. And how people have over borrowed and now have little or no equity in their property.
Question is: Is this fact or fiction?
First of all you have to remember – the people spruiking doom and gloom are either Bureaucrats or Statisticians. Neither in my opinion are part of the real world. Property prices go up and down as do stocks and shares but unlike stocks and shares property always recovers.
Why is this and why do booms and busts in real estate occur?
Ok in my opinion this is what happens. In 2007 we had the global financial crisis. As a result of this people stopped spending money in fear of a recession but what happens now is there is a recession and basically we cause it.
People stop buying white goods, building house’s, etc, etc.
A recession happens because money isn’t circulating in the economy, so everything slows down.
So factories slow their manufacturing. Overtime for the workers drops off, – eventually the workers are put off, because we the general public stop spending. And we wonder why there is no work it’s simply because cash is no longer flowing in the economy.
So where does the money go? Well everybody tightens their belts and stops spending, but the money isn’t burnt in a big Furness it simply isn’t flowing in the economy.
Things stay like this until attitudes change and confidence comes back and we start spending again and the economy starts to recover. This is known as the economic cycle.
I know what you saying so how does this effect housing/property?
Ok in 2007 you were a 15year old living in suburbia with mum and dad. You’re now 26years old and looking to purchase you first home. This applies to you and thousands of other young people across the country.
For this example we say 2000 young people I’m sure there are many more in reality.
OK so there are 2000 people in the market to buy. And let’s say at this time there are also 2000 properties on the market. So there is something for everyone. Now you are or should be looking in the lower price bracket for your first home.
You will probably buy a house where the owner was a first home buyer 10 years prior and now is looking for a bigger place for the family.
Now let’s just take look at the numbers here. The seller paid let’s say $250,000 in 2011. They have fixed the place up a little and are now asking 10 years later $350,000. (Which in today’s market is reasonable).
So potentially there are 2000 people looking at this property. This one sells and the people over the road see this and say, ‘well our place is worth more than that’ and they decide to put their place on the market for $370,000 and would you believe it, It sells.
Now you have 2 happy first home buyers and 2 second home buyers looking to buy their second home. The market is starting to warm up.
This will gain momentum until the 2000 people looking has dropped to 100 then the market starts to slow down because there are much fewer buyers. So what do the sellers do? The smart ones take their properties off the market, the others drop their prices and then complain that real estate is terrible and they lost a fortune!
Had they have waited they would have achieved their asking price eventually.
It’s not unusual when the real estate market corrects for prices to fall by 30% this is due to the lack of demand. If you try to sell on a down market there is always someone ready and able to cash in.
Real estate is a long term investment not a get rich quick scheme. To be sure you must hold for 10 years, unless of course you can buy more than one property on a down market then sell on a high, – this strategy is not for everyone so be carful !
Just to confirm what I’m saying here ask Mum and dad what they paid for their first home and what it’s worth today! I’m confident it will be worth today considerably more than they paid.
In nut shell why will property always increase in value? Because the population is growing and it is highly unlikely we will move back into MUD huts any time soon.
Really it’s common sense. The only thing about common sense these days is it isn’t common!
The other thing I would like to mention here is most home owners would not know there is or was a drop in house prices and would not have a concern. Because if you’re not looking at putting your house on the market then it is not an issue for you or the bank. I guess that is why they declined to speak to 60 Minutes.
As for people’s borrowing and affordability, In fairness the banks have strict guide lines on borrowing to assure you the purchaser are not over stretching to purchase. Most Brokers are very responsible and understand responsible lending. Unfortunately when people go direct to a major bank this has not been the case in the past as you will have seen on the news some of the major banks have been heavily find for irresponsible lending.
My other concern is the fact that all the negative news and Doom and Gloom is based on SYDNEY and MELBOURNE. This is a completely different market to BRISBANE. Prices in Brisbane are much lower than Sydney and Melbourne and growth is much steadier and sustainable but they don’t tell you that on 60 minutes.
This has been just my opinion and I am happy to discus with any one on a one to one basis any time.
PMAA Real Estate and PMAA Financial Services are responsible companies and aim to assist home buyers and investors alike, providing the purchaser has all the facts and can afford comfortably what they are trying to achieve.
Best wishes
Tony Meeds
Managing Director and Principle
PMAA Pty Ltd.
Disclaimer:
The above is a personal opinion only. You should always do your own research and obtain advice from your own legal representative or certified adviser prior to making any decision for a property purchase or real estate investment.