If you’ve been priced out of the housing market, your chance to buy may be close
This is not financial advice. It is just my personal opinion. Do your own due diligence and don’t risk any money you can’t afford to lose.
At the moment, property prices worldwide are at unaffordable levels for many people. In the last decade or so, governments have printed money at unprecedented levels. That has led to insane property prices in many locations.
I’m expecting to see 15–25% price drops in places like the US, Canada, the UK, Australia, and Europe.
But what will cause these drops? I see 4 main reasons that property prices will drop over the next 2–3 years.
#1 — High energy prices
Due to the war in Ukraine, energy prices in Europe have skyrocketed. In the UK, the energy price cap will rise to £2,500 from 1st October. Last winter it was just over £1,000.
That means that the average family will be paying around £125 extra for their energy bills this winter, compared to last year.
That’s £125 less that they will have to spend on their mortgage payments.
#2 — Mortgage rates are rising
With central banks around the world raising interest rates to tackle inflation, interest rates on mortgages are also rising.
The Bank of England raised interest rates by 0.5% to 1.75% in August. That pushed up the monthly payment on a £405,000 property by around £120. This is assuming a 10% deposit.
Many economists are predicting that interest rates will keep rising and probably peak at around 4.25%. If that happened and the same rise occurred with mortgage interest rates, that would add another £600 to the monthly costs of the above property.
It should be noted that these rises won’t affect all mortgage payers right away. Many are on 2–5-year fixed-rate mortgages. They won’t be affected until their fixed rates come to an end.
#3 — Inflation
Inflation around the world is very high. As well as energy and mortgage costs, consumers are having to pay extra for food and other products. Inflation is 10% or higher in many European countries.
That means that extra cash that could have gone towards a mortgage isn’t available. It also means that many people are having to use their savings for their general monthly spending. That means less money is available to use as a deposit for a property.
#4 — Recession
This is the big one. Many economies aren’t doing so badly at the moment. Unemployment is still low. People are still out there earning money.
Unemployment in the UK is expected to rise from 3.7% to 6.3% over the next 3 years.
When unemployment starts rising, people will put off buying property. Many may even be forced to sell their properties if they’re out of work and can’t afford the monthly repayments.
What does this all mean?
If you take all four of the above reasons together, I don’t see any way that the housing market can not crash. Many cities in the US already have falling house prices.
Black Knight recently reported that house prices in the US had fallen 0.77% from June to July. That’s the second biggest drop in prices in July since 1991. It’s only beaten by a 0.9% drop in July 2010 during the Great Recession.
The report from CNBC also claims that…
Some local markets are seeing even steeper declines over the last few months. San Jose, California, saw the largest, with home prices now down 10% in recent months, followed by Seattle (-7.7%), San Francisco (-7.4%), San Diego (-5.6%), Los Angeles (-4.3%) and Denver (-4.2%).
And that’s just the start. We could have 2–3 years of falling prices. Once prices start falling, buyers tend to put off buying property, as they think prices will continue lower.
Every cloud has a silver lining
As the saying goes, every cloud has a silver lining. House prices dropping from the current insane levels is a good thing. It will make property more affordable.
While some locations will have more resilient prices, other areas could suffer a big collapse.
I wouldn’t be surprised to see house prices crash 40–50% in places like Arizona.
If you’re patient and keep an eye on the market, you’ll be able to pick up some real bargains in the not-too-distant future.
I was lucky to have bought my first property in the depths of the 1990s house crash. I bought a property in London for £50,000 in 1995. I sold it for £150,000 a few years later when I upgraded to a bigger property. In 2005, the property sold for $550,000. That’s the sort of bargains that you can find during price crashes.
Of course, not all properties will do that well after a crash.
But you should prepare yourself now for the bargains that will be coming your way.
After property prices have crashed has historically been a great time to build wealth.
Once interest rates have peaked and inflation has settled back to nearer 3%, governments around the world will start stimulating their economies. This is the time we start to see property prices start to go up again.
What do you think? How deep will the property price crash be in your location? Or do you think that prices won’t crash at all? If so, what do you think will prevent prices from falling?