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4 Red Flags When Looking To Buy A Home

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4 Red Flags When Looking To Buy A Home

Buying a house can be a dream come true; a place to call home, express yourself, and take full ownership of design and renovation decisions without the need for outside permission.

If entered into carelessly though, that dream come true can quickly become a nightmare. So we thought we’d weigh in on a few common problems home buyers encounter that are, or should be, deal breakers in most cases.

Number 1: Market Instability

Across Australia, in 2014 housing prices have risen approximately 8% 1. While residential construction remains on pace with demand, the four-year-record-high prices of 2014 have created price-to-income and price-to-rent ratios well above historical averages according to the New York-based ratings agency, Moody’s.

The Moody’s report, which was the basis of an article on the Daily Mail 2, warned that low interest rates and their escalation of housing prices may pose risks to the Australian economy. These risks would be constrained to the real estate market and not impact the broader economy due to favourable economic conditions such as, “historically low leverage levels, strong mortgage buffers, and a well-capitalised banking system.”

Some potential buyers may find the need to get into a new house more important than potential market risks

That’s good news for the broader economy, but probably not good news for home buyers. Some potential buyers may find the need to get into a new house more important than potential market risks, or maybe home ownership is preferable to renting.

While current low interest rates provide buyers an added sense of assurance, Australian policy makers are currently faced with the dilemma of having to either raise interest rates in the hope of discouraging off-shore-based investment buying—the ultimate source of escalating prices, or leave rates alone to aid job growth in a few struggling sectors of the economy, but leave intact policies that are creating a housing affordability crisis across the country.

Certainly a buyer’s best decisions are informed ones, so understanding where your particular situation falls in the dynamic and ever-changing spectrum of market forces will help ensure no surprises come along to burst your home ownership bubble.

Number 2: Dodgy Location

Always remember you’re not buying a house, you’re buying a neighbourhood. Location almost always ranks at the top of the list of criteria for the ideal home with several other factors including length of commute to and from work, crime rates, access to local shops and services, noise levels, and the wider community. However ultimately it’s the budget that determines your location when buying a new home.

In an article from March of last year, Business Insider Australia writer, Tara Nicholle Nelson, reminds us how enough small compromises in location can add up to a major mistake 3.

Researchers have found that the longer commutes lower overall happiness.

An extra 20 minute commute for example, may seem like just a minor adjustment, but as Nelson noted, “researchers have found that the longer commutes lower overall happiness.”

Regardless of budget, for just about any home buyer, it’s one of the most significant financial commitments they will ever make. Don’t let that decision hang on the sole desire to upgrade the home itself.

Number 3: Termite Infestation

Although the coastal belt and northern parts of the country are the ones most regarded as the high hazard areas for termite damage, in truth the Queensland Forestry Research Institute tells us that termite damage to structural timbers occurs throughout Australia. If you’re inspecting a potential house for purchase, remember that termites survive on subterranean moisture and moisture that occurs in wood.

TermiteInspection

Frass piles—termite waste resembling sawdust—may appear around window sills, doors, wood flooring, and other seams and joints between wood surfaces. Mud tunnels extending from the main termite gallery will appear along rafters, studs, and joists. But if significant evidence of a termite infestation is readily apparent, it’s likely too late to stave off catastrophic structural damage. Termites will devour wood from the inside until they breach the surface or encounter a layer of paint.

Any structural member that suffers termite damage will have to be replaced, which may encompass a major overhaul of the structure.

Any structural member that suffers termite damage will have to be replaced, which may encompass a major overhaul of the structure. On the upside, depending on the judgement of an inspector or appraiser, termite damage may be grounds for a serious price reduction.

If you’re looking to buy a property with the intent of undertaking a major renovation in the first place, and the damage isn’t too extensive, you may stand to gain equity in the purchase once the repairs are done.

Number 4: Career Uncertainty

According to a Wall Street Journal report from Aug. 26, 2014, it was a decline in investment in Australia’s mining sector following a decade-long boom that prompted The Reserve Bank of Australia to drop interest rates to 2.5% over a year ago.

The stated intent was to spark job growth in other, non-mining sectors to help “pick up the slack.” That same report stated that Australia’s economy still displays a high degree of resilience in the face of a potential positive price feedback loop in the housing market, but still referred to the Australian economy as “fragile.”

The Australian Government Department of Education, Employment, and Workplace Relations is projecting very promising job growth figures for the five years to 2017.

Still, there are a few industries for which the job outlook is projected to run into the red. Mining is projected to continue growing in spite of the drop in investment. But agriculture, forestry, fishing, and secretarial positions can expect to see reductions in job numbers over the next few years.

Understand the market projections for your own industry and allow that knowledge to inform your financial decisions, especially home buying

The point is to understand the market projections for your own industry and allow that knowledge to inform your financial decisions, especially home buying.

And on that note here’s a final word of caution.

Don’t enter into a contract as serious as a mortgage on home under unstable circumstances thinking you can sell the house off or refinance your way into a better situation quickly. The potential for delinquency, foreclosure, and bankruptcy is too dire.

So even if you’re a professional working in the real estate industry who is savvy in the art of selling off properties quickly with very low costs to yourself, make good and sure you have all your ducks in a row before you sign on that dotted line.

This is general advice and does not take into account your circumstances. We recommend you seek professional advice before acting on any of this information.


1 http://www.abc.net.au/news/2015-01-02/home-prices-rise-nearly-8pc-in-2014-boosted-by-strong-december/5996972
2 http://www.dailymail.co.uk/news/article-2671865/Australian-property-market-danger-overheating-warns-ratings-agency-Moodys.html
3 http://www.businessinsider.com.au/6-things-to-consider-before-buying-house-2013-3