So a friend asked me this question, and it resulted in a lengthy exchange.
The subtext of her question was about rising interest rates and the imminent property crash she’s been hearing about in the news. We live in a flourishing real estate market, and property prices have been steadily increasing for years. My own apartment that I bought in 2017 has gone up by about 50% in value.
For months now, the news has been getting increasingly negative. Interest rates have started to rise. Pundits are making dire predictions about inflation and yes, the possibility that the real estate market could crash.
I’m not an economist, and I can’t make head or tail of the statistics and the predictions myself. And I don’t think it matters. Let me recap the advice I gave her.
The First Question: Do You Want To Buy A House?
Deciding to buy a property is a complex and highly personal decision. While there are tangible, fact-based, number-based factors and criteria you can use to make your decision, the decision often comes down to personal needs, wants, ideas, and beliefs. People buy properties for a range of reasons. To have a “home”, to achieve a sense of permanence, belonging, or stability. Some people want to buy a property because they believe they should, because it’s a rite of passage into adulthood, or because it’s what their parents did, or they believe it will make them financially secure.
Only you can answer the following questions for yourself: Do you want to buy a house? Why do you want to buy a house? Do you think your reasons are solid? If you suspect they’re not, is buying a property something you want to do anyway, or do you want to put the decision on hold?
The Main Criteria: Affordability
Once you’ve figured out you want to buy a property, it comes down to what you can afford.
Determining what you can afford requires you to understand what goes into property ownership. Essentially, you need to figure out all the costs of owning the property and whether you can afford it.
Running the numbers on a primary residence is all about the costs. A lot of people just look at the mortgage repayment costs, but be aware that there is a lot more to owning a home. First, there are property taxes. In a condo or coop building, or if you live in a community managed by a Homeowners Association, you’ll have to pony up for condo, coop, or HOA fees. There will be insurance costs — your lender may require you to have insurance to protect your mortgage, and then you should probably get insurance on your house and its contents as well. Depending on the jurisdiction where you live, the type of mortgage, and the type of property, this can come in a variety of types and amounts of insurance. Finally, the big ticket item you need to be aware of is maintenance costs. There is no hard and fast rule of how much money you need to set aside for maintenance. For condos, coops, or homes in an HOA, some maintenance costs are taken care of by the property management or the homeowners association out of the fees you pay. For other properties, you will be solely responsible for maintenance, and then you have to consider the condition of the property you buy — a brand new house vs. an older house that’ll need a new roof in the next couple of years.
Is That All?
Well, yes. If you want to buy a property, and if you can afford it, then go for it. It doesn’t need to be more complicated.
But what about all the doom and gloom economic indicators that are being flashed about on the news? Sure, there will be curve balls that come at you during your property ownership journey. No one can guarantee that you won’t lose your job or face unexpected medical costs or a divorce. For this, I can only recommend that you have an emergency fund for yourself and your family, and a separate home emergency fund to make sure you don’t get caught (figuratively) with your pants down.
What if there is a crash, and you could wait a few months and get a property for less? Sure, you could save a few bucks if you wait for the crash and “buy the dip”, but no one knows if or when a crash will happen or how that will play out in the market you find yourself in. In the real estate market, as with all investments, it is time in the market that matters, not timing the market. As long as you have bought an affordable property, keep paying the mortgage and stay put. Over time, property prices will eventually go up again.
