Buy Now Or Save Your $?
As house prices in many parts of the country have fallen a few percent, some first homeowners are choosing to put their purchases on temporary hold and to continue saving.
Others that have limited deposits have been told that the cost of Lender’s Mortgage Insurance is a waste of money and are also holding off on jumping in.
Are these good strategies for first home buyers and investors, or should they, in fact, be doing the complete opposite?
Even the experts can’t time the market
There are 3-4 main property research houses in Australia and even those experts don’t profess to be able to predict the bottom or the top of the market and so what chances does even an experienced investor have, let alone a first homeowner who has never bought before?
Many of those researchers were predicting pretty good growth in 2018 but then had to revise their numbers down with the impact of APRA and the Royal Banking Commission. The market can turn positive just as quickly as it can turn negative and to reverse that drop, all it could take is a change in consumer confidence or some new peer to peer lending products that allow those with equity to continue investing.
Buy now while you can borrow
You might be able to borrow now, but you might not be able to borrow in 6 – 12 months time, especially with the tightening of the credit market, so I would much rather lock in a $500k property now, even if it was due to fall 5% to $475k. When the market recovers and it rises 10 – 20% you’ve then got a property worth $550k+. Whereas the person that didn’t buy, still may not be able to borrow.
You can’t save your way to wealth
When it comes to entering the property market, the biggest cost could be that of delaying your decision. If the market grows at around seven per cent per year and you are saving $2,000 per month from your wages, then as you save $24,000 in a year, that same $500,000 property has grown by $35,000, or in other words, it’s gone up by more than you will have saved. In the market for a $1m property - then are you going to be saving $70,000 a year?
Should you pay mortgage insurance?
If you listen to your parents or the typical bank teller, you’ve probably been told that you have to save money to make money and one way to do that is to build up a 20% deposit and avoid the $10,000 - $20,000 Lenders Mortgage Insurance (LMI) premium.
I believe LMI can be of amazing benefit as often you can add the cost to the mortgage and, as a result, you’re only paying interest on that cost. If your property doubles from $500,000 to $1,000,000, it doesn’t make a lot of difference whether you owe $500,000 or $520,000 in 10 years’ time.
By using LMI it allows you to enter the market quicker, which given the current market means that you could buy now, when no one else is, allowing you to buy a better property at a better price, than if you carried on saving and entered the market, mid-way up the next cycle.
Even if you have saved a 20% deposit, I would still be keen on using LMI to put down maybe just 5% or 10%. This will then give you more money for a cash buffer to be used in case of emergency, some extra funds to pay for a renovation or to be put towards hiring a professional buyer’s agent. All of which will increase your chances of building instant equity and holding on to the property for longer.
It’s very hard to be a contrarian investor and to do the complete opposite to what everyone else is doing. However, if you ask any wealthy person whether they followed the herd or did something different, you’ll see why they got a different result to the average person.
It’s also important to remember that there isn’t just one property market, there are many and so just because many properties are falling, some are still holding firm or even rising. I am a firm believer in buying median priced properties close to main capital cities over the long term as they do typically continue to rise and when other properties fall, they tend to slow down and not go down. So, unless you’re a genius and can pick all the peaks and the troughs, then assume property will normally be more expensive tomorrow than it is today.
About Chris Gray: Chris Gray is CEO of Your Empire, a buyers’ agency which builds property portfolios for time-poor people – searching, negotiating, renovating and managing property on their behalf. Chris’s team buys up to 1-2 properties a week and often spends up to $5m+ a year renovating on others behalf, providing a unique insight into market conditions and buyer and seller sentiment. Chris hosts ‘Sky News Real Estate - Smart Investing’ each Monday on Sky News Business channel, where he interviews various heads of property research companies and major industry figures. Chris is a qualified accountant, buyers’ agent and mortgage broker.