By: Tim Bennett
21.02.2019
21.02.2019
With UK house prices falling in real (post-inflation) terms, Tim Bennett take a look at the winners and losers.
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Are falling house prices good, or bad, news?
For the first time in years, the UK looks to be facing a sustained period of very weak house price growth and even price falls. Leaving aside the media noise around this issue, a key question is; who wins and who loses? The truth is that falling prices create opportunities for some buyers, a rule of thumb that holds in the property market just as it does in other markets.
Background
Whichever index you look at in January 2019, the picture for property prices is broadly similar. The northern-focused Halifax index recorded growth of just 0.1%, whilst the more southern-focused Nationwide had the number at around 1%. With inflation running more broadly at over 2%, this creates prices falls in real, or post-inflation, terms.
But as to whether this is a good, or bad, thing that depends on who you are and where you are on the ladder. In a normal market, where prices rise, there are clear winners and losers. These flip places when prices slide.
The price rise winners
Over the last 20-30 years, property prices have usually risen. That, in turn, has created an army of “winners” with a vested interest in prices continuing to climb.
The rising prices losers
On the flipside, relentless price rises keep first time buyers off the bottom rung of the housing ladder and make it more expensive for those trying to move up the ladder.
An example
Let’s say you own a £200,000 property, with a 50% mortgage in a rising market. You want to buy a new home valued at £400,000. If you sell the first property to help you buy the second, you will release around £100,000 of “equity” (before transaction costs and stamp duty) and will therefore need to find another £300,000. If a mortgage lender is willing to make this loan, you will have a loan-to-value arrangement (LTV) of 75%. As a cash buyer, on the other hand (perhaps you have come into a recent inheritance, or have been saving bonuses from work), you will need to find £400,000 from somewhere. I work through this example in the video.
If, on the other hand, prices are falling such that your existing property is only worth £150,000 but the one you want to buy is also only £300,000, then as a mortgagee you will need to fund a £250,000 mortgage (rather than a £300,000 one above) but on a higher LTV of 83% (250,000/300,000). That’s because the equity you can transfer from your existing home is only £50,000 (before costs).
Further thoughts
Falling prices do have a few other knock-on effects that can make taking advantage a bit tougher. Firstly, sellers who don’t need to sell, may choose not to, which reduces overall market liquidity. Next, there is the challenge of higher LTVs as I mentioned earlier. Also, in the long-term falling prices can help to accelerate future prices rises if housebuilders retrench and build fewer homes.
Conclusion
Overall then, the old clichés that “fortune favours the brave” tends to hold for property as it does for, say, shares. When prices fall, canny buyers who are patient and do not overstretch themselves, can pick up a relative bargain. For existing homeowners, the rule of thumb is don’t sell unless you have to and that means that buyers need to be ready to pounce when the right home comes up for sale.
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