A question everyone has been asking for years now is ‘will the market ever go down? We have seen one of the strongest markets with local and foreign investment pushing prices sky high. Locals taking advantage of low interest rates and forcing prices up through competitive purchasing, all due to the notion that it will only go up. But what are driving forces for a market to drop out?

I think anyone who believes the market will never decline or just stagnate are maybe hiding from the truth of what history has taught us, or just plain old naïve. Aside natural disaster, which would bring an immediate down turn in prices, the past has shown us what may happen when an economic crisis hits. Forces such as the stock markets can see people in a bind, though our biggest driver are our interest rates.

If you want to take a logical approach, while interest rates are low, many people have opted to borrow to the brink. This means that in their current situation, there is no more money to be made and that’s all good and fine while you pay the mortgage, put food on the table and live a simple life on an even keel. Though what happens when the Reserve Bank of Australia (RBA) begin to increase rates? One-point rise, a quarter of a percent, can create havoc in households who are just managing to pay the bills. If there’s no more money that can be made, what do you sacrifice.

The first action is usually recognising that the biggest debt, your property, is the one that will need to go, so you list your property in line with comparable sales before the interest rate rise. The only problem is, the banks just tightened, and the market has had a bit of confidence knocked out of it, you also find that you’re not the only one in this position as a flurry of listings come on at the same time creating more supply than demand. Essentially turning the it to a buyers’ market.

After months on the market and buyers having too much choice, you’ll find that you as well as other in the same position will start to drop their expectations. Usually by the third point rise, around the nine-month mark if rises are quarterly, the pinch is in full affect and taking an offer that is half of what you paid seems to be somewhat inviting before you are bankrupted. It only takes one of your neighbours to take that offer to set the bar. That first comparable sale is now real and not one buyer in their right mind, would pay more than they must once they have that data in their corner.

If you look at history, this is how the real estate market works, ups and downs. It’s only the people who get burnt on the way down that remember the market declines, the rest of the population remain ignorant during the uprise and think they will never have the opportunity to get in the market because prices will only go up. Borrow money based on a thirteen percent interest rate and you’ll protect yourself for any rises and get through the downturn. If you can see the other side of a down market, that’s when you will get the best return.

 

DISCLAIMER

The following advice is of a general nature and intended as an opinion and broad guide. For all legal, financial or real estate advice you should obtain independent professional advice to do with the specific nature of your circumstances before making any legal, financial or real estate decisions.

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