Rarely, if ever, has it been smart to postpone buying a house on the expectation that prices will fall.
Twenty years ago it was a mistake to wait and 10 years ago it was a mistake to wait. Last year, in a deep recession, it was no different.
Today it is no different.
In the first instance, the wayward performance of house price forecasts over many years shows this to be true. To think anyone can forecast or anticipate house prices down-swings so that you can buy-in at a lower price is fanciful.
More importantly, a look at house price trends over any reasonable time frame shows that they go up and that this occurs at a time when incomes go up both through normal wage increases and through promotions as workers gain experience and knowledge.
The definition of a ‘reasonable time’ when it comes to buying a house to live in has to be 10 years or more. It is largely irrelevant if, after you buy a house, the price is up or down in the year or two after the purchase date. You are not going to sell it, either way.
A few facts:
Based on Australian Bureau of Statistics, the average compound annual increase in Australian house prices over the past 15 to 20 years has been 5 per cent. Some years have been stronger, some weaker as the various factors that influence house prices wax and wane.
10 years of 5 per cent annual increases results in a price rise in excess of 60 per cent. At that rate, the $650,000 property purchase 10 years ago is now worth around $1 million. If you had borrowed $550,000 at the time and kept your repayments constant, you would owe less than $400,000 on that $1 million property. You have made half a million dollars, tax free.
Over 10 years, even in an environment of low wages growth, incomes are likely to rise around 35 per cent through normal wage increases and promotions. An annual household income of $80,000 a decade ago is now likely to be around $110,000. Servicing that mortgage has become easier and easier.
Where to now for housing? And does it matter?
At the moment, there is some reasonable strength in house prices. According to Corelogic, house prices have risen for the past four months after dropping in the five months prior to that. In the year to January, prices are up 3.0 per cent.
Low interest rates, a relaxation of lending rules and an improving labour market are having an impact on housing demand, which is also getting a kick along from a range of government financial ‘incentives’ skewed mainly towards first home buyers and new construction.
At the moment, these influences are over-riding the negative shock from faltering demand as immigration stalls and still sold growth in new supply as dwelling completions roll out.
These latter issues – low underlying demand relative to solid growth in supply – will likely bite at some stage to dampen the recent price actions.
Judging when the international borders will reopen, how new construction will pan out as some of the government assistance measures end and whether there are any regulatory changes to lending is, frankly, impossible.
Many of these issues will be gone in a few years in any event, over which time house prices are very likely to have been skewed higher making it hazardous to postpone a decision to buy.
There are stories of people holding off a decision to buy their property in 2020 on the expectation that the COVID-19 pandemic and resulting recession would smash the housing market. The logic was sound, but the reality was wrong.
Those postponing now have to stump up more money as the house price recovery unfolds.
All of this shows how difficult it is to pick the timing of buying into the housing market at least from the perspective of getting the property at a lower price.
Waiting to buy is a strategy that has failed for anyone with a medium to long run time horizon and it is likely to fail again in the years ahead.
Is it a good time to buy a dwelling?
I think the answer is clear. It always is.
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