Contrary to popular belief, property prices don’t always rise, and property prices aren’t skyrocketing all over Australia.
Sydney and Melbourne might be booming, but did you know that prices have actually been going backwards in Perth and Darwin.
The average residential property price in Sydney jumped 23.7% in the two years to September 2016, according to the most recent available data from the Australian Bureau of Statistics.
Melbourne prices also significantly increased in those two years – by 17.5%.
However, during the same time Perth property values fell by 7.2%, while Darwin declined 9.1%.
We all know that property moves in cycles so eventually the cycle should turn but what sort of things do you need to be mindful of when property prices fall? How does it impact everyday mortgage holders?
Typically, we think of the worst case scenario, someone who might have bought at the top of the Perth or Darwin market, and the property now not worth as much as what they paid for it. Even worse if it drops so far that your mortgage now exceeds the value of your home.
These are fairly extreme, but there are more broad reaching impacts that all property holders may want to keep in mind. Borrowers usually find themselves in one or more of three camps when property prices fall.
- Grin and bear it
Some property buyers are ‘flippers’ – within a short space of time they acquire a property, do a few improvements and then flip it for a tidy profit. While that can be a lucrative strategy in a rising market or even a flat market if you have renovated cost effectively, in a falling market people might be forced to hold their property for longer to avoid making a loss. This may involve having to change your plans, rent the property out and become a landlord for a while until the opportunity comes up to sell at a profit.
In a falling market, many borrowers have the painful experience of seeing their equity decline. (Equity is the difference between the value of the home and the amount of the outstanding mortgage.) Thinking that you have $150 to $200k in equity can feel pretty comfortable but if this starts to shrink it can be a bit disconcerting. Focusing on paying off extra then becomes your chief means of building equity and even then, these gains may dwindle if the value continues to fall.
You may have no intention to sell and so are not concerned, but you may find a loan with a cheaper rate or want to shift lenders to access better features. If the balance of your home loan is hovering around 80% of the value of the property, it may not be feasible to refinance.
As bank valuations tend to be conservative, if the lender’s valuation comes in and you owe more than 80% of the value, then you may choose to stay with your current lender rather than having to pay thousands of dollars in mortgage insurance. Any savings that you get from the cheaper rate can be far outweighed by these sort of costs. Not being able to refinance can make you feel trapped with your current lender.
- Forced to sell at a loss
Although property prices can fall when the economy is in good shape, property market downturns can often coincide with economic downturns. That can mean a double whammy for some borrowers – losing their job and losing equity in their home.
You may not even lose your job completely but things like overtime, bonuses or a cut in number of hours you work could mean things get pretty tight.
Struggling to keep up with repayments can be bad enough, but it’s even worse if the asset you’re struggling to hang on to is depreciating.
Even though you don’t want to sell when prices are depressed you may be left with no option but to put your home on the market. It can seem like you have gone backwards when the cash you will have left over from the sale is less than what you put in to purchase it in the first place. Having to realise a loss can be very painful indeed.
- Have to find alternatives
If you are used to regularly accessing equity to fund other things in your life, a property downturn may mean that you have to find other sources of finance. When prices are rising, it can be quite simple to have your house revalued and top-up your loan to pay for a renovation, add a new room, consolidate smaller debts, pay for a new car, go on an overseas holiday or to take advantage of an investment opportunity.
Having constantly increasing equity financing these things can become an expectation or way of life.
When house prices fall, paying off your mortgage becomes one of the primary ways to build equity. Savings for these additional things or needing to resort to taking out a personal loan to fund large purchases may be the new reality.
Falling house prices are not something that we have really had to deal with in the Australian market but just because they have tended to rise doesn’t mean they always will. To ensure that we are able to weather such an occurrence, forward planning is key.
First, be careful not to over commit when you take out any finance – any sort of finance.
Stretching things that bit further to get that extra outdoor area or the beautifully renovated bathroom and kitchen may mean that things are very tight from a cashflow and an equity perspective. Having a bit of breathing space on both counts may help you sleep at night.
Be a little bit conservative when you are tempted by an interest free deal or great sounding finance option. Lots of small debts do add up and repayments on these can cause strain just as much as home loan repayments.
Second, make sure you have a buffer in place that you can rely on if you need it. Having savings put aside for a rainy day can give you peace of mind and options at the end of the day. Having to stick with a job that you hate because you can’t afford a few weeks or a month without an income can add a lot of stress and strain. Consistently paying more on your home loan can also build up funds for emergencies as well as get you used to paying more when interest rates rise.
By Peter Ellis
The Borrowers Advocate, Lending Mate™
Peter is a trail blazing campaigner with a vision to put power back into the hands of borrowers. He was disheartened by an industry where home loans were less about the individuals borrowing the money and more about sales targets. Those impacted most were people that didn’t tick all the boxes to fit the ideal profile, who were often being left to fend for themselves.
Lending Mate™ wants to restore this power imbalance and start a movement where borrowers get a fair go. Lending Mate™ is having someone on your side, genuinely working in your interest to enable you to get ahead financially. We aim to provide the information, help and guidance you need to put you back in control.
Disclaimer Statement: Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product.
Free From Financial Worries Pty Ltd trading as Lending Mate™ (ABN 88 134 812 165), Credit Representative number 442518 is an authorised representative of Connective Credit Services Pty Ltd (ABN: 51 143 651 496), Credit License number 389328.