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Recently, there’s been a lot of talk about a property crash approaching. Granted, there’s always been a huge group of cynics waiting for a bust for the past 5 years or so, but over the previous months I’ve noticed a slow growth in numbers for “team cynic”. Please note, I’m not implying a property crash will occur anytime soon, I’m just going to provide some information on property crashes in general.
What does a property crash look like?
When do property crashes occur?Well, in the past, property crashes occurred when unemployment was rising, as were interest rates. The rising interest rates were putting homeowners under immense pressure. Eventually, a lot of homeowners can’t afford their mortgage repayments so are either forced to sell, or have their property repossessed. At that point, a tonne of properties get put on the market, but because unemployment is high, people can’t afford to buy homes. In essence, that’s when you’re in the middle of a property crash.
What are the signs of a property crash?Well, the most obvious sign is a lot of “For Sale” signs up, especially if the same houses have the sign up for months. That implies that homes aren’t shifting; it’s a sign of stagnation (a state of inactivity).
Keep an eye out on interest rates. The higher interest rates get, the more likely people will struggle with their mortgage payments. And as soon as people start to struggle, homes get repossessed.
The problem with repossessed homes is that they sell cheaper than face value. If a lot of houses in the same area get sold at repossessed rate, it will bring down the average price of the entire area.
Who will benefit from a property crash?It’s the people that have been struggling to get on the property ladder that will benefit the most. A property crash is the perfect time for first time buyers to get on the ladder as property starts to become affordable. Once the crash is over, house prices start to increase, and the first-time buyers are quids in.
Property Crash strategiesI’ve read a lot of theories in regards to what property investors should do if they think a crash is fast approaching. I think it depends on your personal circumstances and goals.
If you’re in property investment for the short term, then you should sell if you believe a crash is fast approaching. Once you’ve sold, you should rent. Once the crash has taken its affect, and you think property is it it’s lowest value, you should start buying again.
Knowing when prices have hit rock-bottom is difficult, but you can make a pretty good estimate if you do a little research. Speak to estate agents, watch what’s going on in the area and using your local knowledge to determine which way the market is going..
If you’re in property investment for the long-term, and aren’t a full-time active investor, then I think you should just keep hold of your property, as long as you can afford your mortgage payments. Even after a property crash, properties have always managed to exceed the value at their peak before the crash.
For full term investors, with very active roles in the industry, it’s probably in their best interest to sell, and make the same movements as the players that are in it for the short term.