Five new property & mortgage tips
Read Neil Faulkner's top new tips for homeowners and wannabe owners.
You want a DVD player. You can drive round the corner and get one for a total cost of £100, but you can save £10 if you drive to the out-of-town department store. You choose to travel further to save the £10 and Hey Morrisons! You've saved 10%.
The next day you decide to buy an HDTV. If you go round the corner your total bill will be £3,000, but you'll save just £10 - a measly 0.3% - if you travel out of town. You decide to go round the corner instead.
That is a common mistake. The cost - a longer drive, and the benefit - a £10 saving, is the same for both trips. So do you want to save the £10 or don't you?
That introduction, believe it or not, leads me into my first of five new property tips:
1. Waiting for the perfect re-mortgage deal can cost money
The financial mistake I described above was confusing a percentage saving with a pound saving. Interestingly, we don't make that mistake when it comes to our mortgages. (Did you see that twist coming?) Instead, we care a great deal about every £10. We don't want to be stitched up!
I know two couples who delayed re-mortgaging, saying they were leaving it till they had time to research the best deals properly. In the meantime, they paid a much higher amount on their existing mortgages. What they could have done is contacted a whole-of-market broker to do the work and, if they had just five minutes to spare, double-checked the deal using an online search tool.
I worked out that both couples would have saved more money by taking one of many reasonably competitive deals more quickly. They would have saved a lot more than £10.
2. You won't get the best price on your property deal
Stressing about the perfect deal affects property buyers and sellers, too. If we buy and the value falls or we sell and the price rises, we all too easily feel consternation, stress, frustration and disappointment that we didn't call the market perfectly, or obtain the best price.
One thing is almost certain: you will not buy at the bottom of the market, because it's impossible for most people to do so. Most sellers, on the other hand, will not sell at the top of the market. On average, we can't all get the best price.
For that reason, most of us should be satisfied if we do better than average, getting something of a bargain. This shift in attitude will make us feel like we've won. The old attitude will for most people leave a sour taste in the mouth.
3. Sellers must lower their prices
That was as an unusually esoteric point from me, so let's get back to more solid financial ground.
Here's a picture of the property market over the past six months:
- Quite a lot of sellers.
- Millions of interested buyers.
- Almost no sales taking place whatsoever.
What's going on?
It's all about price. Estate agents have been advising sellers since the start of the market downturn that they should price high and let the buyer negotiate downwards. That is why properties aren't selling.
Even now, not many buyers think prices have stopped falling and so they've been waiting. Most buyers will not even look at a property in a falling market unless they think it is already at a fair price. A 'fair price' to them means it's at or near what they think will be the eventual low point in property prices. If the property is priced high, they won't even view it. They just wait till the price comes down.
Therefore, sellers who can't wait for prices to rise again should reduce their prices to what they think their property will actually sell for. If you judge it right, you will get 20 interested people round in a month (rather than the one interested person so far in 20 months). Some buyers will still try to haggle, but it's simple. You say 'No', and you can say it confidently, because you know it's a fair price and one of the many other buyers will pay that. Once people start turning up to admire the place, you may even start a bidding war.
4. Buyers should get buying
Buyers should think about getting a move on, despite falling prices. Remember, it's not likely that you'll buy at the bottom, but on either side of it. When enough people think it's the bottom they'll rush in again. This will quickly push prices back up, create a lot more bidding wars, and the danger of gazumping will return.
With this in mind, consider making your best guess on the bottom now and start making offers based around that figure. It'll be less stressful for you to buy now when the seller will be grateful that someone turned up to see the property. As I said in my last point, most sellers are struggling because they've priced high, but no one is making offers. Oblige them.
5. If you're not going to sell, fix your mortgage rate
We need to be concerned about mortgage rates. Interest rates have low for quite a while now, but with the Bank of England pumping money into the economy to encourage more spending, interest rates will eventually be forced up.
