Beginning my real estate career in the early 2000’s off the back of the last price hike, I bear witness to a fairly strong dip in the market. Across the board, people were making losses averaging around 30% from what they purchased their property for, though I saw over 50% losses in some of the inner city apartments, especially throughout the docklands, where there was mass saturation and no infrastructure to support it.
During an increasing market, the fear of not being able to afford a property is much higher. Younger generations who haven’t experienced the cycles of real estate, buy at whatever cost, just to get in. What generally drives the real estate market upward are low interest rates and money becomes very easily accessible, banks nearly give it away. Competition gets fierce, records are set nearly weekly and people secure their dream home, just not exactly the dream life while they slave away to pay for it.
The biggest problem is that a lot of the younger purchasers who absolutely believe that the market will only keep going up, are struggling to make ends meet once the buy that perfect home. Some live dollar to dollar to ensure that the bills are paid, there’s food on the table and that the mortgage is paid. They work two jobs, maxed out in physical hours to work and in some cases, cannot make any extra money than they are. They live day to day in survival mode without being able to save a penny, but that’s okay, because they have this amazing asset to their name, which the bank owns.
So while interest rates are low and everyone is surviving everything is great. Then the market turns and the RBA (Reserve Bank of Australia) increase interest rates by 1 point, .25%. This small difference for most people doesn’t affect them. Though for the one person in your street who is geared right up and has no breathing space, this weekly, monthly, yearly amount is a lot. When the money can’t come from anywhere, they start to dip into all different areas to find it. Cash advances on credit cards, borrowing from parents or friends, the list is endless and this is only the first increase.
I would keep my eyes on the third increase, which usually takes about 6-9 months or earlier for it to come around. By then, they’ve already had the property on the market for most of that time and haven’t sold it because buyers lose confidence and the banks tighten on their lending. As the pressure builds and creditors are chasing these individuals down month on month for missed payments, it eventually starts to cut into the mortgage repayments. Once the banks start to threaten with defaulting and bankruptcy, it really puts a lot of pressure on these individuals to sell at any price. In many cases, this could mean that selling at a 20%-30% loss is okay, because they can maintain what’s left of the loan and not go bankrupt. Essentially, these are the people who get burnt by real estate.
Now you may not be in this situation, you have planned ahead and you pay your bills and mortgage, so how does this affect you? It’s simple, your house is worth what your neighbour sells for. People gauge prices by similar sales in the area or apartment building. You may not have been falsely pressured when you purchased and you purchased well within your means. Though the mistakes of others will come to haunt you. If your neighbour has a home in direct comparison to yours and sells at a 15% loss from their purchase a few years back in the height of the market, then yours by default suffers a similar loss. The only problem is, it’s not usually only one neighbour that is affected and after 20% of your street sell up at losses, it draws down the value and equity of your home.
This is the most logical way the market draws down. It is only one factor in a declining market, though it plays its part. All you need to do is make sure you can hold off until the rates stop rising, stagnate, then turn downward again. This is the cycle of real estate.