There’s blood on the streets of Britain’s housing market. Five successive interest-rate rises have gouged deep wounds, but the coup de grâce could be yet to come – an estimated 2m people on fixed-rate mortgages will have to take out new loans at higher rates within the next 12 months, sending their monthly payments soaring and reducing their ability to trade up.
Of course, the market, especially in London and the southeast, is being underpinned by a rising population and a shortage of housing. But we can only handle a certain amount of debt, which means prices cannot keep on going up at the same rapid pace for ever. There comes a point when something has to give.
Over the past decade, it has been possible to trade up the ladder simply by owning a place on it – as I know from my own experience. During that period, without moving more than a mile within the same patch of southwest London, I have gone from my first flat right through to a large house with private parking on my favourite street, all by refurbishing and extending each property. The builders move in next week to start digging out the cellar, which will mean that, so long as I can still afford the mortgage when our fixed-rate deal expires, we – that’s the wife and two kids – are all set for the future. I have no intention of moving again. Nobody has a crystal ball. I certainly struck lucky a couple of times with market timing, but we also bought and sold well, and did the right work on the right properties.
In paper terms, bricks and mortar have been making money at a far greater rate than I’ve been earning from my day job. And that’s true of many people. Owning land or property has always been part of the British culture, but it became an obsession during the boom years.
Having read, watched or surfed our way through the extraordinary amount of magazines, television programs and websites dedicated to all things property, we’re all now fully fledged, albeit self-certified, property experts.
Yet it has been much too easy (at least for those of us who got on the ladder early enough, if not for today’s struggling would-be first-time buyers). I meet people all the time who have made big mistakes in the past – going way over budget on the renovation – and have gone without punishment, as the market has effectively caught up and washed away their mistakes.
Don’t expect that to continue. Make a mistake in today’s market and you will have to pay the price. Most of us are not nearly as clever as we like to believe – and, yes, I include myself here. The genuinely stupid people, however, are the ones who, in the misguided belief that they were truly better off just because their house was worth more, went out and spent their increased equity – or paper money – on cars and holidays.
We’ve come to expect to make money on our homes. We’ve even come to demand it. So it is going to be a nasty shock when a slowdown means that isn’t going to happen. We will have to make a conscious effort to outperform the market, rather than simply ride it.
So, there you are, Mr and Mrs Average, with a sprog and a dog, squashed into your three-bedroom house, thinking about trying for another baby and worrying about needing a bigger place. What should you do?
Let’s imagine that you already have a decent slice of equity, but no great promotions or pay rises on the horizon, and that one of you would like to give up work when junior number 2 comes along. With the high costs of moving, and without the market to help this time, you’re going to have to get it absolutely bang on.
You will be forced to make compromises somewhere, so focus on finding flexibility – a home with room to grow into. It is always cheaper to build extra square footage than it is to buy it on the open market. You need to buy a property you can improve in terms of internal layout or fittings: one you can extend outwards (or up or down), or one in an area that becomes increasingly popular during the time you live there. The best opportunities combine all these elements.
Remember: “Location, location and location.” Well, I would say that, wouldn’t I? But it remains the truth – you’ve got to get it right to stand the best chance. The next district to “come up” and benefit from above-average price growth is likely to be one that borders an area that is already popular. Most buyers will be prepared to compromise on their ideal location in order to buy a larger property adjacent to their favoured position – hence this ripple effect. Even in highly developed and mature markets, it is still possible to find a few post codes surrounded by more expensive property on all sides. If the architecture in these emerging locations is similar, then, however shabby or unfashionable the area, the anomaly in values is likely to correct itself at some point.
Much of our housing stock was designed and built with the lifestyles of our Victorian and Edwardian ancestors in mind. These days, there is a preference for more open-plan, less formal living, with fewer but bigger rooms. Opening hallways, removing doorways, shifting corridors and repositioning partition walls are simple changes that make better use of the space and can provide a more contemporary environment, leading to subsequent increases in value. Kirstie Allsopp, my co-host on Location, Location, Location, recommends lying on the floor and looking up at the ceiling to gain a better perspective.
