If you're gonna sell, sell now
Your house is worth less than you think. And it's probably not going to rise any time soon.
I was chatting to a friend the other day about house prices. She’d like to sell her house and move to somewhere smaller, but she’s not willing to sell at her estate agent’s valuation. She think her house is worth more than that, and she’s going to wait until house prices have risen a fair bit before she sells.
My friend isn’t alone. Halifax has reported that many potential sellers are holding back because they think prices are too low.
Sadly, I fear all these potential sellers are wrong. Look at this forecast from the highly respected economists at the NIESR.
They have predicted that inflation-adjusted house prices will fall by 4.5% this year. They then expect further falls of 1.5% a year right through till 2016. Given the gloomy outlook for the economy, I suspect the economists are right.
There appears to be a bit of a psychological issue here too. A US study shows that many home owners are kidding themselves about the value of their home, and this was the case long before the financial crisis. The study shows that, on average, home owners overestimate the value of their properties by between 6 and 10%. Owners who bought their homes when the economy was booming are especially likely to be wrong.
So all these potential sellers are holding back thanks to a delusion.
Eventually, the sellers will have to accept reality and sell at less than their target price. When they do that, there will be more houses on the market, and the extra supply will be a further constraint on house price rises.
My friend should beat the rush and sell her home now.
More: Worst house price slump for a generation! | House prices now at 2003 levels
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Sellers are holding back because most of them have the luxury of doing so. Homeowners have been the beneficiaries of staggering government largesse in the form of risible interest rates that only represent one tenth of RPI, at the expense of those saving for a deposit or living off their savings. Homeowners are enjoying paying two-figure monthly mortgage interest, meanwhile would-be FTBs struggle to save while paying soaring rents at the same time. This is social injustice of epic proportions. At this rate wealth in future will be determined purely by whether or not you owned your own home in 2007! Additional mortgage finance is not the answer - why do we want to return to the bubble? Am I really expected to cheer the return of CDOs as John Fitzsimons suggests?! I would prefer to see a gentle return of interest rates to a sensible (and fair) level - over 12 months, say. This might coax the homeowners living on the edge to take the money and run, either downsizing or renting, without causing an avalanche of repossessions. As these marginal homeowners get the market moving again, buyers and sellers alike will gain confidence in the market price and the deluded valuations will vanish, restoring the housing market to some semblance of functionality.
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Iamcoldsteve said: "Inflation adjusted means that prices will remain static on a numerical basis, as inflation is about the number quoted here." Well yes, the nominal value won't change. But so what? If the real value of your asset is falling, your wealth is falling. So better to sell when the real value is higher and you can put your money to work in an asset that might grow in value. Moving on to your next point, yes, we sometimes publish opposing views on lovemoney.com. I don't see the harm in that, I think it helps our readers to read both sides of the argument and then make their own informed decision. Regards, Ed
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Inflation adjusted means that prices will remain static on a numerical basis, as inflation is about the number quoted here. What a dull article And only 2 weeks later there was a completely different opinion on house prices over the next few years from LM. http://www.lovemoney.com/news/property-and-mortgages/house-prices/12041/why-house-prices-will-rise-over-the-next-five-years?source=1000550
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09 June 2011