Is It Too Late To Sell Your House Before Prices Crash?

Today your editor is beavering away at finishing the November issue of Australian Small-Cap Investigator.

That means a couple of the subjects I wanted to bring up today will have to wait until tomorrow – the Irish bailout was one of them, and proof of Reserve Bank of Australia manipulation in housing markets was another.

But, yesterday I did leave you with a promise:

“One last note, in recent weeks we’ve also receive a number of questions from people asking whether they should sell their house and get out while they can before the housing slump really starts to bite.

“Hold fire on that, I’ll have something to say on that in tomorrow’s Money Morning.”

I like to keep the promises I make, so I will cover that subject today.

You wouldn’t believe the number of letters we receive into the Money Morning mailbag from first time buyers who are absolutely petrified about the position they’re in – especially about how a large mortgage and falling house prices could impact their lives.

But by the same token we’ve received plenty of letters saying that we’re causing unnecessary fear.  That either there won’t be a house price crash, or if there is it’ll only be because we’ve caused it with all our down-talking antics.

For starters, don’t overestimate your editor’s influence on anything.  The Australian housing market is valued at $3.5 trillion.  And on any given weekend well over $200 million worth of houses are bought and sold nationwide.

And Money Morning has a readership of just 45,000 people.

While that’s quite a lot, it’s peanuts compared to the combined efforts of the mainstream press who continue to pedal the same old tired lies about a housing shortage and house prices always going up.

But it has struck us recently why the spruikers get so tetchy with your editor.  Then we worked it out.  Until Money Morning and our sibling publication Daily Reckoning came along, the spruikers had it all their own way.

They could make the bogus claims about housing shortages and prices doubling every 7-10 years and no-one would question them.

But now, with roughly 100,000 readers spread across the two publications, the population is wiser to the real story with Australian real estate.

But that doesn’t mean we have the influence to push housing prices up or down.  All we can do is point out the spruiking scams and mainstream fibs and then leave it up to you to make up your own mind.

If something is overpriced the market will eventually figure it out (the market being comprised of people like you).  You can’t buck the market.  People try – such as the US Federal Reserve – but ultimately the market always wins out.

The only possible influence we could have is to perhaps warn people about what will inevitably happen.  Because house prices would have crashed regardless of whether your editor had written about it or not.

That’s just the way markets work.

And based on the feedback we’ve received recently it seems to us that many potential buyers are glad they didn’t burden themselves with a life-destroying massive mortgage.

Anyway, many weren’t so lucky.  They bought in at the top of the market.

They were suckered in by the spruiking spin and government bribes.  And now they want to know whether they’re better off selling up now while they can, or whether they’re better off staying where they are.

Here’s my advice… of a general advice nature only.  And no, just in case you’re wondering we aren’t suggesting you sell your house and then pour all the cash into small-cap stocks!

The simple fact is, buying and selling houses and moving houses is extremely expensive.  There’s the cost of buying, the stamp duty, the cost of selling, real estate agents, removal charges, rental bonds, and gawd knows what else.

But it’s also expensive to stay where you are – what with interest charges that are tens of thousands of dollars a year.

But while as I pointed out yesterday, a housing price slump could only be a matter of months away, the decision on what you do with the house you’ve bought with a mortgage really depends on how you view your house.

What do I mean by that?  I’ll get to that in a moment.  First one quick point…

Several readers have kindly made the point that the housing slump in Australia didn’t start last week when we said it did.  For sellers in Western Australia and Queensland the slump has been going on for at least the past year, if not longer.

Again, so much for the idea that house prices always go up.

In fact last week we received an email from one reader – sorry for not mentioning you by name, but I’ve misplaced your letter! – who had received an email from a real estate spruiker saying something along the lines of, “Buy now, there’s a housing shortage don’t you know…”

But then if you scroll down to the bottom of the email there’s a big banner displaying a message to the effect of, “Mortgagee auctions, prices slashed!”

The spruikers are obviously immune to their own spin.

Back to our point.  Whether you stay or sell depends on how you view your house.

Remember that the main purpose for housing is that it’s a place to live.  That means any house that’s bigger than the living requirements of the occupants is not just a dwelling but either a consumption item or an investment.

For instance, if you’re a single person living by yourself in a five-bedroom home, you can safely say that your home isn’t just to provide a roof over your head.  You’ve bought the large room for other reasons.  Either because you believe the value of the bigger home will rise more than the value of a smaller home or because you just want the extra space.

If it’s the former then you’ve bought the home partially as an investment.  If it’s the latter then you’ve bought it partially as a consumption item.

But, if you’re living in a home which is roughly the size that you need, and you don’t consider your home to be an investment, then providing you’re able to service the mortgage comfortably then you should have little reason to sell up.

But, if you borrowed more than you should have and it’s giving you sleepless nights, and the main reason for buying the home was because you were fooled into believing that house prices always go up, then you should seriously consider selling.

Look, I’ll be honest, it’s not rocket science.  If a purchase is costing you more than the enjoyment you’re getting from it, get rid of it.  It really isn’t worth it.  That’s the case not just for housing but for anything.

Sure, buying a house rather than renting does have advantages.  I won’t deny that.  But renting has advantages too.  I’m not saying that one is definitely better than the other.

But what I am saying is that if you really are struggling to meet the repayments then you’re probably better off getting out before things get potentially worse.

Of course many will tell you that once you get off the property ladder then it’s hard to get back on.  Yes that was true, in a way.

It was true that during the 1980s, 1990s and early 2000s, house prices soared beyond all expectation.  But as we pointed out last week, it was on the back of an easy-money inflationary boom that started in the 1970s.

But just as house prices soared, the banks made it easier to borrow money, and that made it easier for you to get into a huge debt hole.  As Business Spectator columnist Robert Gottliebsen admitted:

“They [banks] are liberal in granting housing loans, so there is a strong consumer demand for houses.”

The willingness of the banks to lend as much money as possible to home buyers and loosen the lending standards, helped push house prices sky high.  And remember, that for every dollar you are in debt, that equals a dollar of assets for the bank – now do you understand why they’re so keen to foist credit card applications and limit increases on you?

But like any Ponzi scheme, it works as long as there are suckers willing to pay ever-higher prices.  As soon as they stop buying that’s when the downward pressure starts to hit as over-leveraged recent buyers start to make for the exit, and those that bought in early equally look to get out and try to lock in their gains.

The gist of what I’m trying to get across is that you shouldn’t assume that the value of your home is going to double or even triple.  If you believe that then I’m afraid you’re likely to be sorely disappointed.

But if you just view your home as a place to live and you prefer the convenience of buying rather than renting, then stay where you are.

Because don’t forget, you still need somewhere to live.

Unfortunately, Aussie buyers don’t have the same luxury that US buyers have.  If they’re in negative equity they can just hand in the keys and walk away.  Imagine how good that would be if you’d been fooled into buying an over-priced home.

You on the other hand will be hounded by the banks for years while they scrounge to get their money back.

Buying a home is supposed to be a great Australian dream.  But to use a well-worn cliché it has become a nightmare for many.

I’ve gone on the record to say that house prices will crash, and they will, that’s guaranteed.  But you’ve got to consider your personal circumstances and your ability to cope with higher interest rates before you decide to sell or stay put.

I hope that’s helped.  Because we’re a bit rushed today we’ll follow up on this if need be tomorrow…

Cheers.

Kris Sayce
For Money Morning Australia

Tagged as: banks, house, lending, money morning, mortgage, Ponzi