In the past month I have been experiencing a form or ‘Ground Hog Day’. On at least seven different occasions I have found myself explaining how to work out if someone is asking too much for their property. Speaking to nervous buyers they find the blizzard of house price reports confusing rather than illuminating, rather than making things easier the internet has made life more difficult with a form of information overload. Some websites now look so credible that it’s easy to forget that a £130bn business like Rightmove.co.uk for example is almost exclusively a shop window for estate agents with property for sale and to let and their comments on prices are usually based on asking prices. The extremely well put together Rightmove monthly house price report could be described as just a ‘Greed Gauge’ and only really tells you how much people want to get for their properties.
Remember that it costs nothing to put your house on the market so an ambitious asking price costs you nothing – directly. There are over 850,000 today and last month, according to HMRC just 73,000 sold across the UK. Sellers by nature are optimistic – they only have a 6% chance of finding a buyer in the first month and at present only a 30% chance of selling if they leave their house on the market for a year!
It’s the same with indices from lenders like Halifax & Nationwide. Their monthly report is based on the mortgage advances they have made. The biggest is the Halifax and they have a 20% market share. With around 40% of the few sales that are happening at present ‘cash’ deals (ie. with no mortgage involved) the mighty Halifax survey is sometimes based on fewer than 7,000 sales across the whole country!
The Land Registry is often said to have the final say on values. The fact that you can look up what someone paid for their property is indeed a huge help – possibly the most useful online resource to happen to the housing market but it’s worth remembering that the monthly ‘average’ that people like me analyse in minute detail is in fact a relative price – Land Registry set the index for England & Wales at 100 in January 1995 and they exclude a lot of sales. If you would like to know more about the various house price surveys (or need a cure for insomnia) then you may find this Acadametrics paper helpful.
Lastly, if you want to know the true value of something you could always pay for a formal valuation. I’m not talking about a ‘market appraisal’, the ‘advice prior to a possible sale’ given by an estate agent for free in the hope of getting an instruction to sell. I mean the figure you would have to pay a surveyor for and that he would back with his Professional Indemnity Insurance. Just remember, there are different valuations – valuations for insurance, for mortgage purposes and ‘forced sale’ numbers to name but a few.
So despite the endless guides, reports, indices and prognostications, how can one easily establish in very basic terms if a property might be over-priced or not? Valuing a property is part art, part science. The ‘art’ bit is hard. What price a can you put on the feel of a place, the proximity to friends and family or the chance to do up a home to your exact taste? These are subjective things that not everyone will want. The ‘science’ bit is much easier. It’s just a question of doing the maths.
If you work out what a property or similar property might let for you can calculate a ‘yield’. All financial investments can be compared by looking at their yield, stocks, gilts, deposit accounts…. For property this is the income you might receive if the property were let. Work out the annual rent, divide it by the capital value (the asking price) and multiply it by 100 to get a percentage.
It’s not too hard to lock up your money in a bank or building society for say 3 months and get a 5% return. Remember that with inflation this probably doesn’t actually put you ahead and there’s no risk to your money. Property howver is an illiquid asset, it costs a lot to buy and to sell, to let it out and to manage the letting. You need to take into account voids (when you have no tenant) and you may need to borrow money to make the purchase so there is a cost of funding. Even if you want to live in it you should do the same sum.
In parts of central London and in Cambridge city centre for example gross yields are at around 4%. When you remember that the capital value of a house can also fall you can see that a yield of less than 6% is only attractive if you expect prices to rise. There are not many commentators who think they will rise in the next year!
Either rents will have to rise or capital values fall for yields to improve today. Whilst we wait, the gap indicated between average asking prices and average selling prices illustrates what many smarter home buyers are doing. The samples on which each average is based are not identical but what they indicate is that those who are doing deals are not paying ‘ticket price’, they are being savage and ensuring that they get a decent yield that will help protect them against falling prices in the months to come.
So, when you are working out what to offer for the home you want to buy calculate the yield and make an offer that adds up.