To increase the likelihood of outperforming the market, you’ll need to work harder to find a house that combines as many of the above elements as possible. Remember, any property can be a good deal – provided you buy at the right price.
The headline that so many Londoners it is said have been waiting to see has at last appeared. The agent that everyone likes to hate has battled with an unenviable image since it was set up 25 years ago and founder Jon Hunts’ competitors were the most vocal in their rage at his success. To add to their pain, they couldn’t believe it when he sold the firm earlier this year for a rumored £490m.
The fact that the firm had succeeded despite the pages of bile that you can find on the internet if you search for Foxtons is perhaps an example of the old adage that I was taught when I first started selling houses. There are some firms whom you want to sell through and some that you want to buy from. Foxtons was one of the former and it is these firms who make the big money. The ‘gentlemen’ firms may be nice people to do business with with but their clients don’t pay them to be nice to buyers and tenants – they want the highest price that they can get and aren’t too worried what the other side thinks.
The headline is not all it seems since it and the many others refers to the American version of Foxtons which is reported to be laying off over 300 of it’s 380 employees due to the US housing slump. It may even file for bankruptcy. I expect that this is not the whole story as like the London agents, many American brokers have whinged about Foxtons tactics in the US and complained that they shouldn’t be charging so little in a market that routinely grabs 6%+ to sell a property.
What is worth noting however is that there are more and more people who think that it may well be only a matter of time before we could see similar conditions here in the UK and whilst it unlikely to result in the demise of one of London’s’ most colorful estate agents, it will bring pain to many and as in previous property recessions, the loss of one or two brands from the market.
The credit crunch is already pushing up costs for new borrowers and for anyone coming off a fixed rate product. By Christmas, it’s possible that we will see the equivalent of a full percentage point increase in mortgage costs when compared with 1st August.
Around 8% of consumer spending in the UK in recent years has come from the release of equity from property. This will dry up as homeowners discover the higher cost associated with re-mortgaging and the impact will be felt most directly by DIY firms, builders and decorators, the motor trade as well as holiday companies. All business who have benefitted recently from the wave of cash that re-mortgaging has generated
Northern Rock accounted for nearly 20% of new mortgages in the first half of this year. It is unlikely that anyone except the remuneration committee are going to be persuaded that they are going to have anything like that kind of share now and other lenders are likely to pull their 100% products too. This will make it harder for new buyers to afford the record prices being asked for homes which in turn will lead to a downturn in values across the market. The property website Rightmove have already indicated that asking prices are 2.6% down on last month and I have noted supply in general to be down 15% year on year.
No doubt cynics will try to blame all this on HIPs but in all seriousness, the additional costs will make houses more unaffordable for the very people on whom values depend – new borrowers buying homes currently for sale. As a result, it looks like house prices will start 2008 on a downward trend with younger estate agents discovering the excitement of valuing in a falling market.
What is important to remember is that house prices for everyone are set by the few transactions being done at any one time. The people who are most likely to suffer in any downturn are those who bought in the past 12 months. Even if values were to fall by 20% it would take them back to roughly what they were between 12 and 18 months ago so the pain for most people would be the perceived loss and not actual pain. The pain would be reserved for those who had dived into the market recently with high gearing (who look like they will loose most of their equity) and those who who forked out for a ‘Buy-2-Let’ property when they were just a plan a year ago and can’t now find a tenant to pay the rent.
The queues that formed outside branches of Northern Rock illustrate that the public don’t need to understand the fundamentals – panic and a flight from a business backed by the Bank of England – who sign as guarantee our bank notes remember, could just as likely happen to the property market as it has in the banking sector. It is just likely to be more drawn out, more painful and felt by more than just the customers of one lender.
