Today’s topic of the blog is the convenient timing of the purchase of real estate in which I´ll expand on the summer contribution Development of real estate prices: 3 scenarios and autumn will decide. In the first part of this text, I´ll put the timing of the purchase of real estate in a broader context, the way I understand it, because we miss this in the summer article. In the second part, I´ll focus on the current situation.
The timing of the purchase will greatly affect how financially satisfied you will be with the investment. I use the word financially on purpose as the goal of the purchase are often other important things, such as family background, which may be more important than waiting for the best purchase as far as finances are concerned.
Real estate prices change over time, they go up and down (it´s foolish to think that prices can only rise but I understand that due to the very long continuous growth it´s possible to forget that decline exists). Prices can fall, be it temporarily for several years or, in extreme cases, for a very long time.
Therefore, we can lose a lot of money by wrong timing. If we buy a property at the peak of the prices for 5 million CZK, a few years later we may go through a severe economic recession and the price may be lower by, for example, 20 percent, so at the moment we´re losing 1 million CZK, but only on paper. In reality, we´ll only lose money if, for any reason, we sell the property at this inconvenient time. It´s quite probable that if the property is in the right location (I´ll discuss this term below), in the next 10 years, during the economic boom, it´ll cost more than 5 million CZK, for example 7 million CZK, because eventually money loses its value and the income of the population also increases in the long run.
If we don´t have to sell the property, the decrease in the market price doesn´t have to bother us. Most often, people are forced to sell real estate in crisis for financial reasons as they are heavily burdened by their debts. Thus, if I wanted to say one single and most important thing with this article – no matter when you buy, buy for the long term and always think about your purchase financially so that even in bad times you´ll be able to pay the mortgage. Then the purchase will be almost risk-free at any time.
Another important aspect of purchase is the right location. There are places where prices don´t return to the original values for which we bought them. Probably the most common reason was the location´s dependence on one mainstream of buyers that made prices skyrocket to a level that is exorbitant in the region. A typical Czech example is the centre of Karlovy Vary which was dependent on Russian demand and where the prices were reaching unrealistically high amounts. After the demand had weekend, prices dropped quickly and the place is returning to the original levels only very slowly. The second reason is an objective deterioration of life in the given location. This can be caused by a newly built busy road in the immediate vicinity, moving of inadaptable fellow citizens to the surroundings, etc. As I see it, the right location depends on a wide range of buyers, there are many employers with different types of business, due to the job offer new residents keep coming to this location and create demand for real estate and, therefore, keep real estate prices stable so that they only fluctuate because of the economic situation, then there will be little risk in the purchase.
Now let’s have a look at the current situation on the real estate market. So far, we haven´t seen a decline in real estate sales prices as demand has been very strong in recent months. Some buyers tried to make up for the time during the first wave of measures when they didn´t go on tours, other part of buyers are afraid of devaluing money, want to invest it safely as soon as possible and they see real estate as the right choice. The economic crisis hasn´t yet fully manifested itself, probably thanks to government measures to support employment and postpone loan repayments. The cancellation of the acquisition tax also helped. All this still keeps real estate prices on the same level. My opinion is that the real economic situation isn´t good and must always manifest itself sooner or later. Unemployment will increase (more on the context of economic development and real estate prices in the article here) and this will affect demand for real estate, some buyers won´t be able to buy real estate and some will postpone purchases until the situation on the labour market stabilizes. As soon as the demand drops, real estate prices will decrease because some sellers will need to sell and will meet their luck halfway by reducing the quoted price. The change in prices will also depend on the location. Locations for people with lower or average income will suffer the most as these are the people who are the most affected by the economic situation. The least affected locations will be those for people with high or above-average incomes as they usually have sufficient reserves and earning capacity and when a crisis comes they aren´t forced to sell real estate.