Home buying tips | Causes of high house prices explained
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A path to financial security is home ownership. Since there is no rule saying your first property must be a home to live in, you have the freedom to buy the home you can afford as the best way of getting started.
Asset prices have escalated much faster than wage increases over the past 70 years and that trend is likely to continue. This simply means that homes are becoming less affordable, says Renier Kriek, MD of Sentinel Homes, a non-bank home loan provider.
"If the trend of decoupling asset and wage prices is going to continue the best bet is to get into the property market sooner rather than later. Particularly when there are so many bargains to be had."
First-time homebuyers are progressively becoming older because of affordability. It has moved from around 30 to 32 years to around 38 to 40 years.
"You must get in earlier to buck this trend. If you wait until the time you can afford your dream home you may never be able to achieve that goal."
It is now a buyer's market. Kriek explains that South Africa is coming off from a high-inflation-high-interest-rate cycle. "Inflation has become a more manageable beast, and market watchers are starting to predict a decline in interest rates next year."
Time the market
Unfortunately, very few people act until they see the first rate cut. By then the cat is out of the bag and the market will change quite rapidly. "If you want to time the market you have to buy now."
Kriek says first time buyers who can afford to acquire a real estate asset at current interest rates will likely be able to afford it through the cycle; and they are unlikely to purchase a property they can't afford. "The ugly duckling may be a better start than the shiny house on the hill."
He also suggests that prospective buyers use a bond originator to get prequalification for a home loan. "It shows that you are a serious purchaser, which makes everyone so much more willing and able to help."
Real estate, whether it is your own home or an investment property, comes with expenses and tax consequences. However, if you do not want to live from wage-to-wage for the rest of your life then some sacrifices are called for to enter the property market.
"Every goal has some sacrifices and the sacrifices for financial goals are of the living standard kind. If you want to truly benefit from asset ownership you will have to suffer some short term discomfort. That is reality."
Take the leap
Owning inflation-beating assets, like residential real estate in the correct areas and markets, is generally a good idea. Kriek has 19 years of property investment experience.
His advice:
- Save for a deposit; it gives you leverage to negotiate a lower interest rate.
- Research; look at tenant vacancy rates and payment behaviours in different areas.
- Be astute, notice and make use of financial opportunities.
- Don't get too bogged down in the preparations; at some point you must take the leap and buy.
- Don't underestimate the power of leverage. That is using other people's money to ramp up your investment returns. Residential property is the safest way to use leverage to create wealth.
- The magic of compounding means the sooner you start the better.
The causes of high house prices
The high cost of housing is making it increasingly difficult for first time buyers to enter the market. While rising house prices are good for investors, it can make it challenging for the average consumer to enter the property market. Understanding the underlying causes of house price appreciation can help buyers to better navigate through the home buying journey.
"Property prices increase every year - which is what makes it such a great long-term investment strategy, but it can make it challenging for first-time buyers to enter the market," notes Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa.
To dispel some of the common misconceptions held among buyers, RE/MAX of Southern Africa expounds on some of the myths and truths surrounding rising house prices.
Developers
The common misconception is that developers cause house prices to increase by building new housing in a suburb that attracts a wave of new buyers. The truth is that developers often only come to a suburb because they are drawn to its profitability. This means that house prices in the suburb were probably already on the rise (or well on its way towards it), which is what made the area attractive to developers. Rather than being the cause of rising house prices, developers are the by-product of it and can act as the outward confirmation that demand for the area is on the up.
Short-term rentals
Platforms that allow short-term holiday rentals can, in part, be to blame for high rental prices. Because homeowners are choosing to offer the property for short-term letting year-round, fewer homes are available for long-term letting. This leads to a decrease in supply, which then causes prices to increase.
Demand vs supply
The main culprit behind both causes outlined above is demand and supply. When demand for housing outstrips supply, prices automatically increase. Even when new developments appear, the available stock seldom fully satisfies the demand. It is useful to keep in mind that not only first-time buyers are looking to snatch up affordable homes. Real estate investors and share portfolios are also on the market for their next investment and often like to purchase within new developments.
"Barring some sort of economic crash, property prices will inevitably continue to increase over time. That's why I always recommend that the sooner you can enter the property market, the better. Rent also increases every year, which means that it'll become increasingly difficult to find the spare cash to keep saving up for your first home," Goslett notes.
To give themselves a better chance of entering the housing market, Goslett recommends building a good working relationship with a local real estate agent as soon as possible. "As experts in the industry, real estate agents can share some much-needed guidance on where to find entry-level homes and what buyers need to be saving towards. They can also put them in touch with a bond originator to help them find out what they can truly afford. It is never too early to chat to a RE/MAX agent for some free advice that could potentially help buyers enter the property market sooner than expected," says Goslett.
https://www.property24.com/articles/home-buying-tips-causes-of-high-house-prices-explained/31879
Author: Property24