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Why Falling Property Prices Are A Good Thing For Many Home Owners
by Andrew Nielsen
The last few years have seen solidly rising property prices in many parts of the world. Many home owners have been celebrating this fact thinking that they've done well on their "investment" in the property in which they live. In this article we explore why falling prices would in fact have been better for many home owners.
If you buy a property, live in it and the price of it goes up you may – like many others - think that you've made money. In fact you have not. You only make money the day you sell the property and capitalize on the increase in the property's value. Until then, the increase in value only means that you have higher expenses. Your insurance costs, property tax and other expenses will increase as the value of the property increases.
And here's what's even worse: when many home owners sell their property, they buy something bigger, better and therefore more expensive in the same or better area as the old property. And if this is the case, it would have been better if the prices had fallen. Take the example of a home owner who bought a house 5 years ago for $100.000. Say this house doubled in value selling today for $200.000. If the homeowner – like so many others – sells the house to upgrade to something better, then the new and better house will also have increased in value. If the new house cost $150.000 5 years ago, it should cost around $300.000 today. This means that the difference in prices between the two properties grew from $50.000 5 years ago to $100.000 today. As the home owner now has to fork out more money to get the better house, the increase in value is actually a bad thing for him or her. If instead the prices of properties had halved, upgrading to a better house would now cost the home owner only an additional $25.000.
Here you may argue that if the prices fell, this would be a bad thing for the home owner, as the money generated in the sale of the old house is less than what the home owner paid. This is indeed true. However considering that the home owner did indeed buy a house 5 years ago that he or she can't travel back in time and choose to rent instead, it is still an advantage for the home owner if the prices fell.
So who benefits from rising property prices and loses when prices fall? Well, those people who change their home to a smaller or cheaper one certainly will. This happens often for people nearing their retirement age or for people moving from expensive areas – for example in the big cities – to cheaper areas. Also of course, those of us who own properties which we don't live in ourselves – properties bought as investments, for example for letting – will benefit from rising prices and lose when the prices fall.
So should "normal people" not be buying properties if their fear that prices go up? Well, there are certainly many advantages to owning your own home. It is for example often cheaper to own than to rent a home. Also, if you intend to own your own home – which I generally consider very wise - then it is obviously better to buy it while the prices are low than when they are high, as this means you get more for your money.
Investing in properties should however be seen as something different from buying a home to live in and this is the basic flaw in the thinking of some home owners. If a property is bought as an investment it should be seen as just that: an asset which generates income and which may be sold in the future, generating a profit. Owning the property you live in is good for a number of reasons, but to consider it an "investment" does not make sense. Consider that you have expenses like mortgage payments, insurance and property tax which mean that instead of making you money, it actually costs you money to live in your own home.
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About the author:
Andrew Nielsen is the author of The Online Business Builder.
Andrew is an entrepreneur and internet veteran and is currenly helping individuals and small businesses make money on the Internet.
Article source: Why Falling Property Prices Are A Good Thing For Many Home Owners
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