This is a question that I am frequently asked. Many homebuyers are frightened of buying at the top of the market and are hoping to buy at the bottom.
Whilst this sounds simple enough, the reality is that no one can predict the short term future of the market, not even experts. If you are fortunate enough to purchase in this scenario, it would be good luck rather than good management.
I recently analysed the marketplace in our area. I found that, if you had purchased a residential property in our region 26 years ago, back when I started selling Real Estate, today it would be worth at least six times what you had paid for it.
If you had borrowed all of the money to buy it back then, the interest repayments would have been six thousand dollars per annum, or about one hundred and twenty dollars per week. Interest rates at that time were on average fifteen percent.
If you were still paying the mortgage now, as interest only, your repayments would be two thousand dollars per annum or forty dollars per week, as interest rates have fallen below five percent.
The rental value for this property now, would be two hundred and sixty dollars per week. So if you had rented this property for twenty six years instead of purchasing it with a mortgage, you would have paid approximately two hundred and sixty thousand dollars in rent and now had no equity in the property, as you did not own it.
If you had borrowed the full purchase price, when you originally bought it, you would have paid approximately one hundred and ten thousand dollars in interest and would now have two hundred and twenty thousand dollars in tax free equity in your own home. That’s a net position of three hundred and seventy thousand dollars benefit, for a purchase versus a lease.
In addition, you would have had the benefit of the security, of not having to move unless you chose to and of also having the ability to renovate and decorate to suit yourself.
In conclusion, I have found that many purchasers are afraid of the commitment in purchasing and taking on a mortgage. The above scenario however clearly states, that there is more risk in not entering the market, than there is in purchasing.
The reason for this? INFLATION!
In NSW, the population is increasing by about two thousand persons per week. This increase in demand, together with an under supply of housing stock, combined with increasing construction prices, leaves little doubt, that the long term market conditions, will continue as they have historically.
In the short term, who knows? Prices may go up or down but in the long term, may I conclude with an old saying “As safe as houses.”
Author: Alan Jurd principal of Jurd’s Real Estate