Homebuyers have watched the housing market collapse in the past 18 months as
the mortgage drought has suffocated new sales and pushed prices downwards.
To help to address the problem, Gordon Brown has announced a
multibillion-pound plan to support the banks and boost mortgage lending.
Housing experts gave a cautious welcome to this week's proposals but warned
homeowners not to expect immediate results. Simon Rubinsohn, of the Royal
Institution of Chartered Surveyors, said: “Any attempt to boost lending is
welcome, but it is unlikely that the latest scheme will be the panacea to
the housing market against a backdrop of a crumbling economy.”
Despite the gloom, tentative signs are emerging that homeowners and cash-rich
first-time buyers could be returning to the market, spurred on by reports of
substantial discounts from desperate sellers. Estate agents and property
websites report a surge in buyer inquiries this month.
So with a mortgage rescue plan under way and renewed buyer interest, is now
the time to grab a bargain? Times Money asked mortgage and housing-market
experts to consider the options for first-time buyers and homeowners looking
to trade up.
First-time buyers
Hundreds of thousands of first-time buyers have been watching the slump in the
housing market closely, hoping that a home of their own would soon be within
reach. But with prices still falling and lenders becoming more cautious,
they face the twin dilemma of when to enter the market and how to find an
affordable mortgage.
In the past year banks and building societies have reduced new mortgage
lending dramatically and are mitigating against the risk of further falls in
house prices by insisting on hefty deposits. The best deals are reserved for
customers with a 40 per cent deposit, which would be about £60,000 on the
current average cost of a home. First-time buyers with small deposits are
punished with painfully high interest rates. The most competitive deal is
from Cheltenham & Gloucester, which, along with Halifax, is now part of
the Lloyds Banking Group. It is offering a two-year fixed rate of 5.69 per
cent to borrowers with a 10 per cent deposit. The deal, which carries a fee
of £995, is only available online, directly from the lender.
Research from Propertyfinder.com,
the property website, indicates that high mortgage rates are forcing
first-time buyers to remain in the rental market. In a small number of local
authorities - including the London boroughs of Hounslow, Newham and Sutton -
it is cheaper to buy than rent. But in almost every other part of the
country first-time buyers could save up to £400 a month by renting.
Propertyfinder says that if best-buy rates fell from 5 per cent to 3.45 per
cent, it would become cheaper to buy than rent in 95 per cent of the
country.
First-time buyers who qualify for a mortgage deal should be able to secure a
heavy discount from sellers in the current market, argues James Hyman, of
Cluttons, the estate agent. “Buyers need to find the best value in the
market to mitigate against further potential price falls,” he says. “Some
areas, such as London, will bounce back sooner, but areas without the demand
or the demographics to support the current levels of housing stock will take
years to regain value.”
There are bargains to be found in almost every postcode, he suggests, but
first-time buyers should consider areas with strong transport links, period
property and homes that are “not too generic”. He adds: “Bland terraced
houses or flats in areas with a lot of similar stock will continue to fall
in price in the next year.”
New-build property is not totally out of the question, but buyers should do
their homework. “Researching the market thoroughly before committing
yourself is essential,” Mr Hyman says. “The heavy discounts available could
make some developments good value for money.”
The temporary increase - until September - in the 0 per cent stamp duty band
to include properties up to £175,000 is another incentive for first-time
buyers to jump into the market sooner rather than later. After September 2
the zero-rate threshold will return to £125,000. David Hollingworth, of
London & Country Mortgages, the broker, says: “The deadline could
kick-start a revival in the first-time buyers' market just when prices could
be flattening out.”
But other experts warn first-time buyers to remain cautious. Capital
Economics, the consultancy, does not expect prices to recover to 2007 levels
until 2032. It also expects prices to fall by a further 20 per cent in the
next year - a total fall of 35 per cent since the peak in 2007. Savills
Private Finance, the broker, expects prices to fall by a more modest 11 per
cent this year, before levelling out in 2010.
Melanie Bien, of Savills Private Finance, says: “First-time buyers don't have
to wait until the end of the year, provided that they negotiate a good
discount and can find the financing.But most will need to save a deposit
and, with prices continuing to fall, buyers will be at no disadvantage if
they wait another six months.”
Trading up
Estate agents report an increase in inquiries from homeowners hoping to
exploit falling prices by trading up. A 15 per cent fall in prices shaves
£22,500 off a £150,000 home, but £45,000 off a £300,000 property.
It is cheaper to trade up to a larger home than it was a year ago. Upgrading
from a one-bedroom flat to a two-bedroom house cost £41,494 in 2007, but
£30,722 at the end of last year, according to Propertyfinder.com. Trading up
from a two to a three-bedroom home was almost £8,000 cheaper. But the market
is not without pitfalls - moving from a three to a four-bedroom house became
more expensive between 2007 and 2008.
Nicholas Leeming, of Propertyfinder.com, says: “Young families at the bottom
end of the ladder will find it easier in cash terms to trade up - and if
mortgage availability frees up in the second half of the year, more people
will be able to take advantage.”
Good deals for creditworthy homeowners with a large equity stake in their
homes include Halifax's two-year fix at 2.99 per cent for those with at
least a 40 per cent equity stake and HSBC's 2.99 per cent two-year
discounted deal. Les Jacobs, of Mortgage Monitor, the remortgage broker,
says: “We have had no problems sourcing new deals for good-quality
homeowners trading up. It's a great time to buy: repayment costs have fallen
by half and prices are down 25 per cent.”
But homeowners who took out deals with higher loan-to-value (LTV) ratios at
the market peak could struggle to raise finance. A falling property
valuation could tip the amount that a household needs to borrow over the
maximum LTV limit of 75 per cent that many banks and building societies
insist upon. Banks lending more than this add a significant premium.
If house prices fall more aggressively in the next year, it may pay to wait
until 2010, or beyond, before trading up, as homes that are more expensive
become proportionately cheaper.
Mr Leeming suggests waiting a couple of months to see how the market develops:
“If I was a vendor I would wait until February or March to see if the high
numbers of enquiries received by estate agents are turning into
transactions. But once agents report a steady stream of new sales I wouldn't
hang around.”
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