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Hubcaps

First Timer

Posts:2

01/07/2008 3:03 PM	Alert
I understand that some people may think I'm a complete idiot, but can someone please explain something to me in language I understand (which is pretty basic!!!)? I'm 29 and am just about in a position now where I can start saving seriously for a deposit (I can save around £750 per month although how long I can do this for without going mad is another matter!!). This has only happened over the last couple of months and of course, this coincides with house prices starting to come down. I've seen a 2 bed flat for £117K where there is 5% deposit paid - I could potentially get another 5% deposit together but would involve doing something like taking a cash advance on a credit card, the balance of which I would transfer to an interest free deal. Even if I didn't do this I'm fairly confident I would get a mortgage - my only exsiting credit is £120 per month and I take home nearly £1.8K per month. Anyway - the flat looks large and well appointed when I compare it with 2 bed new builds that are still going for £125K in this area ('my' flat has a separate kitchen and en-suite which the new builds don't). So, my questions are these - I understand that many of you here have detailed reasoning's why house prices may come down a lot over the next few years. But there are two questions that I have that I can't seem to find the answer to, and I'm hoping someone can help me with them. 1. Surely, as soon as house prices start to drop significantly, 1st time buyers like me are going to start to buy (I understand not all of them will be able to as they will have no deposit - but some will) - won't this just cause house prices to stabilise again?? 2. Everyone talks about the crash of 1992 - but there are now many more property investors - won't these do the same as the FTB in question 1 above? Am I nuts to consider looking at this property with a view - if I love it - of putting in an offer of £105K and 7.5% deposit paid (making it easier for me to get the 10% to put down)? Any help would be really appreciated!!

chefdave

Activist

Posts:464

01/07/2008 10:48 PM	Alert
I think that major problem investors and FTB's like yourself are going to come up against is the lack of cheap and easy credit that has underpinned this decade long boom. This could lead to a 'stand off' between venders desperately clinging to their pre 2008 valuations and potential purchasers that's access to borrow large sums severly limited. this perhaps could explain why this years May figures for mortgage approvals were down around 60% from last years. A related problem is the effect on the banks' collective balance sheet. They're going to have a load of mortgages on their books for eye-watering sums, now reality is sinking in and the collateral is starting to lower significantly leaving both the home-owner and the bank exposed to negative equity. The crash has only just started and the labour market is still relatively sound yet already Northern Rock have gone under, Bradford and Bingley (the bank favoured by the buy-to-let investor) looked on the verge of going under only a few weeks ago and those such as Halifax are curently trying to raise capital via a rights issue in order to provide a bit of a buffer. The above puts the banks in a weaker position to lend as the money they acquire throught the inte bank market (Libor) becomes more expensive as investors are wary of their ability to function as a profitable business. Therefore even if a house that previously has been sold for £200k on a 4% mortgage dropped £100k as many mortgage rates are now approaching 8% the interest payments will be the same. This again is going to have a huge impact on prices as it will effectively halfs the principle amount that individuals are able to service. Also, you're not 'nuts' for wanting to buy a house, just make sure you get it for a decent price!

