Romanian housing market has been on life support by the government program for the first time house buyers.
House prices are still far from the bottom and few of my arguments are the following: solvable demand is very poor, unemployment is rising, salaries will be cut for the public sector, taxes on property are going up and heavy indebtedness and tight credit are set to keep it this way or even get worse for the next period.
House prices are still in bubble territory as the average house price is still well over five times the average annual income, 80% of adults under 30 years are not able to afford a house.
Salaries and rents prove that prices will keep falling for the next 2 years. Anyone who bought a house considering it "bargain" this time last year is already sitting on a painful loss and things won’t stop here.
I think that times when people have overstretched themselves on the basis that their salaries and benefits can only ever rise; that their jobs are jobs for life are history.
It's still cheaper to rent than to own the same size and quality house, in the same area. Currently renters win and owners who took a mortgage during 2007-2009 lose. Total owner costs include taxes, maintenance, and other costs like insurance. Buying a house is still a very bad deal in most of the cities but it does make sense to buy in some relatively poor cities/ districts where prices have already fallen into line with salaries and rents. Check whether you should rent or buy in your own area by making an easy calculation.
The only true sign of a bottom is a price low enough so that you could rent out the house and make a profit. Then you'll know it's safe to buy for yourself because then rent could cover the mortgage and all expenses if necessary, eliminating most of your risk. The basic buying safety rule is to divide annual rent by the purchase price for the house:
Total annual rent / purchase price < 5% means do not buy
Total annual rent / purchase price = 6-8% means borderline
Total annual rent / purchase price >= 9% means it’s ok to buy
Don’t forget that it's a terrible time to buy a house when interest rates are low, like now. Many agent and developers just lie about this fundamental fact. House prices fall as interest rates rise, because a fixed monthly payment covers a smaller mortgage at a higher interest rate. Since interest rates have nowhere to go but up (considering the historical low interest rates we have now), prices have nowhere to go but down. The way to win the game is to have cash to buy at a low price when others cannot borrow very much because of high interest rates. Then you get a low price, and you get capital appreciation caused by future interest rate declines. If buy at a time of low interest rates and high prices like now is a mistake for both reasons.
It’s far better to pay a low price with a high interest rate than a high price with a low interest rate, even if the mortgage payment is the same either way.
• You will pay lower taxes with a low purchase price.
• A low price gives you the ability to pay it all off instead of being a debt-slave for the rest of your life.
• Paying a high price now may put you "under water", meaning you'll have a mortgage larger than the value of the house and you will not be able to refinance because there you'll have no equity, and will not be able to sell without a loss. Even if you get a long-term fixed rate mortgage, when rates inevitably go up the value of your property will go down. Paying a low price minimizes your damage.
Many buyers have already borrowed too much money and cannot pay it back. They spent it on houses that are now worth less than the loan. This means many banks are actually preparing to request additional guarantees, to increase the interest rates or if borrowers cannot pay anymore to sale the property.
Many buyers have used way too much leverage (using debt to amplify gain) and they forget that debt amplifies losses as well. If a buyer puts 25% down and the property price goes down 25%, he has lost 100% of his money on paper. In case he has to sell due to job loss or a mortgage rate adjustment, he lost 100% in the real fortune.
If you make and easy calculation you will see that the renter - if willing and able to save his money - can buy a house in half the time that a conventional buyer can pay off a mortgage. Interest generally accounts for more than 65% of the cost of a house. The saver/ renter not only pays no interest, he also gets interest on his savings. Leveraged housing appreciation, usually presented as the "secret" to wealth, cannot be counted on, and can easily work against the buyer. In fact, that leverage is the danger that got current buyers into trouble.
Because the housing bubble was not driven by supply and solvable demand now we have many houses on sale which will not find a buyer at current prices. Prices in the bubble, even now, are entirely a function of how much the banks are willing to lend. Most people will borrow as much as they possibly can amounts that are completely disconnected from their salaries or from the rental value of the property.
Many owners have simply stopped paying their mortgages, and the banks are doing nothing about it yet, letting the owner live in the house for free. If a bank takes possession of a house that means the bank is responsible for property taxes and maintenance. Banks don't like those costs. If a bank then sells the house at current prices discounted for example with 25%, the bank has to admit a loss on the loan. Banks like that cost even less but they won’t be able to wait for long time.
One day, not so far, those houses will come on the market decimating the prices and allowing many families to buy a house without a suicidal level of debt, and maybe without any debt at all.
Many people were corrupted by the housing boom and they were very happy because their houses were earning more than they did, never asking where all this free money was coming from. Well the truth is that it was being stolen from the next generation. Houses price increases don't produce wealth; they merely transfer it from the young to the old, from the coming generation of families who have to take high debts if they want to own, to the sellers who cashed their property.
House price inflation has been very unfair to new families, especially those with children. They have been foolish to buy at high prices and the government never talk about how lower house prices are good for families, instead preferring to sacrifice the young and poor to benefit the old and rich. Every affordability program drives prices higher by pushing buyers deeper into debt. Increased debt is not affordability; it's just pushing the problems into the future.
Now there are many empty new houses. Builders are being forced to drop prices even faster than owners, because builders must sell to keep their business going. They need the money now. Builders have excess inventory that they cannot sell at current prices, and new houses are completed at lower costs, making the housing slump worse.
Be patient and you will make a good deal!
