What's happening to Property Prices?

publication date: Sep 14, 2008
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Property prices are hitting the headlines on an almost daily basis, with headlines telling you prices have fallen by 10% and may well fall by another 25%.

All scary stuff if you are thinking or in the middle of a property project, or indeed are investing in property for income or capital gains.

In this article we will answer what is actually happening to property prices; who the winners and losers are in a falling market; whether you need to worry or not; what the future holds for property prices, will the continue falling or stabilise?

What is actually happening to Property Prices?
On average there is an approximate 10% fall in property prices compared to January to July 2007. This means that anyone who bought a property during that time could have bought it for 10% less if they'd waited to move another year.

However this general "10%" figure is made of of lots of different property markets and movements of lots of different properties. Prices continued to rise from 2000 to 2007 for three main reasons:-

1. There were more buyers than properties for sale, so they always sold to the highest bidder 2. Lenders (such as banks/building societies) were happy to lend around or more than 100%mortgages
3. Mortgage rates were at their lowest ever with people securing mortgages at 5% or less interest rates.

Due to lots of reasons, from June 2008, some areas and property types became oversupplied. A good example of this is flats in Birmingham, Leeds and Nottingham. Less buyers than sellers meant sellers dropping prices to capture buyers

Secondly the collapse of Northern Rock and the 'Credit Crunch' stopped many lenders lending money to people who wanted to buy properties. This then reduced the competitive nature of securing a mortgage - in fact lenders tried to avoid or get rid of those people they felt were in risk of defaulting on their mortgage.

Lenders that continued to lend were put under huge pressure and were also heading for financial stormy waters, so they started to increase the cost of mortgages. Mortgage rates shot up to 7% or more - almost doubling the cost of a mortgage for new and current borrowers. And lenders only wanted to lend to people with more than 10% equity left in their property.

These three factors led to buyers, especially first time buyers and investor buyers not being able to secure mortgages. This in turn meant buyers were falling out of the market. If no-one buys at the bottom of a chain, then few people can move throughout the chain, so as demand for buying property fell, supply of many property tops in most areas across the UK started to plummet and prices started to fall.

Once prices start falling, this is reported relentlessly by the media and all the 'property price crash' pundits who have been predicting property price falls since 2000 were constantly wheeled out to express their gloomy views. The result being that even those buyers that could still afford to buy stopped - due to fear or hope that property prices might fall further.

So, the downward spiral continued. This was made worse in August by news reports of the suspension of Stamp Duty - who would buy a property if they thought they could save a few quid? So August 2008 was an even worse month.

And that's why prices have fallen so far...so who are the winners and losers of property price falls?

Property Winners and Losers
If you are a first time buyer, investor or trading up you will be a winner in the short term as you can secure a property for 10% less than last year. If you are selling and buying, then you just cut your own property by 10% (so to £90,000 if it's worth £100,000) and buy for 10% less (so pay £135,000 for a property worth £150,000 in 2007). So if you are trading up you actually gain, in our example £5,000.

If you are trading down, have a property in an undesirable location such as near a busy main road, pylon or overlooking factories etc then you are likely to lose out. Trading down, you are likely to have to drop your property more than you will save on the next one. However most people trading down bought years ago, and as prices have gone up by approximately 20% in the last 10 years, it just means you've made 190% tax free income, rather than lose 10%.

If your property isn't in a great location you have to drop it quite substantially to attract buyers away from other, more desirable properties.

The real losers though are those who are forced to sell and have little equity in their property (10% or less). However the government has produced some helpful packages that could mean you don't have to sell if you can't afford your mortgage.

Should you Worry?
You are only affected by falling prices if you are trying to sell a property or release your equity. And this should olny be an issue if you have less than 10% equity in your property. If you are in financial trouble seek advice from Citizens Advice Bureau.

If you are looking at buying and worried about prices falling further, then don't as long as you are going to stay in the property for at least the next five to ten years as prices are likely to recover.

The Future of Property Prices
Don't believe anything that you read currently on property price predictions - well apart from this article!!

Why? Because no-one can honestly tell you. Prices have fallen by 10% on average across the UK, but some areas and property types haven't fallen in price at all, others have fallen by up to 50%! However we don't have enough data yet to predict what happens next and we won't until December 2008/January 2009.

In Kate's view there are currently three scenarios for property prices:-

The Good
Property prices are mostly influenced by supply and demand. Between September and December many sellers are likely to take their properties off the market, lowering supply. Hardly any developers are building now, so less new properties will be for sale. Some mortgage rates in September are back to 2007 levels and prices of oil etc are starting to come down.

With any luck, demand will start to increase a little and supply will reduce a lot. Property price reports will be compared to lower prices year on year as prices started to fall in September and October 2007, so we are likely to get 'more positive' media reports. So with supply and demand matching and more positive media reports, confidence will start increasing and prices stabilise.

The Bad
This is the main reason why people can't predict what's going to happen in property prices. The next key driver to property prices is people's confidence and their ability to buy. Lots and lots of companies are currently reporting bad results - and are making people redundant.

If we reach two million+ unemployed, then confidence will not increase as people will worry about their job security and won't move. Those made unemployed may or may not be able to get another job and may be forced to sell their home, increasing supply versus demand.

This could well mean prices continue to fall due to supply being more than demand for property.

The downright Ugly!
Sadly when we have a few economic shocks (Kate did an economics degree!) then others often hit that we are not expecting. So far we have had the credit crunch caused by our lovely bankers borrowing too much money to lend effectively to poor Americans (sorry it's a bit more complicated than this, but broadly correct!). Then price rises from oil and food.

What's next - unfortunately we don't know. Another war? Another Tsunami?

We just don't know, and therefore if you don't have to buy, then leave it until November/December in 2008 when some of the best new build deals will be available. If you do need to move and are trading up, planning to spend five plus years in your new home. Don't worry.........

If you need help and are struggling financially, then it is out there, so get all the help you can!

Any comments on this article gratefully received!

The Designs on Property Team.




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