How To Keep Your Home And Assets When Boom Turns To Bust

Seasoned property investors know they need to prepare for the tough times even when there are no clues that markets might tumble and interest rates go up when they purchase a property.

Homeowners and new investors can learn a thing or two from investors who have been through a couple of property cycles.

In this property blog we look at:

• Timing
• FOMO – (fear of missing out)
• First Home Buyers
• Boom to bust property cycle
• Tips

There is a saying, “there’s never a bad time to buy a property,” as it’s the property and the price that always dictates if it’s a good deal or not.

The Role of Media

However, if you follow what you read online, especially in mainstream media, you’re probably still holding out to get on the property ladder. There is never any shortage of conflicting news items written by real estate ‘experts’ who most collaborate with the media for publicity or remuneration.

Clickbait

“Bad news sells,” and there’s no shortage of news items on the state of the real estate market. Plus, it’s not unusual to get mixed signals of the state of the market. One article may warn of bad times ahead and that you’d be mad to buy a property now. While another article will suggest if you haven’t got a property by now, you’ve taken too long, and you’ve most likely missed out.

FOMO

FOMO (fear of missing out) is a real emotion and it’s said to be responsible for driving up property prices around the globe.

Bloomberg wrote on the topic in July 2021. 43 out of 150 cities saw double-digit growth in property prices. Turkey and New Zealand experienced 30%+ real estate price increases while many cities in Europe experienced high teens like Luxemburg with 16.6% between Q1 2020 – Q1 2021.

Exceptionally low-interest rates, lack of supply, and competition from “flippers” aka speculators who buy property often unseen and quickly sell it again for a higher price.

Millennials

Globally it’s millennials that make up the lion’s share of buyers. A report in 2020 says millennials bought 38% of real estate and Gen X’s bought 23%. So who was selling? The Boomers, of course! 45% of all homes sold were by the boomer generation. There’s no doubt 2020 and 2021 were ‘boomer’ years for selling real estate! 🙂

First Home Buyers – Young Families

First home buyers were the most active group of real estate purchases. 33% of homes purchased were to first home buyers. The most active age group of first home buyers was 30-39. Interestingly, this is the time most women start their families, so first home buyers also have young children!

Boom to Bust Property Cycle

With the largest group of property buyers being first-timers, many are blissfully unaware of a property cycle. For example, property prices have only gone up in recent years – not down. Interest rates have done the opposite, and they have gone down. For example, if you live in an area where property prices have steadily gone up year on year, it’s unthinkable that anything could happen that would devalue your property.

Property Bubble

However good times don’t last – tough people do. Investopedia has a good explanation of why real estate prices go up and down.

Housing bubbles are deceptive, and they can and do pop without notice. Pent-up demand i.e. FOMO, lenders offering attractive interest rates on mortgages, and a shortage of supply create a property bubble. Seasoned investors know the warning signs, and they are more likely to sell when prices peak and buy when property prices bottom out.

Interest Rates

First home buyers are often caught paying too much for a home funded with a substantial home loan. While interest rates are rock bottom at 2% or 3%, the repayments are manageable.

Financial illiteracy among homebuyers catches them out when their loans interest rates rise. What’s more, when homeowners are on fixed incomes, and there are price increases, i.e., inflation, they have to forego something. Recently Russia’s central bank raised the interest rate from 9.5% to 20% and their second largest home loan lender has upped their interest rate by 4% to 15.3%.

In the USA mortgage interest rates were around 2.67% in January 2021. By the end of 2022, the home loan rate could be as much as 4% – while this doesn’t seem like a lot – it is for homeowners on fixed incomes who bought their homes during the peak of the boom when property prices were their highest and home loan interest rates at their lowest.

For a home loan of $500,000 at 2.67%, the annual interest repayment is $13,350 versus $20,000 at an interest rate of 4%. If your loan is $750,000 – your annual interest at 2.67% is $20,025 and at 4% it climbs to $30,000. Plus, when central banks raise interest rates, everything costs more. Your food, utilities, transport, and so on.

Tips

What can you do to keep your home when the boom turns to bust?

Increase your household income

Seek out ways to increase your income so you’re not reliant on your fixed-wage. Create variable income streams. Some of the ways to create an income include:

• Rent out a room, or build a small dwelling and rent that out
• Freelance – use your skills to learn an hourly income online
• Part-time job – take on a second job in the evenings or weekend
• Trade or sell belongings you don’t need

Reduce Expenses

While it’s easier said than done, there are ways you can reduce your outgoings, including:

• Shop around – renegotiate your suppliers e.g. data plan, utilities
• Work from home will save you the cost of getting to and from your workplace
• Grow your produce. Small vegetable-raised boxes can be packed with seasonal produce
• Plant fruit trees
• Barter economy. Seek out ways to trade what you have for what you need

Create a Rainy Day Fund

If you don’t have a rainy day fund for emergencies yet, it is time to start it. Planning for the unthinkable, so you keep your house and assets will be the best use of your time. There are many inspiring stories of how people have reached their financial goals. Here is one from business insider.

Summing Up

Always expect the unexpected and make sure you can afford your home loan when interest rates go up. Change is inevitable, and therefore preparation is vital for success.

Always plan for the worst-case scenario, and be prepared to change your lifestyle to keep your home and your assets. If this article interested you see this one on 9 investment tips that may harm your bottom line