Maximising Your Equity

By Craig Lowe

 

The market has improved this year with sales volumes in our office increasing substantially compared to last year. This is almost certainly to do with interest rates hitting historical lows, which combined with the recent drop in home values means residential property is more affordable than it has been for many years. A wave of short term optimism has been a welcome change.

Is this the turning point for the market? While I don’t subscribe to the view of some ‘experts’ predicting we still have 20% or so to fall, values have dropped considerably already. From here I think prices are more likely to stagnate for a long period of time than collapse completely. This is assuming we don’t see interest rates of 8-10% again, which in the current climate would be a death blow for the property market.

A sideways moving property market means the equity in your home is essentially dead money. Rising inflation (your money buys you less) and opportunity cost (potential return other investments could give you) eat away at the value of your equity. Worse still, if you have a mortgage on your home, it means the interest payments you make to the bank is the financial equivalent of paying rent to a landlord, while your nest egg sits there doing nothing.

For families who require a stable family home, those who are wealthy or anyone happy to pay to maintain the lifestyle their home provides, none of this really matters as things will eventually improve.

However there are many people out there who I believe would benefit from making some prudent decisions about their living situation. For instance, if you have a large amount of equity in your home but very few other investments, and you enjoy some level of flexibility, now is the perfect time to free up some cash by either downsizing to a cheaper property or even selling up and renting (if you are really adventurous). If you purchased earlier in the decade you will be locking in huge gains.

It is debatable how far the market will fall from here, but any recovery is almost certainly going to be a long and protracted affair. Freeing up money that is not producing any cashflow and investing it in cashflow producing assets while they are cheap makes good financial sense. You could even invest it back into the housing market if you can find rental properties with positive cashflow and keep your debt relatively low. Clearly good financial decisions need to be made but there is no doubt the current financial crisis is creating a huge amount of opportunity. Now more than any other time, these decisions will make life changing differences in the future.

On the other hand this is still a good time for first home buyers to enter the market. First home buyers usually do not have a nest egg big enough to properly diversify investments and buying a home is a great step to accumulating an asset base. However they must take a long term view.

I would be happy to discuss your situation if you feel the current increase in sales volumes could be a good opportunity for you to sell. For a free appraisal of your homes value call me anytime on 021-764-647 if you would like to take advantage of this with absolutely no obligation or cost.

 

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