Home Values Down Its A Buyer’s Market Everywhere

Do you know the implications of a homebuyer’s market? If you don’t, and you’re a seller, buyer, or real estate agent, you may come off badly in property deals. The housing market is neither a seller’s nor a buyer’s market simultaneously. It favors one over the other, and the property cycle indicates which group is in the driver’s seat, i.e., has the most control in determining the sales price.

Property Cycle

In the boom phase of the property cycle, it’s a seller’s market, giving sellers the upper hand over buyers. When the property market is in the bust (down) phase, it’s a buyers’ market that can negotiate a sales price that favours them.

Homebuyers

Homebuyers who do well in a falling or bust phase of the property cycle are typically first-time home buyers and investors with sufficient cash – i.e., they have a deposit, also known as a ‘downpayment,’ and can secure a home loan.

Vendors

Home sellers who understand the property cycle won’t sell when their house value drops. If they want to sell up, they will wait for the recovery or boom phases to get the best price for their property. The sellers who sell when property prices are dropping are either naive to market trends or desperate. Home buyers who have been looking for the ideal property for some time will know market trends, and as such, they will not pay more for a home than its market value.

Agents

Real estate agents want their clients to get the highest possible price, as that usually also translates into a higher payout for them when their fee is commission-based, not a fixed rate. However, when property values drop, sellers hold off selling, resulting in fewer listings. Real estate agents have motivations, such as earning an income, to encourage their clients to sell for whatever a buyer is prepared to pay, so they get their fee.

Now that we understand the primary motivations of parties involved in property sales and purchase transactions, we examine the reasons behind the current downturn and the current state of property markets in the UK, USA, and Australia.

Curbing Inflation

Worldwide inflationary pressures, stemming from the pandemic, Brexit, supply chain issues, and the Ukraine war, have led to a surge in house prices. Some property markets witnessed annual rises much higher than owners’ income. Homebuyers paid a lot more, and FOMO was their state of mind.

Lenders were happy to provide mortgages that were many times the household income of their clients. Interest rates were meager, so repayments on large loans were affordable. However, the tide has turned, and property markets worldwide are diving, with home values dropping.

Affordability

Interest rates are rising quickly, and mortgagees with loans coming off low-interest fixed rates are feeling the pain of higher interest rates.

For example, a household with a £250,000 loan at 2% interest will incur approximately a monthly repayment of —£420. When the interest rate doubles to 4%, so do the refunds. In this example, £420 per month becomes £840 per month. This hurts mortgagees when their fixed income does not rise to cover the increase in costs. Curbing inflation pushes prices up, so consumers pay more for everything, including their mortgage!

In an economic downturn, the good times are behind u. As a result, homebuyers can borrow less, which means they are prepared to pay less. Sellers, therefore, have to readjust their sales price expectations. Buyers are controlling what homes are sold for, and sellers that are not stressed – i.e., struggling to afford their repayments or motivated for a quick sale will stay put and not list their home for sale.

Initially, there will be fewer homes for sale, but during a downturn, many homeowners caught out by rising costs and dropping property values will aim to cut their losses and sell up. This provides good purchasing opportunities for astute home buyers, including investors.

Property Markets

What’s happening with property markets – are they favouring buyers or sellers?

It’s a similar story just about everywhere in the western world. Costs of homeownership are going up, including:

• Loan interest rates
• Rates
• Insurance
• Maintenance
• Services

What’s to come is anyone’s guess. However, the general sentiment from market experts is that the global downturn is here to stay for some time. Governments are raising OCR, and taxes will cut public spending. Homeowners must dig in and cut costs to keep their main asset.

United Kingdom

House prices are set to drop 10% in 2023, reports The Guardian. However, Credit Suisse says it could be as much as 15% with the UK in a recession. Other experts agree and the evidence of tough times for mortgagees is the near doubling of interest rates by Nationwide in just three months. A £500K loan, standard in London, would now set you back £881 more per month.

Investors with an appetite for higher risk and cashed-up homebuyers will have the upper hand over sellers. It will be interesting to see some statistics on deals during the next twelve months. Swapping your mortgage for rent will not be much less, however, as rents are rising too.

USA

Bloomberg presents statistics showing what can only be described as deep pain felt by homeowners as values drop as much as 20% in some regions. In the USA, mortgagees can secure 30-year fixed-rate mortgages, and currently, FreddieMac’s interest rate is 6.94%.

How do you know this is a high or low rate over such a long time? In the 1980s, interest rates were in the mid to high teens, which makes any rate under 10% good. However, between 2010 and 2022, the interest rate was mostly between 2% and 5%.

Australia

The Guardian reports a 20% drop in property values. Of the five main cities, Sydney is witnessing the most significant housing price falls, with Brisbane and Melbourne not far behind. However, post-COVID, the rise in house prices was steep, up to 20%, so a fall of 6.1% in Sydney still has property values up over the previous 12 months. Enjoy it while you can. The reset is happening, and all the gains are forecast to go by the wayside, at least in the short term.

Final Thoughts

Property is viewed greatest asset due to its price stability over time, locking in your initial investment.  Typically, homes double in value every ten years; therefore, whether you buy in a seller’s market or time your purchase to buy under market value in a buyers market, over time your home will go up in value.