Here's an interesting thought - what is best for your average home owner that aspires to a bigger and better house ? A reduction in house prices or an increase in house prices ?
Lets say life is going well and I can afford to get a 2 bedroomed house in Cape Town's city bowl. It costs me R2 m. I would love to get that incredible 4 bedroomed house but at R4 m it is just too expensive. I can't stretch to an extra R2m.
A year passes. I continue to yearn for that bigger and better house. Suddenly, in a puff of smoke, my fairy godmother appears - she can do one of 2 things for me, she says - she can create a boom and make house prices double or she can create a crash and make them lose half their value. Which choice would get me closer to my dream house ?
Naturally, one would assume that a doubling of prices would be best. Heck, you would be R2m richer, that has to be a good thing doesn't it? Well, yes, if your dream was to sell the house and go cruising around the world … but that is not my dream - what I want is that gorgeous 4 bedroomed house. In that case, strange as it may seem, a house price drop makes it more obtainable.
Take a look at the maths -
| Price of present house | Price of dream house | Total Amount I need to borrow to get dream house | |
|---|---|---|---|
| Now | 2 | 4 | 4 |
| Double | 4 (gained 2m) | 8 | 6 |
| Half | 1 (lost 1m) | 2 | 3 |
So if house prices double I need to find an extra R6m on top of the R2m of easy money I made to get the dream house - if finding 2m extra was tough, getting 6m will be impossible - sadly the dream house must remain just that, a dream.
However look at what happened after the crash. I may have lost R1m when I sell my house but for another R2m I can get the dream house - I might just be able to stretch to that - so for a total outlay of R3m the dream comes true.
Everyone thinks that as house prices rocket they will get closer to their dream house. In reality, the opposite occurs. As prices rise the cost of upgrading to something better becomes increasingly prohibitive. In other words, for the hard working Joe Average who is aspiring to get something bigger, a house price crash could well be an excellent thing.
The people who will really suffer are the speculators who have geared their borrowings to the max in the hope of flipping their houses in a year or two for a hefty profit. When interest rates go up and house prices go down, they are in serious trouble and there will be blood on the streets. But then again, that is why it is called speculation.
At the end of the day, if a decent amount of your bond has been paid off and you are ready to upgrade your lifestyle, a crash shouldn't be something to fear, it might just be the answer to your dreams.
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