Property Search 
Time to Take the Plunge?
09/11/2008
The following article is a detailed personal view of the current housing market and what might happen in 2009. Kevin Rolfe, MRICS is responsible for Aitchisons, part of the Aitchison Raffety Group, a long established practice of Chartered Surveyors and Estate Agents.
I make no excuse for the fact that this article provides a more positive outlook on the housing market than many, and yes, of course I have a vested interest in so doing. However, I think that many people will agree that there is more than enough “negative” emphasis around and that it might be helpful to hear the other side of the debate.
I believe now is an appropriate time to step back and to try to put the issues in perspective.
This article analyses the individual factors that have existed during the ongoing “credit crunch”
which have combined to result in a substantial reduction in the number of homes being sold.
I consider how these factors are changing and may improve in 2009.
Could now/the near future be a good time to move home?
PROBLEMS GETTING A MORTGAGE
It is generally accepted that this recession was set off by the unprecedented global credit problems. As a consequence, obtaining a mortgage in 2008 has become harder than in 2007. I accept that certain potential borrowers (those with small deposits or poor credit history, in particular) continue to find it more difficult to secure a loan than in the recent past, but that has not been the case for most existing homeowners. Most have owned a property for many years and have benefited from previous considerable house price inflation. Competitive mortgages are available to those who have good amounts of equity.
In my view the availability of mortgages for all sectors will improve as we enter 2009. This is because since the UK bank bail out, our major lenders do now have access to cash. The government will want to see some improvement in lending in return for the tax payers’ investment and I consider both lending and demand will pick up as we enter the traditionally busier Spring period. The better availability of mortgages should combine with reducing interest rates to create more competition and better deals for borrowers. Perhaps even better deals than ever for many of us.
Whilst first time buyers or those with deposits of less than 10% will still find it harder there are solutions. The first is of course to save up for the deposit! With house prices having fallen there is less to find. Many first time buyers benefit from the generosity of parents in putting up all or part of any deposit. There may never be a more affordable time to do so and to take a relatively small further advance to secure part ownership of a property at much lower prices. There are also shared equity schemes around such as My Choice Homebuy which provide good opportunities for first time buyers/key workers to buy into any home they want from as little as 50% of its value.
AFFORDABILITY OF MORTGAGES
Interest rates were reduced by 0.5% in October to 4.5% and all pundits see further reductions in coming months. Some are predicting base rate at 3% or even less during early 2009. This is a completely different scenario to recent recessions when interest rates rocketed (15%) resulting in high repossession levels. Throughout the last 20 years base rate has averaged around 7.5% so 3% would be historically highly affordable. There may not be a better time to borrow!
COST OF LIVING
One of the principal reasons why the volume of house sales started to reduce so much was because, at the start of the “credit crunch”, we were all feeling the pinch from rising inflation and in particular the rapidly escalating costs of petrol and food/energy prices. In recent weeks petrol prices have slumped and commentators believe that inflation has peaked and will reduce substantially in coming months. The recession should generate strong competition resulting in prices being more affordable. Falling prices together with lower interest rates will mean more money in our pockets.
HOUSE PRICES ARE STILL FALLING
Many commentators seem to suggest or at least imply, that because house prices are reported to be falling, nobody should buy until it is widely accepted that prices have bottomed out! This is an over simplistic view to take. Falling prices is the inevitable consequence of all the negative factors that exist. In my view house prices will fall over the coming weeks as we enter the Christmas period (although it should be remembered that this is traditionally a quieter period whatever market conditions exist). I believe that the rate of house price falls will start to reduce as we enter 2009 and will of course bottom out in due course. In recent weeks we have already detected more activity and we consider that Spring will see a more noticeable increase.
A correction in house prices is a good thing and has happened during every economic cycle. After each one we all say “prices will never go back up to that level again” but they always have done. It has just been a case of how long it takes. I believe that the period of price falls will be shorter this time than previous recessions for a number of reasons. Firstly prices have fallen quicker than before and secondly, despite the falls most of us will still be able to afford the mortgage, whereas in previous recessions many could not due to high interest rates. Therefore there will be a time soon when homeowners can say enough is enough. We simply don’t need to accept further discounts. This price readjustment is a positive thing as it will allow the market to start again from a solid base with greater affordability for first time buyers in particular.
