Why You Should buy into the Property Market Now

Buy a Home now and Make Money

We are living through one of the greatest economic problem periods of modern times, and one, which, unfortunately has been brought about mostly by banks, financial institutions, and government policies.

The lead-up to this was the frenzy of borrowing which occurred during the mid years of this decade, where we saw house prices rising at an incredible speed in most areas and in most parts of the world. How many banks called you to advise you that you qualified for a credit card, or a gold card? How many lending institutions told you that the cheapest form of credit lay in your home-loan? As house prices rose, we were all encouraged to consolidate our debt by taking out ever-higher loans on our houses, which were increasing in value on an almost monthly basis. Thus many people re-financed their homes, some to pay off credit debt, some to make improvements to the home, some to help pay for children’s education, and some simply to go on holidays that they would never have dreamed of ten years previously.

Everyone had money, but no-one stopped to think that this was no more than monopoly money; it was just a paper figure – a matter of borrowing from Peter to pay Paul, and that eventually, we would have to accept the fact that the money was no more than just paper, or actually, plastic.

And then the bubble started to burst. It was not just an American phenomenon, although the USA has been hit worse than other countries. First of all, house prices stagnated, then began to drop. Secondly, in the American market, bonds which had been granted at low, or below prime interest rates, suddenly reverted to normal interest rates, leaving the borrowers unable to make the monthly repayments. This caused many people to default on their home-loans, and, in the end to lose these homes.

There has also been a strong knock-on effect: builders have gone bankrupt, banks have collapsed, hardware stores have suffered enormously, many estate agencies have closed their doors, and many proud new home-owners have found themselves out on the street.

Because of the sharp downturn in property prices throughout most of the world, but particularly in the US, many people have found themselves in a position where the amount they owe on the home vastly exceeds the actual value of the home at today’s prices, so they are not only out on the street, but they also still owe a myriad of institutions enormous sums of money. Despite government intervention to halt this spiral of decline and despair, the slide has continued into this year, and may go on doing so at a slower rate in the two years to come.

But all is not doom and gloom. Some wise person once said that every cloud has its silver lining, and for those of us who were not adversely affected, or still have sufficient moneys at our disposal, here is the silver lining: if we are able to take on a housing loan which is affordable, or better still, if we have cash, there are enormous bargains to be found in the market.

In some areas – according to Standard & Poor’s/Case-Shiller 20-city housing index – many cities across the US have suffered double digit declines in the value of homes, a far worse decline than was seen in the early 1990s. The worst hit part of the market, according to them, is the Sun Belt (Las Vegas, Phoenix, and Miami) where property prices fell by an enormous 29% in the last year. However, this decline has not been limited to the Sun Belt; it has been felt throughout the US. However, Standard & Poor believe that the rate of decline has slowed in the last two months, and that some sort of ground level will be reached within this year. (Guardian UK, Zoe Wood, 30/9/2008.)

In the UK the picture has been largely the same. According to Bloomberg.com, as of January 6th 2009, house prices had suffered the biggest drop since 1991 and consumer confidence declined as banks rationed credit and homebuyers shunned the property market. Although interest rates are declining in most the world today, this decline has failed to re-ignite the fires which were built under the property market from 2002 onwards. Banks are far less keen to offer mortgage finance to would-be buyers, simply, in many cases because they do not have sufficient funds.

As more and more buyers are defaulting on their home-loans, more and more homes are reverting to the ownership of the banks, and are available at almost knock-down prices.
In many cases, the bank is only interested in retrieving the money it has lent in order to buy the house, so in the instance of a property being mortgaged to only half its value, that same property can be obtained through a cash offer of half its original price.

That means, in simple terms, that a house sold for $1 million could now be purchased for only $500 000. The bank’s interest in this transaction is devoid of philanthropic reasoning; unfortunately the institution is not concerned that the original buyer may have lost everything; as long as it gets its money back, that’s fine. You, on the other hand, as the new buyer, stand to make a very good profit when the market begins to recover, which it will, at the very latest, in two years time.

