One of the main concerns of those looking to buy a property is what might happen to house prices. Let’s face it; nobody wants to invest in such an expensive asset if it is going to continue to lose value. With the media full of reports of double figure falls in values, and estimates of further significant reductions throughout 2009 it would be very easy to conclude that it would be better to wait until values have reached rock bottom.
However, the media hype and doom-mongers hide the reality of the situation, as they ignore activity in their calculations. There is no doubt that the average fall in value of houses sold in the last year has been between 10% and 15%, but because the total number of sales has only been a tiny fraction of what can be considered normal market activity, it is questionable as to whether this is a true indication of the fall in property value. There are those who will argue that the true value of a property is what any individual is prepared to pay for it at any given time, but this is only case if there is a seller prepared to sell at that price. Conversely, those who say the value of a house is what the individual owner is prepared to sell it for are also mistaken, unless there is a buyer prepared to buy at that price. When buyers and sellers have widely different opinions of the value of a property, sales fail, and there is, in fact, no market.
To a large extent, that is the situation we are faced with currently. There are plenty of properties on the market, but the majority of sales are limited to those who have to sell, whether as a result of repossession, relocation or family upset. Those who are in the position of wanting to sell, as opposed to having to sell, are still tending to price their properties at a level where buyers believe them to be expensive. This begs the question as to how long it will be before sellers become more realistic, and I would suggest that the most likely answer is that they will not. The majority of sellers continue to be employed, and in many cases are enjoying interest rates which are the lowest they have ever experienced. It therefore follows that if they can afford their mortgage, they will simply stay where they are rather than sell their property for less than they believe it to be worth, especially if in doing so they will eat into their equity or even go into negative equity.
Of course, there will always be those that are in a forced sale situation for whatever reason, and this is where the bargains are to be found. Currently one of the main sources of such properties are those placed on the market by mortgage lenders who have repossessed them, and a significant number are from buy to let landlords who were unable to keep up with their mortgage payments when interest rates went up last year. However, as the government becomes ever more strict with lenders concerning residential repossessions, and as rental incomes continue to increase whilst interest rates fall, this source of bargain property is likely to be restricted.
The lack of bargain property in the market is currently balanced by a corresponding lack of those who are actually able to buy a property. Whilst mortgage interest rates have fallen substantially, the best deals are generally available only to those who have very substantial deposits or equity, and that is not something which can be said to be a characteristic of a typical first time buyer. Whilst the price of an average house might well have fallen to 160,000, that still means that the absolute minimum deposit required will be 16,000, and it will currently cost an average rate of 6.5% for the next five years at that level. With a deposit of 24,000, the typical rate would drop to around 5.2%, but it would take a deposit of 40,000 or more to secure the market leading rates of around 4%.
Therefore, if we ignore the vast majority of property for sale, which buyers believe to be over-priced, the market consists of a small number of reasonably priced properties being competed for by a small number of buyers who have large enough deposits. It is our belief that whilst the current climate remains bleak, the supply of mortgage finance will increase before the supply of bargain properties does, and if that is the case, it can only lead to increased competition, and eventually, increased selling prices. On that basis, it must be better to buy now whilst you can pick and choose, and negotiate.
Of course, the opposing view is that the recession will deepen into a depression, and the ensuing availability of thousands of repossessed properties from those who lose their employment will force down prices even further. Whilst this is a possibility, we have to ask ourselves whether a government who has already invested billions of our money in the banking system, and has introduced revolutionary schemes to help those whose homes are at risk, are prepared to let this happen. Our view is that they are not.
About the Author:
Jerry Figueroa-Lee is the co-founder of The Mortgage Warehouse, one of the UK’s leading online Mortgage Advisory Services, providing independent advice on the best Mortgage Rates and Equity Release Schemes available from the whole UK mortgage market.