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 buyer’s market simultaneously. It favours 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

The homebuyers that do well in a falling or bust phase of the property cycle are first home buyers and investors who are cashed up – i.e., they have a deposit, aka ‘downpayment,’ and can source a home loan.

Vendors

Homesellers 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 price possible as that usually also transpires into a higher payout for them when their fee is commission based, not a fixed rate. However, when the property values drop, sellers hold off selling, and there are fewer listings. Real estate agents have motivations, like 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 know the primary motivations of the parties involved in property sales and purchase transactions, we look at why we’re in a downturn and what property markets are doing in the UK, USA, and Australia.

Curbing Inflation

Worldwide inflationary pressures caused by the pandemic, Brexit, supply chain woes, and the Ukraine war resulted in hyperinflation of 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 on 2% interest will incur approximately monthly repayments. £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 they are on a fixed income that has not risen to cover the rise in costs. Curbing inflation pushes prices up, so consumers pay more for everything and their mortgage!

In an economic downturn, the good times are behind us, and homebuyers can borrow less, so they are prepared to pay less, and sellers 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 nor 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 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, common 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 up to 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.