real estate

Real-estate basics: Are home prices vulnerable?

There is no doubt that the real estate market is one of the most financially-rewarding industries of all times. A decade ago when the world was facing a financial crisis and every industry suffered the consequences, the real-estate industry was one of the first few industries to recover from the shock and bounce back to life.

Ever since that time, investing in the real estate market has been considered a lucrative option across the world and the industry has remained untroubled and stable. And apart from the perspective of investment, who doesn’t want to own a house or a property?

But as promising as it sounds, the real estate market could be dynamic. Despite the overall market stability, the condition could differ from country to country, therefore, it’s always advisable to think carefully before making a real estate investment.

This is because there are some important pointers indicating that home prices are vulnerable, and the property market could be negative in the future. However, the situation is not completely bleak and with proper preparation and planning, the risks can be reduced, and people can make informed purchase decisions.

Here are some pointers on why home prices are considered vulnerable and what to do about it?

1. People are mostly unprepared

Many buyers out there buy houses through mortgages without thinking about the future consequences. And for anyone who invests in real estate without assessing the possible future outcomes of such an investment is always in a susceptible position. For example, when rates become high, borrowers are not used to this as they fail to foresee the uncertainty of the real estate industry.

Ten years ago, homeowners had to face these uncertainties more often and were unable to cope with the extra charges imposed by sky-rocketing mortgage repayments, but over the years uncertainties have been very short-lived or absent. However, one must be prepared for future uncertainties related to rising mortgage repayments. In this way, although there would always be an element of vulnerability when it comes to the prices of housing, people would be able to come out of the crisis soon if it ever strikes.

2. Lending rules of mortgage might change

If there are changes to the rules of lending in mortgage, that can make the prices of houses vulnerable. Gone are the days when mortgage lending was a very simple process. People were able to comfortable borrow amounts of money which was triple times more than their earnings. For example, if someone borrowed $300,000 in mortgage, the amount would still remain $300,000 irrespective to the changes occurring in the rates of interest, and if there was an increase in the bank rates, it would not have any impacts on people’s ability to borrow money from the bank.

However, in 2014, the scenario changed, and everything became complicated for borrowers because banks started issuing new rules regarding how much a person could borrow in accordance with their monthly earnings, and how much their monthly outgoings were. Therefore, the amount of money they could borrow became directly dependent on how much they could afford to pay on a monthly basis. Therefore, if the rates of mortgage and lending rules change, then monthly expenditure would increase too, and in turn, making an investment in real estate vulnerable.

3. Basic calculation predict vulnerability

If rates of mortgage rise in future, it could make the prices of real estate houses vulnerable as evident from simple math. For example, 11 years ago, the average fixed rate for a two-year-long mortgage plan was 6.45 per cent. Today, however the same fixed mortgage rate over a two-year period has lowered down to 2.22 per cent.

Thus, this simple math shows how even a quarter-point increase in the rates of mortgage can make a huge difference for mortgage borrowers than it did a decade ago. Therefore, anyone fancying borrowing a mortgage loan to invest in real estate should think about the future consequences of borrowing and the vulnerability of housing prices in the future.

4. Buy-to-let arrangements are declining

A decade ago, mortgage loan borrowers had to face the increasing rates of mortgage which impacted the buy-to-let arrangements in the property market. More than a decade ago, buy-to-let was one of the commonest ways of investing in the real estate market, and many individuals were opting for this option to let out more than one property.

Typically, these buyers would purchase two-bed flats, and this practice drove up costs across the whole real estate market. But that was a decade ago when things were not as hard as they are now. This is because, at present, there have been a number of tax initiatives that have made it tougher for landlords to purchase a property and sell it (buy-to-let). The rates of stamp duty have risen when it comes to purchasing second properties and tax reliefs that landlords earlier used to enjoy offsetting the interest rates of their mortgage against income tax have been changed.

All of these factors, therefore, point out the fact that the property market and housing prices could become vulnerable in the future. However, these predictions shouldn’t discourage homebuyers to invest in the real estate market because the nature of the market is dynamic, but they should always remain prepared for risks and potential setbacks so that they always have their plan B ready whenever needed.