All house price indicators lag well behind market activity and indices will continue to show falls even after there has been a significant increase in viewings/offers/agreed sales which are the first and more accurate sign of what is happening. An index is only a guide and there are many geographical and house type variations to consider. The results can vary enormously and the lower the sample base the less accurate they become. Furthermore it seems that at present all comparisons point to 2007. The headline figures for reductions in mortgage lending and rise in repossessions being put forward are frightening. But 2007 was a year when lending was at record levels so any comparison will inevitably appear distorted. The best way to work out what is really happening is to consider local prices in the area in which you wish to live. Just because house price indices are saying that house prices are reducing doesn’t necessarily mean you should wait.
Most importantly we should all remember that we are buying a home and not an investment. If our lifestyle requires that we need a new home soon, then that should be the principal motivational factor. House prices are of course relative. Most buyers are trading up and such buyers are in fact better off if they move when prices are falling than when they are going up, as shown by the simple example below:
House A is worth £300,000. Prices fall by 10% so it is then worth £270,000.
Owner of House A wants to buy House B which was worth £500,000. It is now worth 10% less, £450,000.
The difference required to fund is £180,000 not £200,000 had prices remained flat. If prices had been rising by 10% the difference would be £220,000 so it is £40,000 less for the buyer to fund when prices are falling.
In the current climate there are some owners, particularly certain house builders, who are prepared to sell at higher discounts and may use incentives such as Part Exchange which can be hugely beneficial for the buyer. I would go as far to say that there could be some bargains in the market place. We are seeing some buyers entering the market because of this. As soon as it is perceived that the market is improving /bottoming out then the same level of discount will not be available.
Finally it is often forgotten that most of us own a home for a relatively long period of time, at least five and often 10 or more years. Having bought a home that you can afford and that is right for your needs it is highly unlikely you are going to sell it within a couple of years. Despite the reported annual falls in the last 12 months, prices remain at approximately 60% higher than they were at the start of the decade (source Nationwide). It is worth remembering that this percentage increase is on the whole value of the property and not just the cash that an owner has put into it. The return on our own money has been substantially more. Basically owners have been able to use lenders’ money to get a hugely better return than they would have by leaving the money in a savings account. In the medium/longer term most people remain of the view that house price growth will return. People continue to believe that “bricks and mortar” is a more secure place for their money long term, rather than investing in highly volatile stocks and shares for example. There is a major undersupply of housing in this country which is exacerbated by the current problems in the house building sector. When demand does return there will be a major imbalance for years to come. This only means one thing – prices rising.
THE “R” WORD
This time my “R” refers to “Redundancy”. In my view this is now the most relevant factor of all for a potential buyer to consider. There is a lack of confidence at present and the safe option in such times is to sit tight and do nothing. That may not be the best option for some. For many it will be, as they have no choice.
The current unemployment level although still rising, remains only a relatively small percentage of the working population. It is below the level of only 10 years ago and remains below other major European countries such as France and Germany. During the last recession we also had rapid inflation and high interest rates which is not the case this time. Not every sector of business will be affected. Some businesses are doing well and others will strive to keep hold of good staff as far as possible to benefit from the future market recovery.
Any redundancy is hard and seeking another job may not be easy. Holding a good quality income/mortgage protection insurance policy would provide some security should the worst happen and give some breathing space to find an alternative job, in the knowledge that the mortgage is being paid. Moving home is the ideal time to be taking out such a policy.
There are products available that offer value for money. If we assume insurance for £1500/month then that would cover the full mortgage payments for many of us. A premium is currently likely to be in the region of £45 per month, for 12 months pay out period. Advice from an IFA is required.
With mortgage rates reducing significantly in coming months this would more than offset the cost of such a policy. Furthermore assuming payments are made for 2-3 years then the total payment over this time is more than swallowed by vendors’ current expectations and could form part of any negotiation at the point of agreeing a sale.
So in conclusion, it is tough out there. 2008 has been an “Annus Horribilis” in the housing market. However it is not as bad as some would have you believe. I believe 2009 will see the start of a gradual improvement in the volume of sales. In bad times come unrivalled opportunities. Many will sit and wait whereas others will decide to take the plunge and pick up their ideal home sooner rather than later.
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For further information contact:
Kevin Rolfe
Group Director
Aitchison Raffety Group
Tel: 01442 875509
