Sellers, it seems, are getting anxious. Property website Rightmove confirmed this week that, in January, asking prices for UK houses dropped by their largest year-on-year amount since 2002. That’s good news for first-time buyers waiting to get on the ladder, but there are plenty more falls to come. However, homeowners who need more space, and really feel they can’t wait to trade up, might be tempted to move. And you can see why.
Provided you have a decent amount of equity in your existing home and can avoid the negative equity trap, the numbers increasingly stack up in favour of those wanting to trade up. For example, say you have a £200,000 house with an £80,000 mortgage and dream of owning something twice the size worth £400,000. If prices all double, your £80,000 mortgage will leap to £480,000 to fund your new £800,000 home (£800,000 – £320,000 of equity). However, if they halve, your new mortgage will only be £180,000 (£200,000 – £20,000 of remaining equity). As such, Phil Tennant at Hamptons International believes the chance to buy a bigger property more cheaply is the “number-one reason to sell at the moment”. But a deal-starved estate agent would say that and we’re not sure he’s right. Selling, renting and then waiting may be a better bet.
First off, prices have a lot further to fall. The Ernst and Young ITEM club suggests a drop of 16% for 2009, while the property derivatives market is factoring in a further 30% drop in British house values by the end of 2011. And the further prices fall, the better the numbers we looked at above become.
Next, prices are not dropping in unison. “When prices were at their peak, all areas of the market were moving up at the same pace,” says James Hyman at Cluttons, “but in a falling market, certain areas, streets or buildings hold their own better than others.” So, if you want your dream home, you may need to wait and then be ready to pounce when the right one comes up. Anyone renting in this very slow market for property – the Royal Institution of Chartered Surveyors reckons deal volumes are at a 30-year low – will be able to move much faster than a rival housebuyer who still needs to sell.
On top of that, the current market is so illiquid that trying to hold a multiple property chain together is nigh-on impossible. By selling your existing house and renting you only have to worry about one deal at a time.
Best of all, there are so many sellers out there holding out for price rises by renting out their properties that tenants are being spoilt both in terms of choice and price. In London, for example, residential rents fell as much as 15% last year due to new properties flooding the market, according to Hurford Salvi Carr. What’s more, Knight Frank found that rental levels eased almost 10% over 2008’s final quarter alone, the largest decline since its Prime Central London index started in 1995.
So, if it’s more space you’re after, cut your asking price and sell up. Then wait. Your patience could be rewarded.
A week in the property market
• House prices have dropped 1.9% this month, says Rightmove, leaving the average house price at £213,570. Based on asking prices, house values have dropped 7.3% in the past year.
• Over 2.3 million US homeowners faced repossession proceedings last year, says CBC. That’s an 81% rise from 2007, with more than 860,000 actually being repossessed. The four states with the highest number of repossessions were Nevada, Florida, Arizona and California. More than 1.1 million properties in these four states received foreclosure notices last year with over one in five of those being in California.
• Five people have pleaded guilty to buy-to-let fraud. The five directors of British firm PPP sold 4,000 properties between 2001 and 2003, promising that the houses would then be let to vetted tenants. Buildings and contents insurance were provided and rent guaranteed through an insurance policy in return for around £25,000. The business was closed in 2003 after investigators found that properties were often worth less than advertised, more than half were unlet and insurance and rental guarantees were non-existent.
The directors used their investors’ cash partly to pay some rental returns in a Ponzi-style scam, but also to fund luxury lifestyles. They had a fleet of smart cars, race horses and £500,000 was spent on art, antiques and designer clothes. Staff once enjoyed a £500,000 Christmas party that included the chance to win a £100,000 villa in Spain in a prize draw. The five will be sentenced in March.