I talk to a lot of people about the property market, and I’ve learnt that there are a handful of questions which come up more regularly than any others.
These are. “Is the market about to crash?”; “What’s going to happen to interest rates?”; and “Should I buy now or wait?”.
For obvious reasons, this last one is the one I’m hearing most often, right now and it’s the one to which I want to devote this article because, in my opinion, it’s the one which can potentially lead to behaviour which will damage your overall position if you’re not very careful.
Just yesterday I took a phone call from a woman who was planning to sell a property then put the proceeds in the bank until prices have ‘bottomed out’.
I understand what she means by that, of course. She’s worried that prices may fall further, and she thinks that, if she waits until they’ve stopped falling, and then buys, she’ll save money on the purchase and have more certainty about the future.
That’s a smart approach, right?
Well, not so fast. While it may sound smart it’s almost always a fool errand and my response is always the same. If you’re in a position to buy now – buy now.
There are three reasons for this:
- Picking the bottom of the market is almost impossible. I’ve been investing in residential property for a long time and have a pretty good idea of how the market behaves – but I certainly wouldn’t claim to be able to pick the exact timing of the bottom of the market. Nor would most other seasoned investors – so I’m almost bemused when relative market newbies, particularly young first time buyers, tell me that this is what they plan to do. I don’t mean to offend but, in my experience, those who think that they’ll be able to pick the bottom of the market inevitably miss the mark, and either miss their opportunity to buy, or buy after the market turns and end up paying a lot more than they needed to.
- The medium term trajectory of the market is always upward. If you’ve read my columns and listened to my commentary over the last few years you’ll know that I talk a lot about the history of the property market and that I’m a very strong advocate of understanding the data. In the case of the kiwi property market that data tells us that, while prices can move around a little at any given point in time, their general direction is always up. In fact, over the last few weeks I’ve been talking about the results of recent research in which I’ve now confirmed that, between 1982 and 2011, the average growth rate of house prices over any ten year period was almost exactly 100% when averaged out across the entire thirty year period. That rate of growth was slower leading up to 2021, and it actually took house prices an average of twelve years, rather than ten, to double over that time – but the long term trend is still in the same direction. Against this trend, a small loss is irrelevant against the long term average.
- Any gains are an illusion in the current interest environment. Let me explain. Let’s say you were looking at a house that would have cost you $800,000 to purchase in January of this year when you could still get a mortgage at a one year fixed rate of around 2.25%. After paying a 20% deposit you’d have been left with a mortgage of $640,000 and monthly repayments of $2,878. If you bought that same house today it might have dropped in price by 5% to, say, $760,000. After paying a deposit of 20% you’d have a mortgage of $608,000. Assuming you fixed your interest rate for 2 years, at 5.39%, you’d have monthly repayments of around $3767. This means that, over a year, you’d be paying almost $11,000 more in interest – or almost $55,000 more over the next five years assuming rates didn’t go up any further. In other words, any gain you think you have made by waiting has been more than wiped out by higher interest rates.
If you’re in a position to buy now – buy now.