Asteve

Activist

Posts:917

02/07/2008 5:58 AM	Alert
I second everything that Dave has said. 1.No I do not think that first time buyers are going to rush into the market. This is wrong-headed thinking. There may be a few BTL investors, but console yourself that you can bid on their home when they declare bankruptcy before 2012. So far, by the most conservative estimates, a £100K flat has declined by 7% since the peek – or £7000 in under a year... and the falls are starting to escalate now. This means that, in order to keep yourself out of negative equity, you'd have needed to put aside nearly £600 per month in addition to paying interest on your mortgage and maintenance on the flat. If you fail to do this, it is entirely possible that you won't be able to re-mortgage at the end of any fixed-term and this might well see you paying 8% APR (at today's rates) or even more in the future + you would not be able to sell the flat - even at a loss - unless you could come up with the balance in cash. To be honest, I would expect to have substantial problems getting a mortgage myself – and that's with a 30% deposit looking to borrow 3x income with substantial cash savings in case of emergency. I've zero debts and have been saving hard for 9 years. Mortgage lenders simply are not lending. According to the BBA, compared to the same month last year, building society mortgage lending dropped by 90%! N.B. In 2004 mortgage lenders were falling over themselves in a bid to encourage me to borrow £500K... I told them that this was more than I felt comfortable to borrow - which elicited a genuine look of shock... I got the definite impression that most people borrowed to their limit. House prices will “Stabilise” - but not at £100K for a flat! Half that, maybe. The error of judgement that you are making is that you've only experienced comically easy and cheap mortgage money. That situation has changed – radically. Mortgages are now very, very difficult to get – and, while they might seem expensive now at 6-8%, there's plenty of room for them to continue to rise... there is precedent for mortgage interest rates of 15% - which would work out as an interest payment of £1250 per month. First time buyers should also refrain from assuming that there will be wage inflation to erode debt. All indicators are that we're heading into a doozy of a recession – where most will be lucky to remain in employment – let alone force pay rises. 2.The optimistic talk about the crash of '92. Anecdotal evidence was that some properties dropped in value by about 50% - but the indices only reflected a few percent... rather similar to the figures reported today... except that our housing market is only just starting to decline... and that in 1992, the interest rate problem was national not international (because our chancellor of the time was a monkey who thought he could “fix” foreign exchange – and was proved wrong.) A better time in history to compare with the present would be 1929 – not 1992... in the West, at least. There are some distinct similarities between Japan in 1990 and the UK today – though there are many differences too... such as a savings culture and buoyant manufacturing industry in Japan. My advice is this: 1.Make absolutely sure that you can afford to BUY the place – I.e. pay the whole price including any cost of borrowing... having paid the interest on the mortgage, plus the costs of upkeep (don't forget the maintenance charge and buildings insurance.) Make sure you can cope with interest rates at 8%+ for the foreseeable future (on expiry of any fixed rate deal... noting that the better fixed rate deals require 25% or 30% deposits. 2.Remember that a 10% deposit is insufficient if prices continue to drop. The conservative index figure for England so-far is 7%; Northern Ireland is 18%... this more than wipes out your deposit even if we only catch up with NI. This will price-you-in. You won't be able to move – even if you want to – even to a cheaper property. You're signing yourself up to this expense for a period of decades... make sure you want to live where you're buying for 20 years at least. 3.It sounds like a new-build. If so, it might interest you that Tailor Wimpey's share price dropped about 50% today on news that they've been refused finance. If home builders can't get finance, you should ask serious questions about whether first time buyers can get finance. Other builders have also slumped dramatically on the news. Many mortgage lenders have already decided to refuse to lend at all on new-build – irrespective of deposit. If you are talking about new-build, you should read this. I hope this helps. I, for the time being, am out of the market... though, mainly for interest, I'm attending an auction this evening... where a house I love is up for sale. If they were willing to accept an offer of 70% of the guide price, I'd be extremely hard pushed to turn down the offer... (thinking with my heart not my head, of course) though I am desperately aware that I'd have a huge challenge to put together a mortgage... even at 2x salary with a 50% deposit. We live in very interesting times... which, I predict, will become far more interesting later this year.

Hubcaps

First Timer

Posts:2

03/07/2008 3:55 AM	Alert
Thank you very very much for taking the time to answer this for me - it's certainly given me a lot to think about. I'm still going to look at the place anyway just out of interest, but I don't think I'll be buying for a while - looks like I'm in it for the long haul when it comes to saving my £750 per month - but then if that means I can buy a 2 bed house instead of a flat, then so be it!! It isn't a new build that I'm going to look at, but it is 3-5 years old - some investor is looking to sell it! I'd love to think that prices will come down as much as you have said they will - I'm just like a lot of other people I guess, in that I have had 8 years (since I graduated) of 'you must get on the property ladder' rammed down my throat (which I have ignored (unlike some of my friends) but which is hard to carry on ignoring when, for the first time, I find myself in a position where I could buy - if - as you point out - I can get a mortgage!!!) I guess I'll keep on saving and will see what the market does in 6 months. Unless this place is amazing in which case I might put in a ridiculous offer (much lower than the £105K I was talking about in my original post). Mind you, sounds like it's going to be much harder than I thought to get a mortgage in which case the decision may be made for me!! Anyway, thanks again. I think I know in my heart of hearts that I really should wait and bide my time - but I don't want to miss the boat and see prices starting to go up again meaning I have to rent for another 10 years!! Asteve - did you end up buying the house???

