The US property market is not doing all that well. After-sales and prices rose sharply for two years straight. But the comedown has begun. At present, we are seeing a correction rather than a crash, though it is unclear how bad things might get.
For what it’s worth, the US is not alone in this. Property markets around the world, including in Europe, Asia, and Africa, are all struggling. Banks are raising interest rates and lowering demand by making housing unaffordable for many people.
But there’s only so much comfort you can get from knowing you’re not alone. If you are active in the property market, you may have some tough decisions to make. Is it time to sell your properties and hold off on buying new ones? Or is this correction temporary, making it the perfect time to buy property?
Let’s start by looking at the reality for potential homeowners before discussing investors.
Homeownership and its risks
If you are renting a home but are itching to become a homeowner, this is understandable. Rather than paying money to a landlord and possessing nothing in return, you can pay that cash towards a mortgage. The problem is that homeownership comes with extra expenses and is particularly costly right now.
Rent is also high, but the associated expenses are not at the same level as those that come with homeownership. Homeowners insurance covers a whole property and is therefore expensive. On the other hand, renters insurance will keep you covered from theft and damage to your possessions. The potential payouts are relatively low and premiums reflect that.
Maintenance is another issue homeowners have to deal with that renters can avoid. So, while renting might not seem like the best way to spend your money, it may be cost-effective for the foreseeable future.
Homeownership at the moment is particularly expensive. However, it is not particularly risky. This is because you are buying a home to keep. If property prices drop after you purchase your home, you may feel some buyer’s remorse, but it will not have a material impact on you. Unless you are forced to sell your home for some reason, you are getting what you paid for.
That’s all well and good for homeowners. What about property investors?
Investing in a market in crisis
Investors have more to worry about when it comes to a potential housing crash. After all, your investment might lose a significant amount of its value in the near future. This may seem like a compelling reason to hold off on your investment. However, it does depend on how you intend to make money from your properties.
If you intend to ‘flip’ a home, this is a terrible time to invest. Even if you put a lot of work into the home, there is no guarantee that it will retain its value. You may be stuck with an undervalued property for years before being able to get your money back.
Buying property to rent it out, on the other hand, is a different proposition.
Being a landlord is lucrative
The purchase price of a property does not always correlate with the price of rent. At the moment, rent is very expensive, even as the housing market is cooling. As such, if you are buying property to rent it out, you may not be bothered about the value of your property declining. You may never intend to sell it in any case.
At another point in America’s history, declining property prices may have impacted the cost of rent. People paying high rent would jump on the bandwagon and buy property with much lower monthly mortgage payments. However, this is unlikely to happen in 2023.
The problem is that there is still a housing shortage. Construction delays caused by the pandemic and other factors have led to this shortage and it will take a while before there is enough supply to truly meet the demand. Even if housing prices crash, most renters will be unable to find cheap homes to buy.
As a landlord, your property is likely to remain lucrative even if the housing market crashes. Investing in this market is therefore not necessarily a bad idea.