there are a few reasons why some commentators feel we are going to start to see recovery.
1. Many New Developments have slashed their prices to stimulate demand: True, having said that, when all sites start to do this in tandem it creates a new low, similar to the paradox of deleveraging in some ways. The current buyer sentiment can be boiled down to this – the people buying are doing so in areas they desire not in ‘areas where property happens to be for sale’ and for that reason we are likely to see further price drops in new build and less in the second hand market. Developers are also starting to chop prices further as they near liquidation, in talking to some they have said that they know various developments are not going to sell so they are talking to the bank about what price is acceptable because the loss is coming one way or the other.
2. Interest Rate reductions have made mortgages a lot cheaper: Fact, but at the same time credit is harder to obtain. We did a study where we looked at buying now, renting, or renting then buying and they difference was marginal, what wasn’t marginal was the capital amount owed at the end of the term. This is something people need to be aware of when borrowing, and it is one of the reasons we are currently favouring longer term fixed rates.
3. Mortgage Interest Relief has increased for first time buyers: True but for investors it has been chopped, now you can only offset 75% of the mortgage interest on investment property, that will literally kill 20% of the market in the short term that investors represent, owner occupiers with mortgages more than 7yrs old have been stripped of mortgage interest relief and that will have an effect on their buying patterns. First time buyer mortgage interest relief has not been under threat of removal so while it is an incentive on one hand it is not one that might be taken away so it is more like a coupon for something in the supermarket, if you need it you have it but if not it won’t make you run out and purchase that product.
4. In many cases it’s now cheaper to rent than to buy: See our study, in terms of cash flow only this is not strictly true, if you are using 1yr fixed rates to do your sums then it is true but that is such a numerically skewed way of doing things that we are surprised people are even allowed to release reports using such a thesis as the base for their calculations. It isn’t cheaper to rent or buy, its practically the same.
5. More banks are ‘open for business’ and targeting first timers: All lenders are not ‘open’ for business, they are -at best- partially open and the word to describe them most appropriately is ‘cherry pickers’. In particular the banks with money now got it from the tax-payer, but they are not ‘lending freely’ rather they are using this as an opportunity to target the highest calibre clients that might have gone to other institutions first.
6. There’s a mortgage ‘price war’ targeting first time buyers: The ‘price war’ is meaningless if you can’t qualify for the loan, it is also almost exclusively on short term fixed rates, if banks truly wanted to offer value why not bring back trackers? And short term fixed rates don’t mean much over the course of a 35 year loan. People need to remember – banks are not out there to help you, their job is to make profit, and for all of our sakes I hope they do, but surpass the hype.
7. There was a lot of pent up demand from people who were ‘waiting to see’ what would happen with house prices: This demand is being sapped by the reduction in rental prices as well as the decreased job security many are experiencing.
The driver of demand in the short term will be price drops more than anything, those who still have jobs (and on the bright side 89% do) are likely to hold them, the speed of unemployment is decreasing rapidly showing that the areas in the market that are still intact are likely to remain so.
It is important that people make the transition from using comparative prices and mistaking them for ‘value’. Price is what you pay, value is what you get, and without trying to confound the situation it is vital that in purchasing and investing in property that there is a clear plan of what you should and shouldn’t expect.
As a long term proposition property is still a perfectly good asset class, the dotcom crash didn’t mean people stopped sending emails and despite the property crash living in a house/apartment still remains the most popular choice. The advised view (from our firm at least) is for home buyers to make solid long term location decisions that they can, and for investors to run the numbers to determine their target buying prices rather than looking at the market and trying to model your investment to work within the framework of current asking prices.
We are capitalists, and despite the surge of leftward thinking we remain confident that the market will find its own level, and we remain confident that property is a valued portfolio addition, buying any asset when overvalued is a wealth destroyer, property of itself is not wrong, rather the way we thought it would perform in the short term is.
‘Everything is indefinite, misty, transient; only virtue is clear, and it cannot be destroyed by any force’
– Marcus Tullius Cicero