Find yourself saying “I’m waiting for the market to correct” or “the market is about to crash” a fair bit? Even if you may be correct, it could be your downfall.
As a former residential real estate agent myself (I now work in the more commercially minded projects, and development space), I found myself dealing with a very diverse selection of different buyers. I dealt with hundreds of different individuals over time, but there are a few that I still remember vividly and that stand out to me even today.
It was very common to hear the various phrases, similar to “I’m waiting for the market to correct”, or “the market is about to crash”. If I had a dollar each time I heard a rendition of that, I could have busted the myth of housing affordability myself.
There was a select group of particular clients that comes to mind, I had dealt with these various clients over the space of 3 years, and a few colleagues even further before that.
I’ll paint the case study for you. The buyer was looking at properties in Sydney, and had looked initially at a suburb, let’s call it Suburb 1.
With one of my former co-workers, they had looked at several different options in Suburb 1 in 2007 for $650,000, and concluded that as the market was about to crash, he was happy to wait and bide his time until this inevitable doomsday crash occurred.
In 2010, this same client began enquiring and looking at Suburb 2. This suburb was 10km away, and again, for the value of $650,000 he continued to look, but decided against it, as he did not feel it was worth that amount, and the market correction was imminent.
In 2013, he began looking at Suburb 3. This was in a different (less desirable) council area, and he had still not purchased anything. Again, for the value of $650,000, he looked, almost purchased, but then again decided against buying again.
Fast forward to 2015, he looked at Suburb 4. In the less desirable council area, now 20 km away from Suburb 1, for $650,000. Again, he stated the inevitable crash was about to occur, and did not buy.
Today, my former co-worker assures me this client has still not made a purchase, and still makes fleeting enquiry. Savvy investment strategy? He probably feels he has avoided some hairy financial perils, however that sadly is simply not true. This buyer, who was ready to go in 2007, made mistakes that were to his heavy detriment.
In 2016, Suburb 1’s median price is $1.8 million. Suburb 2’s median price is just shy of $1 million. Suburb 3’s median price is $950,000. Suburb 4? Too early to pick the growth, but it’ll surely mimic the rest of the suburbs.
At the end of the day, the client wasn’t actually wrong. There was one crash, and many corrections in that particular time frame. But if the correction is what you are waiting for, the moment it actually occurs is a gamble, and may not even help you.
If you were looking at a property for $650,000, and over the space of the year that you wait, the market may (for arguments’ sake) increase by 7% during that period. That’s an increase of $45,500 (per annum). What would the correction even be? In Sydney metro, particularly as of late, a correction often doesn’t even change or lower the pricing, but rather slows market activity, and holds pricing steady.
So with a value of $695,000, this is well above your price bracket. Simply waiting, does not help you buy that property. Let’s say the correction takes two years. That’s $91,000 increase over two years. That’s a property value of $741,000. That definitely becomes out of reach.
While it is still heavily important to make sure you are buying correctly in the marketplace, and ensuring you are not drastically overpaying, in most major metro capital cities’, like Sydney, the rate of growth far exceeds your ability to save, and if there is one major correction in 5 years of market activity, the rise may be $350,000 over that period, and only a max $50,000 increase over the same time.
Why wait, when you’ll inevitably lose? Your opinion on the market is irrelevant, and the market moves in tandem with comparable sales, and replacement value. If it stacks up among the comparable sales, that is it’s value, and combined with other elements of your due diligence, it may be worth your while to pick up. But if at that point you don’t buy simply because you feel the market is about to correct/crash/doomsday – you become your own worst enemy.