We’ve all heard about high property prices in London. People are often concerned that higher borrowing costs might be a problem and the current LIBOR rate (the interest rate that banks charge each other when they lend money between themselves) of 6.88% means that in fact rates for new borrowers are highly likely to rise in the weeks to come despite Base rates being held at 5.75% in September. To make money, lenders have to lend money at more than £6.88%.
According to the Land Registry there were 413 properties sold in SW11 in the first six months of this year. There are 43 agents who claim to be operating in this part of London which means in theory that each has sold 10. Even if these figures were 100% out (why would they be?) it would explain why property prices in this leafy suburb have increased by 22% in the last 12 months. Demand is high and supply is tight!
Estate agents in Wandsworth have next to nothing on their books still and you can expect asking prices for what little does come onto the market to be eye watering as they compete for these jobs. Borrowing costs of an extra 1% mean much less to the man on the Clapham Omnibus – all he knows is that if he wants to keep his wife happy he has to bid strongly for what ever rubbish comes onto the market this Autumn. However, if demand dries up or more property comes onto the market then prices will slow even in this Shangri-La.
One month into the program and from Monday all houses with three bedrooms or more require a Home Information Pack. About 60% of all homes coming onto the market for the first time will now be included with the remained to be included later in the year.
About 500 HIPs have been done so far across England and Wales but there is no evidence of a buyer asking to see a copy let alone finding the contents interesting or helpful. Providing packs for all homes that are marketed will cost house sellers about £600m next year. Nearly 4000 new jobs have been created to provide the Energy Performance Certificates and at least two Government ministers have been made to feel a little foolish as the legislation has been railroaded through.
Why? So that the time it takes to sell a property comes down and to keep our promise to encourage greener households – or so they said.
It currently takes a staggering 54 days between agreeing a sale and exchanging contracts. I doubt that a HIP will shorten this but it may help people to see just how inefficient our homes are. The trouble is that most homes are inefficient and frankly, what are you going to do if the house you want is described as a ‘G’? That’s right, you’re going to go ahead and buy it anyway.
It’s still possible for an eager new Prime Minister to pull HIPs due to a deal done with something called a ‘sunset clause’ with the Lib Dems when they were pushing the legislation through the House of Lords. Whether he will have the nerve remains to be seen but it’s hard to think of a good reason not to keep the EPC and pull the rest.
As you will recall, the King ordered a new suit of clothes which despite it’s apparent shortcomings his loyal followers agreed was the finest they had ever seen. In London at the Buy-to-let Forum organised by industry guru John Wriglesworth, followers of the King who appear to run the controversial buy-2-let industry discussed the impact of B2L on first time buyers, the role of property ‘Investment’ clubs and the outlook for the market both in the UK and abroad. The outlook, they said looked great!
Over 300,000 mortgages for ‘investment’ purposes were offered last year and many now consider property an attractive alternative to a conventional pension. With capital values doubling over the past five years, it has been easy to persuade the public that investing in property was a “no brainer” and many have piled in.
Speaking after the event, I said “Last week, the chairman of a large private property company in London warned that he felt that property was overvalued by 20% and with net returns (the rent as a percentage of the buildings’ value) down to 3% in many places, putting the money in the bank at 5% is an attractive, risk-free alternative.
“The delegates were convinced that the market would flat-line at worst but one panelist actually ‘guaranteed’ that property would be worth more next year than it is today.
“My problem is that this chap is a developer and like the other mortgage companies, agents and speculators represented at the event, none could afford to say that the outlook might be poor. Who wants to buy a property or a mortgage from someone who thinks that the market might fall?
“As we have seen in the US where people who over-stretched themselves have brought about a crisis in parts of the wider financial markets, it is usually when everyone is saying that the future looks rosy that the tide turns and we learn words like “negative equity”. As the little girl in the story proved, just because everyone else agrees, doesn’t make them right.
Buy-to-let is a long term investment that one should only make if you remember that property, like all other commodities, can go down as well as up!