First-Time Buyers Should Wait

You've got your deposit. You're ready to buy a home. But is now the right time to put your first foot on the housing ladder? Laura Starkey considers the pros and cons.

As someone yet to put a toe, never mind a foot, on the property ladder, I've been watching the recent progress of British house prices with interest. It seems that now, after years of being priced out of a rising market, people like me are able to feel optimistic.

Recent figures from the Halifax suggest that houses have fallen in price by 14.9% over the past year with the average home now worth £30,000 less than this time last year.

Figures like these probably spell heartache for anyone who has bought property recently, and for those looking to sell their homes. However, they're music to first-time buyers' ears.

The time to buy property is now?

Since the property tide began to turn, asking prices have fallen fast. As I showed in this article, the possible savings first-time buyers can make from these reductions is significant.

So, if you have enough savings in place for a deposit and are keen to own your own home, I can see why you might agree with Neil Faulkner that the time to buy property is now. When I was filming this vidcast, I asked people whether they'd feel comfortable buying property at the moment -- and many of them said yes.

Reasons to wait

Nevertheless, my Foolish friend's article proved controversial. Neil urges buyers to ignore all predictions about the future of house prices and make a decision based solely on their own situation -- but we Brits are a nation of property-lovers, and trying to work out where the market will go next is almost a national sport.

Furthermore, buying a home is probably among the biggest financial commitments anyone will ever make. Many people fear the thought of looking back and feeling they got this important decision `wrong'.

Therefore, I think there are reasons why even first-time buyers who are in a position to purchase property might want to consider waiting. Here are three.

1. There's no need to rush

Back when house prices seemed to be rising every month, first-time buyers felt the need to scramble onto the property ladder as quickly as possible. Saving for a deposit was difficult as prices were high -- and it could be deeply frustrating, because the rate of house price inflation outstripped the speed at which most people were able to build up a lump sum.

But things have changed. While amassing a significant sum of money may still prove difficult for first-time buyers, they shouldn't feel the same `need for speed'.

As I've already noted, homes are now falling in value. And in fact...

2. Prices could fall further

No house price prediction is fool-proof. This year, many economists have seriously revised the property price falls (and in some cases, rises!) they forecast for 2008.

Nevertheless, after 12 months of house price falls -- and as the UK heads towards what could be a serious recession -- it seems unlikely that homes will start to increase in value in the short-term.

Should prices continue to fall, the potential savings to be made by first-time buyers will steadily increase. For example, back in June I calculated that first-time buyers who purchased an average house after a 20% drop in house prices could save £34,923 more over the lifetime of a typical mortgage than those who bought after a fall of 10%.

3. You might get a better mortgage

Since the credit crunch, mortgage providers have seriously tightened up their lending criteria -- and this has meant that in order to get an affordable mortgage, home buyers need sizeable deposits.

If you are able to put down a significant sum on your property up-front, you're likely to get a more competitive mortgage rate -- and will also avoid higher lending charges.

This worked example from Fool partner Moneyfacts helps to illustrate why waiting to buy could help a first-time buyer bag a better mortgage deal:

• First-time buyer Fiona has already saved up a deposit of £40,000, but decides to hold off buying a home. She is able to add an extra £5,000 to her savings pot over the next 12 months.
• Meanwhile, house prices decline by a further 14%. By October 2009, Fiona's ideal home has fallen in price by £23,223 and costs just over £150,000.
• Now, First-time Fiona needs a mortgage of around £105,000 to purchase the property -- far less than the £131,150 home loan she would have required the year before.
• This means Fiona now needs to borrow only 70% of the value of her home. Had she bought the previous year, a 75% mortgage at a higher rate of interest would have been necessary.
• Over the lifetime of a typical mortgage, borrowing less at a lower rate of interest could save Fiona thousands of pounds.

Pros and cons

Of course, there are enough ifs and buts here to suggest that waiting to buy could be risky. Trying to `call' the bottom of the housing market is a gamble -- and by sitting on the fence for too long, first-time buyers might miss the chance to bag a bargain.

I still think there's an argument for buying now if you can afford to do so. Don't forget, people who choose to stay off the property ladder still have to pay rent, which can be expensive.

However, I believe that a first-time buyer who has scrimped and saved for years to buy a home could end up kicking themselves, should its value tumble after they've taken the plunge. Even if I had a deposit ready to put down on a property, I'm not sure I'd want to do so now.

So, what do my fellow Fools think? Is now a good time to buy a first home -- or should Foolish first-timers wait that little bit longer?

More: The Time To Buy Property Is Now | Profit From Property Price Falls