Property Market/Buying a House

IME, when there is a crash in the housing market there are certain types of properties than you can't give away. If prices fall, for example by 30% then then you will probably still get told that a studio is about

80% of the price of two bed flat in the same location, but no-one will want to buy the studio if they can afford the two bed flat (wwhich with prices 30% lowere they probably can) so you'll struggle to sell it at all.

tim

Indeed. It took the sister of a client of mine 10 years to get out of negative equity for a studio flat.

Also, some smallish blocks of flats lost nearly 70% of their value after people just handed the keys back.

I would very much agree with that statement. Although not caught my self, I had friend who had a studio flat during the late eighties. Although the agent gave what appeared to be a reasonable valuation, no one would come and see it. In the end he waited a few years and sold up once prices had recovered.

I have only owned a houses for the last 4 years (now being on my second). I recall being worried about a crash when I bought my first two bed in Guildford for 132k. About 20 months later I sold for 175k and now have a four bed which again I was worried might have been at the top of the market. But again, it rose and stills seems to be creeping upward. In hindsight I did the right thing, but I would be even more nervous of stretching myself if I were in Ed#s position now.

As a measure of the market, I have just gone through the phase of looking at buy to let properties. The danger with these is that there seem to be a lot of people with big portfolios on 80/85% mortages. If they get ill feeling, which could come soon given the poor level of rent yields, then this could trigger a crash at the lower end of the market. I also get the feeling that in some areas there is a glut of new builds coming on and again these could have an adverse impact in the medium term.

I have seen economist reports predicting an 8% rise this year and then a

20/30% decline by 2007, but rising there after.

So the best advice is to buy something you are happy living in and which you can afford even allowing for interest rate rises. If you stay more than 5 years it is unlikely it will be worth less than it is now and it is cheaper than renting.

The main problem with the property market , is that the average familys/persons ability to purchase a suitable property is genrally beyond there means which stops ppl from been able to buy which in turn will bring prices down , if nothing else the prices need to move sideways , untill the average familys wages have caught up with the costs of running a suitable mortages.

IMHO.

What do you call a crash? I think it's reasonably possible that prices in a few years time might be 20% lower than they are now, but probably not 50% lower. Also it's unlikely that anything will happen quickly. Stockmarkets can crash in a day because you can sell shares instantly, but houses take months to sell.

The real question is whether you can afford the interest. It's possible that base rates could get to 6%, maybe 7%, so make sure that you could afford the payments if they do, or else look at fixed or capped rates.

Actually rather the opposite, it tends to be houses at the bottom end which do worst. In last crash the "broom closet" type properties became more-or-less completely unsaleable, as did a lot of tiny 1-bedroom "starter homes" because no-one wants them if they can afford better. OTOH the actual amount you lose may be more; a 30% fall on a £60k house loses you £18k, a 10% fall on a £200k house is £20k. I would suggest buying the house you *want*, subject to being able to afford it. If you intend to live there for many years it doesn't really matter what happens to the price, except psychologically.

It's a FAQ; search the uk.finance archive -

Well, yes, but prices have probably risen 20% since the last time we discussed it ... also the likelihood of interest rate rises is a lot clearer. For example, last time I read a copy of Money Observer, probably 6 months or so, the editor was still telling people that he thought that rates would go lower and they shouldn't consider fixed-rate mortgages.

But what happens is that they simply stop selling until the asking price drops to what the market will bear. You might not actually see a drop of 30% in asking prices over one week, but effectively that is what has happend to the value.

Two stories from the last crash:

In the block I lived in one of the owners died and their family inherited the flat. These flats had been selling at 115K several months before. Bur even after dropping the price to 75K they had zero interest (so they kept it and rented it).

I worked with someone, who having waited for the bottom, wanted to buy. He went and looked at houses and always offered

25% below asking and waited for someone to say yes. He didn't have to wait long.

tim

more-or-less

concept covered in previous discussions

concept also covered in previous discussions

More fool him. Viewing the previous discussions would have presented a range of arguments and the fundamental issues influencing house prices, which would have better equipped the op to make his own judgement.

Daytona

Theres no harm in revisiting this as circumstances change however. We may have discussed scenarios based on how they could change, but now that they have changed we can firm up that discussion.

I see a lot of the prophets of doom beginning to doubt their own publicity, just as they did with the tech boom. Building society indexes seem to be suggesting prices can keep rising as interest rates firm up. These factors may change some of the thinking on this group.

Neb

But what the market will bear is partly a function of expectations, people are prepared to pay current prices because they see other people doing the same. Many house purchases are pretty much forced, so purchases don't drop to zero in the way they can with shares, and sellers don't drop prices immediately if they don't sell, they hang on and hope. There might be localised cases where you have a high density of BTL properties which don't appeal to owner-occupiers, but BTL is still a relatively small part of the whole market. IMV there are not likely to be distressed sales from owner-occupiers the way we had last time, if there are problems they will be in BTL and only in a subset of that, basically people who haven't anticipated rising interest rates. The imbalance of supply and demand remains, so we aren't going to see lots of empty properties any time soon, it's only about affordability.

Excellent post. I have been saying the same wrt inflation. (I think pls correct me if I am wrong). Here is what I posted to another group yesterday:

################################################ stagflation was stagnation with inflation whereas we *seemed* to have growth without inflation. however i think the true level of inflation is definitely under-reported. as you rightly point out inflation is on the up when the money in circulation is on the up and that is something we have seen an abundance of recently with the house price boom. more and more money is being borrowed on the strength of these (imaginary ) gains and hence leverage comes into play (as galbraith points out). if we had a better measure of inflation (why not one based solely on house prices for example) then our current situation would be a lot clearer. we are indeed in an inflationary tulipomania bubble which can only burst with some degree of pain. however everyone - including Gordon - seem happy to ignore the reality and pretend they live in low-inflation high-growth paradise. ####################################################