Is now the time to buy property?
Britain’s property market has changed dramatically over the past 18 months. Five years of soaring prices, followed by the credit crunch, global recession and an overall tightening of lending criteria, have caused average house values to plummet.
Most regions across the UK have been affected, according to Propertyforecasts.co.uk. “It has been disastrous, with significant falls being experienced since last April,” says Mandy Bradley, the website’s director. London, despite its seemingly indestructible housing market, has seen some of the biggest falls across the whole of the UK.
Some areas have been savagely hit. Average prices in Belfast, for example, are down 37% over the past year, according to Nationwide, while those in St Albans and Leeds have slumped 22% and 18%, respectively.
A typical house is now around 15% cheaper than it was a year ago, points out Fionnuala Earley, Nationwide’s chief economist, although the rate at which values are falling does appear to be slowing down. “The average house fell in value by 0.4% in April,” she says. “This reverses some of the rise seen in March, but is in line with our expectations, given the current economic conditions.”
So does this mean the market has bottomed out? Not according to Seema Shah, a property analyst at Capital Economics, who warns against getting too excited about published figures showing modest month-on-month growth.
“We expect prices to continue falling into 2010 because of the awful outlook for the economy,” she says. “We believe that factors such as the sharp rise of the number of people who are unemployed will have an impact.”
However, Richard Mason, managing director of Moneyextra.com, disagrees. He is adamant that now is the time to take the plunge back into property, citing the increase in both the number of people searching for a mortgage and the variety of products available.
“Failing a massive dollop of bad news in the near future, I think we’ve hit the bottom of the market,” he says. “The reductions in interest rates are having an effect, and people are realising that it’s cheaper for them to buy than rent.”
The simple fact is that no-one knows for sure if the bottom has been reached, but this shouldn’t be the deciding factor in whether you should buy a property or not.
If you find a property and you are happy with the price, then buying now could be a good move. Of course, the value may fall going forward, but over the longer term, it is likely to increase again – and your deposit should act as a buffer against negative equity.
However, millions of people are still playing a waiting game to try and time their entry into the property market. First Direct estimates that these people are sitting on savings pots worth more than £20 billion.
So how do you know when it’s the right time to buy? It all comes down to your personal circumstances, so you need to ask yourself a few questions such as: what are your future plans; how much money have you managed to save; and whereabouts do you want to settle?
You need to weigh up all the pros and cons of such a move – regardless of whether you’re making your first foray into the market or climbing up the ladder – because, unfortunately, nothing is black and white when it comes to property.
The advantages of buying now are that interest rates are extraordinarily low, which means mortgages are generally more affordable. In fact, affordability is better now than it has been for more than six years, according to Halifax. The lender found that the house price to earnings ratio declined from a peak of 5.84 in July 2007 to 4.34 in April 2009 – a fall of 27%.
It’s also possible to drive a hard bargain as those needing to move are struggling to attract potential buyers these days.
Martin Ellis, housing economist at Halifax, says that although market conditions are likely to be tough during the remainder of 2009 – and first-time buyers need to factor in the potential for further falls – houses have clearly become more affordable.
“There has been a marked improvement in housing affordability for potential first-time buyers in many parts of the UK over the past 18 months,” he says. “The significant reduction in house prices, relative to average earnings, has resulted largely from the decline in house prices since the autumn of 2007.”
The Bank of England base rate has fallen to just 0.5% and measures the government is taking to stimulate the market, such as the extension of the stamp duty holiday for houses costing up to £175,000 until 31 December 2009, are also expected to help.
This has had an immediate effect on consumer demand. Buyer interest is clearly gaining momentum, says Ian Perry, spokesperson for the Royal Institution of Chartered Surveyors. “The market is still in a fragile state, but with demand picking up, there may be more signs of stabilisation in the coming months.”
However, the risk of buying now is that prices could fall further, warns Andy Gadd, head of research at IFA Lighthouse Group. Just because they have already slumped so dramatically does not mean there won’t be further pain to come.
“This could put you into negative equity and force you to sell the property if you’re unable to finance the mortgage,” Gadd explains. “Reasons for not being able to meet the repayments could include an unexpected redundancy or a sudden interest rate rise.”
You also need to decide how long you intend to remain in an area. If it’s only for a short time, Kate Faulkner, managing director of designsonproperty.co.uk, suggests that you rent instead.
“Consider whether there is a good chance of you needing to move within the next few years,” she says. “If you’re happy to own the property for at least five years, then there will be a reasonable choice for you, and there are even some bargains available.”
But one thing is pretty much guaranteed: house prices won’t be rising dramatically any time soon. The best you can hope for is that the value of your property will stagnate for a while before starting to edge upwards.
To take advantage of the current conditions, you need a hefty deposit; access to a mortgage with repayments that won’t cripple you financially, even if interest rates rise; and relatively secure employment prospects.
The first step is to establish how much you can afford and then to look around for the best deals. The choice of mortgages narrowed dramatically when the credit crunch first took hold, but the situation has since improved slightly.
Although the days of 100% mortgages are long gone, there are still plenty of options for would-be buyers, according to David Hollingworth, mortgage specialist for broker London & Country. The better rates, however, are reserved for those who need to borrow a smaller percentage of the selling price (known as the loan to value rate, or LTV). Simply put, the more money you can put down, the cheaper the deal.
“Ideally, buyers need a deposit of at least 15% deposit, while 25% makes a big difference in terms of the rates on offer,” says Hollingworth. “There are only a limited number of deals available for those putting just 10% down.”
Depending on your arrangement, however, there are ways to cut your mortgage costs. An offset mortgage, for example, allows you to keep your savings in a pot alongside your mortgage, which will ‘offset’ the loan while the money is in your account.
For instance, if you have a mortgage of £100,000 and savings of £20,000, you will only pay interest on £80,000. Your savings won’t be earning any interest – but banks and building societies are currently only paying meagre amounts anyhow.
So what conclusions should you draw? You’ll only know whether you bought at the right time with the benefit of hindsight, but if you can afford it, then it could well make long-term financial sense.
Geoff Penrice, an adviser at Bates Investment Services, says: “Once the mortgage is cleared, the cost of living in a home falls considerably, whereas if you rent the cost will continue – or even increase.”
A way of combining a mortgage and savings so the savings “offset” and reduce the mortgage. Rather than earning interest on savings, the savings reduce the mortgage and the interest paid on the borrowing, so savings are effectively earning interest at a higher rate than most mainstream savings accounts will pay. They are also tax-efficient, as savers avoid paying tax on interest that their deposits would otherwise have earned. Offset mortgages offer the disciplined borrower a great deal of flexibility, as overpayments can be made to reduce the term or monthly mortgage repayments, which can save thousands of pounds in interest payments over the mortgage term.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.