Asteve

Activist

Posts:917

03/07/2008 6:08 AM	Alert
"Buy the house" - Ha ha ha! I'd need to do a lot of research before making a firm bid. It was a research undertaking. The auction was "interesting" - there were 42 punters, one of whom mentioned that "it's very quiet" - I commented that bidders might have watched the news and realised that Wimpey, like Barrat were in meltdown and had huge numbers of both properties and building plots that could conceivably be dumped on the market in the near future. Of 6 properties advertised, one had been "sold prior" to the auction for an undisclosed sum; two had been postponed i.e. no-one had been to look inside them, so the auctioneers knew there'd be no sensible offers - these were the two properties with the highest remaining guide-prices... including the one that caught my eye. The first for sale - a commercial property that could be converted into a spacious 2-bed flat had a guide price of £60K - had two interested bidders and sold for £72K... it was located in a pleasant small town. A 2-room commercial property in prime city area had a guide price of £80-100K - bidding reached £92K with one man getting confused and bidding against himself at £92K having exclaimed "am I the only one bidding" - which I confirmed with an audible "yes". A 3-bed semi in a suburban location had a guide price of £140-160K - bidding reluctantly reached £148K... and stopped - the auctioneer made it clear that the reserve was in excess of £160K - the lot was withdrawn. The end. I'm on the mailing list about the property that interested me... I was almost certain that it would not sell. If it were to pass a full structural survey and have a 30% to 40% discount from the guide price, I'd jump at it. We will see. It is scheduled to be re-auctioned in September. What was remarkable about the auction was that all the interest was in the cheapest property... by that I don't mean the one with the most competitive price - I mean the cheapest. It is as if no-one has any money. ;) Practical advice... think of the bidding process as an act of modern warfare. You are playing a game against the vendor... so you need to best understand his position. It is entirely plausible that the only reason the property is offered is that he is in financial difficulty. Under such circumstances you need to remember that your bid might well be his only option to remain solvent. You have the upper hand. I presume you are aware that for £3 from the land registry you can get hold of rudimentary details - such as the existence of a mortgage - and which lender it is. Such details may give you an edge in negotiation. In addition, it is worth noting that if you have a "letter of intent" from a mortgage lender, any negotiation you do will have more weight. A vendor receiving offers that might not materialise as bids is more likely to decide to hold out for better offers. If a deal looks concrete, it is more attractive - even if the price is lower. A lot of properties on Rightmove turn Sold-Subject only to return to the market a few weeks later.

chefdave

Activist

Posts:464

04/07/2008 9:03 AM	Alert
Why does this thread have stars attached to it? Something I've always wondered about this site.

Asteve

Activist

Posts:917

04/07/2008 9:50 AM	Alert
I get the option to award gold-stars... to a maximum of 5 at the head of every topic. I've always assumed that the reason was that this web-board was written by someone who wanted to be a primary school teacher.

chefdave

Activist

Posts:464

04/07/2008 2:21 PM	Alert
I'm not very good on this subtlety thing, are you joking? If you're not then why can't I issue gold stars as well? I am 2nd in the post count! I'm disenfranchised

Asteve

Activist

Posts:917

05/07/2008 7:35 PM	Alert
No, really, I can... I've no idea why... it's a little frustrating since I never really think about it - but, sometimes, I assign them by mis-clicking and - as far as I can tell - I can't retract them. I don't think I'm the only person who can award gold stars though... there are posts with gold stars where I've not awarded them. With pricedout you should be familiar with things being somewhat 'random'... ;)

plainservice

Concerned Citizen

Posts:84

07/07/2008 7:39 AM	Alert
Hubcaps: You have to remember that people still have a desire to own their own home. It is the national obsession. Do you think that the 20, 30 something will want to rent indefinitely? Hubcaps wrote: 1. Surely, as soon as house prices start to drop significantly, 1st time buyers like me are going to start to buy (I understand not all of them will be able to as they will have no deposit - but some will) - won't this just cause house prices to stabilise again?? You are quite correct. Just as you had sheep mentality that said "Buy or you will be priced out...." and now the same sheep mentality is saying "Don't buy because prices are coming down". So the logic of the sheep is buy when prices are going up and to stay away when prices are coming down?. So what are people waiting for? Prices to go back up? It is a good time to look, simply because it is a buyers market. Things are in your favour. And you can get amazing deals. If you get a seller who is going to make you a good offer, then take the deals (though your price should make allowances if prices fall further). Be cautious and do your research. But your decision should be well thought out and also you need to ask is is cheaper to rent or to buy?. It should be a financial decision. However in your case, I would advise for you to wait as you need to save more for your deposit. Don't borrow money on credit cards and also make sure you can cover at least 4 month mortgage payments plus living expenses for a rainy day. The problem with people facing reposessions is that they overstretched themselves, they did not have any savings or even secure jobs. Also, you have to ignore the hype of the media. I remember when the BBC started refering to 'homes' as 'investments' and 'scaring' people into buying because people will become priced out. And now the media has scared off the public and saying there will be a 'crash'. The media get a kick out of manipulating the public. All this is to generate headlines. Scary headlines = more reader and mroe viewers!. Buyers have been scared off and this is why you have weakness in prices.

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