House Price Falls: The Winners And Losers

Who are the real winners and losers when house prices fall?

There was more bad news about the housing market this week.

The Royal Institution of Chartered Surveyors (RICS) has warned that the number of property sales could fall as much as 40% this year.

The announcement came just days after the Housing Minister, Caroline Flint, inadvertently revealed that the Government believes there will be a 5% to 10% drop in prices this year "at best".

Meanwhile, here at The Fool, David Kuo predicts prices will fall by 20% by the end of the year. Others - mostly economists at banks and building societies - believe the falls in prices will be limited to low, single digits.

But while the jury's still out on whether there is going to be a crash or a modest decline, there does now seem to be a broad consensus among the `experts' that house prices will be lower at the end of the year.

So, is it finally time for first-time buyers to crack open the champagne and celebrate? If you're a homeowner, should you be crying tears into your pillow? 

Who are the real winners and losers when house prices fall?

The Obvious Winners

The most obvious winners, you might assume, are first-time buyers.

Not only are prices becoming more affordable, but it's a buyer's market now, with properties taking 50% longer to sell than this time last year and asking prices dropping, on average, around 7% before a sale can be agreed.*

First-time buyers are in a particularly strong position because they are chain-free buyers.

So far, so good. But are all first-time buyers winners when house prices fall?

Since the credit crunch, it has become much more difficult to get a mortgage, with lenders pulling deals left, right and centre.

Even if you can find a cheap mortgage deal with a low rate, you may not be eligible for it. It all depends on the size of your deposit. Due to the increased risk of negative equity when prices fall, mortgage lenders are becoming increasingly wary of lending to borrowers with small deposits.

While you can still get a mortgage with a 5% deposit, you'll have to pay a higher rate. According to RICS, the average two-year fixed rate (taking into account the fees) is now almost 7%, compared to 6.3% last July.

By contrast, competition for `safe' borrowers has increased. So buyers who can put down a 25% deposit have seen rates fall from 6.4% at their peak in November last year, to just under 6% today (and right now, some of the best rates for these borrowers are on offer via The Motley Fool Mortgage Service).

Unfortunately, to buy the average home (at a price tag of more than £189,000) using one of these cheap mortgage deals, the typical first-time buyer would need to be able to put down a deposit of nearly £50,000.

And with Winkworth estate agents claiming rents have risen by as much as 8% and the cost of living rising almost daily, it is becoming increasingly difficult for first-time buyers to save up for that crucial deposit.

On the plus side, those that can save are benefiting from rising savings rates, as banks compete desperately to lure in your cash during this economic downturn.

First-Time Buyers

So, in summary, if you're a first-time buyer and prices fall:

You're a winner if you can afford to save for a 25% deposit and negotiate money off the asking price.

You're a loser if you're on a tight budget with very few savings, and you cannot afford to save.

The Obvious Losers 

The most obvious losers, you might assume, are homeowners.

After all, when prices fall, they lose money.

...Or do they?

Over the last 10 years, house prices have at least trebled in nearly half of all UK counties, according to Halifax - with some areas, such as Country Tyrone in Northern Ireland, seeing prices soar by as much as 315%.

This should put the fact that prices are falling at an annual rate of 1%, into perspective. Even if prices do decrease by 20% this year, the vast majority of homeowners who bought in the last 10 years will only lose the money they gained in the good times through price increases.

Most will still be better off because they got on the housing ladder and will not lose the money they invested as a deposit.

Of course, first-time homeowners who have bought in the last year or six months are a different story. They will not have seen any price increases and, if falls in prices eat up their deposit (which may well happen if prices fall by 20%), they could find themselves in negative equity - where they owe more to the mortgage lender than their home is worth.

The same goes for homeowners who have effectively used their home as a piggy bank by repeatedly consolidated their debts into their mortgage or remortgaging to release equity.

Then again, as long as these homeowners can afford to meet the repayments on their mortgage, they should be OK.  After all, their losses will only be crystallised if the property is sold during the current slump. If they can sit tight for now, over the long-term, prices are likely to start to rise again.

And price falls are actually good news for homeowners wishing to move up the ladder. Yes, they stand to lose £30,000 on their £150,000 property if prices fall by 20%. But they will gain a discount of £40,000 on the £200,000 home they are looking to buy.

By the same token, price falls are particularly bad news for downsizers: homeowners who wish to move to a smaller property and enjoy the proceeds from the sale of their home.

Homeowners

So, in summary, if you're a homeowner:

You're a winner if you want to move up the ladder.

You're a loser if you plan to downsize.

You're also a loser if you have a large mortgage and you need to sell your property soon.

Celebrate Or Cry?

So it seems, when it comes to falling house prices, the winners and losers are not so clear-cut after all. There are reasons for both homeowners and first-time buyers to celebrate with champagne - and drown their sorrows....

*According to property valuation company Hometrack.

More: A Complete Guide To Buying Your First Home | How To Rent Out Your Home

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