What causes property price to fall and how to stay calm when it does?

As an investor, if we lived in an ideal world we would want property prices to keep on rising. However, as with any type of investment market, investing in property comes with its own ups and downs. If the market does start to decline, the idea is to be vigilant but not panic driven. Remaining emotionally centred and having a back-up plan for when the property market drops too low, will enable you to bounce back a little quicker than the rest.

Why do house prices fall?

If you have been following the Australian housing market, you will find that there are many reasons why house prices fall, especially when property is in demand, decline, or has excess supply. Housing can become overvalued due to low interest rates, insufficient supply, banks’ lending more than they should, and people coming into the market with the belief that the housing market should always be on the rise.

When there are lower mortgage interest rates, buyers are able to spend more on a property. The lower interest rates reduce monthly mortgage payments, which will allow buyers to pay even less over the course of the loan. When mortgage rates start to rise, it not only affects home buyers, but sellers will also be impacted. A home will not be as valuable due to the purchase being at the higher rates – which then becomes less desirable for the buyer. For example, at a lower interest rate, a home may be in an attractive price range for around 20-30 prospective buyers, but with higher rates the number could decrease to only 5-10 prospects.

Other factors that impact the property market

As well as increasing interest rates, there are many other factors that contribute to the property market declining. These can be related to the following:
• Bank lending and mortgage availability starting to fall - making it more difficult to obtain finance.

• Confidence and expectations of future house prices begin to lapse.
• A change in demographics – which can be from less demand.
• Excess supply of housing in the market.
• Changes to government legislation – eg. adjustments to capital gains taxes.
• Slowdown in foreign investment – changes in tax and restriction reducing foreigners entering or buying in Australia.
• Recession warning in the economy – this will contribute to high numbers in unemployment, which reduces demand and can result in home repossessions.

What does the economy have to do with it?

Demand and supply play a big role in how the property market performs. Our economy creates jobs, which then give us an income. Our income is then used as credibility towards banks and mortgage brokers, so we can borrow money to purchase a property. This is what creates demand within the property market. As property prices are similar to economic value mechanism, when you get low supply and high demand, you see value increase. If you follow the economies footprint and use it as a guide for property investing, you may only be hearing all about the doom and gloom of the market. However, if history is anything to go by, you will realise that this is just the ebb and flow of property, and in investor terms – just a bump in the road on a record-breaking market.

Staying calm and having a strategy is key to surviving the uncertainty

It is hard to know what the market is doing at any time. There are things that happen that are out of our control, such as natural disasters, economic changes, bank lending changes, and the fact that property prices won’t always go up - which means at times there may be corrections in the markets. There are only few people who buy at the bottom, and buying as close as you can to the bottom is really the best you can do.

You can never expect the market to remain perfect or time it right, the idea is to have as much knowledge as you can to prepare you for any downturn. As soon as the market starts declining, you can expect knowledgeable and resilient investors to start hunting for the best price to buy. As the market starts to drop, these savvy investors will be the first ones asking, “can I buy now?”

Your ability to survive the downturn will depend on your patience and how well you manage risk. Having the right mindset, along with understanding what causes this will enable you to be more prepared if the market does start to dip. But always remember that the value of property is normally caused by supply or demand and even though prices can go down, history has shown that prices have been going up for 30 years!

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