Are you thinking of putting off the purchase of your new home or your next investment property?
I know this is a common thought with property investors right now!
You could be forgiven considering the current financial and economic outlook.
Interest rates have started rising and while that looks to continue, we are also seeing a spike in inflation.
Even the Stock Market has seen better days.
The media has pounced on this uncertainty to pedal more doom and gloom and there is even another financial “cliff” looming.
Who in their right mind would want to consider investing right now?
I sit with people every day who are a little uneasy and are considering holding off or stopping their search altogether.
For some that may be the right call, but for many, I believe it will be the wrong call.
It all starts by understanding the outcome of your actions, in order for you to make the right decision.
Here are my thoughts:
When is the right time?
So, when is and when will be the right time to buy property?
Almost everyone you speak with is waiting for the “right time” to enter the market.
They are waiting for a sign, but how will they know?
The analytical might be waiting for data to point them in the right direction, while the emotional want to feel confident.
The truth is nobody can pick the turning of a property market, so don’t even bother trying.
Instead, take a long-term approach and instead focus on spending time in the market as opposed to the timing.
More specifically, time in a market that will give you above average, wealth-producing rates of return.
With that in mind, the right time to buy is when you are ready.
When you have a secure job, your finance in place, the right structures in place, and a buffer in place to ride out the hard times.
If this sounds like you, NOW is the right time.
The events of the next 3-6 months will be forgotten a decade or two down the track.
Case study
Let’s use the example of a buyer with a Pre-Approval in place for $800,000 that is valid for 3 months.
At this point in time, I know this will buy you a great investment-grade asset in our major capital cities.
Specifically, in Brisbane, you can buy a house with this budget, Melbourne a Villa Unit in an affluent South-eastern suburb, and Sydney an Apartment in a premium suburb.
While there may be some confusion over the immediate growth prospects, you will be entering a very tight rental market that will tighten with borders re-opening.
In many cases, this will likely see rental increases offsetting some of the interest rate rises.
So our “buyer” is now in the market and can set and forget their great investment acquisition.
What would it cost the same buyer if they pause their search for 6 months in the hope of finding greater certainty?
Well firstly, interest rates are likely to be substantially higher when they’re planning by next year.
This will most likely substantially reduce their borrowing capacity and even if they have $800,000 property drops to $770,000, possible they won’t be able to borrow that much then.
Of course, with high inflation, it’s likely that prices may have also inflated a little in A-grade locations.
From having the capacity to afford a house in Brisbane or in the more affluent suburbs of Melbourne and Sydney, they now must compromise.
Downgrading from a house to a townhouse or apartment or moving that next suburb out will come at a cost.
The cost of inaction
It may not seem like a big deal, but the opportunity cost is one of the most underrated principles of investing, particularly when it some to property.
In this example not only will the buyer face a reduced borrowing capacity, but a compromise may result in a reduction in any future capital growth and compounding rates.
Even a 5% fall in your borrowing capacity from $800,000 to $760,000 may seem small and a fall in capital growth from say 7%, to 6% insignificant.
However small things can compound into big things!
In this case, this buyer would forgo more than $212,000 over the next decade and considerably more the decade after.
While it is not an exact science, it should be evident there will be substantial costs involved.
Fast forward and an opportunity cost of acquiring further funds to put towards another investment may also be missed.
The knock-on effect is not small or insignificant when magnified over decades.
In conclusion
There is no doubt that there are many question marks on what lies ahead.
It is enough to make even the most seasoned investor a little nervous.
But understanding the levers that are in place and how they may affect your decision to wait is critical.
For some, it may make no difference, but I would suggest for the majority it will come at a significant cost.
With interest rates and inflation rising, borrowing capacities will decrease and assets may appreciate.
These buyers may be to compromise on their asset selection or be left in the cold together in a vastly different environment down the track.
For those buyers, now is NOT the time to pause your search.
Instead, take a long-term approach, get the basics and fundamentals right, and Carpe Diem!