To make this easier to understand, let’s draw a picture:
In 2002 Joe Average bought a house for $200 000. In 2003 the value of his house had risen to $300 000, and in 2004 to $400 000, but the amount he had borrowed in order to buy the home had only been $150 000, which had been made available to him at less than the normal rate of interest in the market, as an inducement for him to buy rather than go on renting. As banks and financial institutions saw what was happening in the market, Joe was encouraged to apply for more credit. Either he could increase the amount for which his house was mortgaged, or he could accept a credit card or two. If push came to shove, he could always consolidate his debt by increasing his home-loan in order to pay off the credit card.

In 2005 the value of his home was set at a cool $600 000, so in order to pay off outstanding credit card amounts, take a holiday for himself and his family, and leave himself with a reasonable amount of cash, he remortgaged the house for $550 000. The bank had not been too strict in its qualification of him for this loan; it had not taken into account that the other amounts he owed on various cards, his car, clothing accounts, etc, far exceeded what he was likely to be able to repay. The $400 000 he had borrowed was soon gone, and the interest rates were rising, banks were beginning to curtail their lending criteria and his income had not kept pace with the increasing cost of living. Because oil had become so expensive, most other consumer items had also increased in price by the same amount. The heady days were over and he began to worry about where the next cent was coming from.

But no-one was really worried; there was far more plastic money in circulation, which meant that everyone benefitted. The price of new cars reached an all-time high, and seemed to be set to go on increasing; property had increased enormously in the last four years, so why should it not continue? More and more money was flying around in a circle, but at some stage, those notes would land on someone’s desk, and the bills would have to be paid.

By 2007, Joe’s monthly budget had increased from its original level in 2002 to a point where he was constantly short of money by the third week of each month. He decided that the best he could do was to put tenants in the house, become a tenant himself somewhere cheaper, and sit out the storm. Things were bound to get better.

But there were no tenants to be found who would pay an amount even equal to his home-loan payments and the taxes on the house. Within six months he had defaulted on the loan and his bank had re-possessed his house. Not only was Joe out on the street, but he also faced the problem of paying off the amount still owing on the property, which was ultimately sold by the bank for less than was outstanding. The highest offer on his home was only $450 000, so he still owed the bank $100 000.

Not a happy situation, but one in which far too many people find themselves today.

However, in many parts of the world today, the situation is even worse. As banks and financial institutions are top-heavy with repossessed properties due to debtor default, and as buyers stay away from the housing market in droves, house prices have fallen dramatically, especially over the past year, and therefore it’s possible to pick up a good house today for far less than it would have fetched eighteen months ago.

Canny buyers are therefore attending auctions, or scanning the list of repossessed properties, and many people are thus able to make a killing. Not only are they entering the market as owners of a very attractive home, but their home is an investment which will more than pay off in the next couple of years when the market has stabilised.


The South African economy, although far removed from that of USA, and consequently less affected by this phenomenon, is an interesting case in point. Up until the introduction of the new Credit Act in 2007, the populace was freely invited to borrow far more than the individual could realistically repay. Suddenly everyone had at least two credit cards (and these were often used to pay each other), but the rate of credit in many cases exceeded 27%, and no matter how much was paid on these cards, the outstanding balance continued to grow.

So people increased their housing loans in order to pay off their credit cards and other debts which had somehow accumulated. The price of oil had vastly increased until mid 2008, and it was now costing almost double to fill the tank of an ordinary vehicle. But before the new Credit Act came into law, many people had been encouraged to buy expensive vehicles in which they had almost no cash equity. Electricity had increased from 2007 to 2008 by at least 25% in most areas, the cost of living had risen slightly above the price of fuel, and now what the average person had spent in the supermarket on a weekly basis had almost doubled. Incomes, however, had not. The writing was on the wall, but many people were encouraged to borrow still more in the belief that their home-loan could always be increased.
Since the new Credit Act has been in force, however, they have failed to qualify for the amounts needed, and so they have begun to default on their home loans.

So, make hay while the sun shines! Go to the auctions, peruse the lists of repossessed houses and get back into the market, because there will be large sums of money to be made by those of us who are canny enough to invest wisely. I know that, to many of us, there is a certain amount of guilt in profiting from someone else’s misfortune, but the market remains the market, and if we don’t do it, then no-one else will.

There’s plenty to be made out there, so get wise and start looking.