For much of this downturn, variable and tracker rates have been the cheapest for a reason: there's only one way that interest rates can move significantly, and that's up. Therefore lenders don't want us to fix.
Fixed deals may be more expensive right now, but they're still historically very cheap. If you fix your mortgage now for at least five years you will lock in a very low rate and have peace of mind.
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More: I dodged the housing crash | Help for struggling homeowners
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Considerations of affordability might well suggest that a 50% drop from peak is called for, but that doesn't mean to say that a 50% drop in [i]nominal[/i] terms will ever be seen. If house prices decline slowly enough, or even if they just drop to a certain level and get stuck there for a very long time while inflation moves on (which it will), that will result in a fall in [i]real[/i] house prices, and that's what counts here. I'm inclined to think that the poster above who suggested that the market will bump along a bottom for a long time has more or less nailed it. It's very dull, but it seems to fit. That bottom could be at present nominal price levels. There are lots of people in limbo at the moment because the houses they own have fallen in price to a level where they either can't sell (neg equity) or the LTV on which they would be purchasing is above the current hurdle rate. This will come right by itself gradually, which suggests a steady drip of supply and demand into the market over a very long period as people's house valuations and mortgages move into the zone where they can trade again. They won't all come back at once, and as they do, most of them will need to be very careful about how much they offer for whatever they're buying, so I can't see prices being driven up any time soon. BTW I wouldn't be at all surprised if the BofE is suspiciously slow off the mark in raising interest rates when inflation starts to return. Letting it run a bit would be just the ticket (from this point of view, though not from many others).
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Johnny5. The facts you use are very limited. Mine are based on the broad economic situation. You say there is more money available, well last month mortages dropped, and mortgage rates are creeping up. Compared to 2007, there can only be a third of the money available maximum, as two thirds the money not being available was based on mortgage securities not being traded now. The number of mortgages in general are something like 20 to 30 thousand a month, as opposed to 130 thousand with a normal market. My facts are based on up to date info, you just dissagree with my forecasts. I do read ahead, and predict a fall of 50% from paek that I have said several times now. 3 million unemployed cannot be seen in isolation. It is indicative of the sick economic situation. And low interest rates may make mortgages more affordable, but what happens when IRs go back to the norm, say 5% and in no more than 2 years on a 25 year mortgage. We'll have to agree to dissagree, but I should like to meet here again in say 3 years, and believe that my forcasts are proved with a 50% drop, bearing in mind we have had more than 20% already.
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Nick, saying it doesn't make it so. As i said before you set yourself up as judge and jury. You are entitled to your opinion but that doesn;t make you right. I have read and noted your fundamentals that you trot out each time and you have a point with them but you use them in isolation to back up your entrenched views. You completely ignore the fundamentals i have used. Why is this ? I'll tell you why because it doesn't suit you to...but this is not being objective it is being subjective...this is not rational. In fact the whole mix is even more complex because the things you state and the things I state are not by any stretch covering all of the possible things that can also affect the market. You have a point with the employment situation and that is very worrying but unless it was total disaster 5 mill plus, I doubt 3 mill will affect housing too much as this is most likely already factored in. In fact it would supress interest rates for even longer making mortgages even more affordable. As i said your welcome to your opinion but as far as i am concerned i don't trust your opinion because I don;t think you are taking all things into account and then you are so definite with your negative view of the situation. Me I am trying to call it as i see it not as i want it and I am not sure how things will pan out hence i am trying to be unbiased. The mere fact you are not taking into account the continuing flow of mortgage money means you are either not paying attention or are suppressing this information, hardly objective. What i do note with your funamentals is that they are always behind the curve either data that has been out a while or has just come out. You are not reading ahead of the situation as i indicated with lending. If we take this fact in isolation, you have to admit is has and is increasing. LTV's are dropping and substantial more cash has been allocated by major lenders. And as I said why not? As long as they have got a LTV they are happy with the lenders are making more money on residential property than they have in decades over base. These are facts, facts you seem not to want to recognise.
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26 May 2009