If you're thinking of buying a new build property at the moment, be careful!
Enter a newly-built property for sale in an `up-and-coming' new development by the waterfront. Note the shiny new kitchen, the funky, modern decor and ultra-ethical, eco-friendly features. Calculate how much you will `save' if you take into account the offer of a 5% discount, your Stamp Duty paid and a huge cash-back on completion. And then repeat after me: "All that glisters is not gold. All that glisters is not gold. All that glisters is not gold..."
According to a recent survey by Halifax, almost a quarter of homebuyers prefer new build properties to older, more established properties. But before you give into temptation and snap up one of these fancy new pads at a knock-down price, a word of warning: what looks like a fantastic bargain right now may actually turn out to be one of the costliest financial mistakes of your life.
New build `premium'
Buy a brand new car and the moment you drive it out of the showroom, it loses value. Why? Because it's not brand new anymore. It's second-hand.
The same principle, believe it or not, applies to properties. Many buyers will be prepared to a pay a premium to own a brand new flat. The trouble is, when they come to sell the property, the premium will no longer apply. Those brand new appliances will be used goods by then, the decor will no longer be quite so trendy, and there's a good chance another development will have sprung up down the road off where everything is brand-spanking new...
It is the `new build premium' factor that makes it very difficult to assess the value of a new build flat. Add to that the incentives developers throw in, such as cash-backs on completion or Stamp Duty paid, and it becomes even harder. Whatever price the developer tells you the property is worth, the value of a property is fundamentally what you are prepared to pay for it - in other words, the purchase price, not the asking price.
According to E-Serve surveyors, there are great swathes of good-quality, brand new city centre apartments currently for sale in places like Manchester, Leeds and Cardiff and this has created an imbalance between demand and supply, bringing prices down -- a trend which is only likely to increase the size of the discounts on offer, as developers become increasingly desperate to sell off the remaining flats in the building.
And remember, if your neighbours receive an even greater discount than you did for an identical property, this is likely to immediately bring down the value of your own flat.
Of course, while the housing market has been booming, all this has not really been a problem. After all, if a property increases quickly in value then, despite losing the new build premium, the owner (or the mortgage lender if it is forced to repossess) is not likely to be out of pocket when they come to sell. However, prices appear to have stopped rising so quickly and the pace seems unlikely to pick up again soon. And that means new builds are now a much more risky proposition.
Take care
So risky, in fact, that mortgage lenders are getting increasingly nervous -- and if mortgage lenders are nervous, then you should be too. An investigation by The Fool can reveal that, rather like rats abandoning a sinking ship, some of the UK's largest mortgage lenders are currently trying to reduce their exposure to new build properties. Basically, they are no longer prepared to take the risks when lending on these types of properties that they have done in the past.
For example, to qualify for a mortgage on a new build property with lender GMAC-RFC, right now, you would now need to put down a 25% deposit -- five times as much as you would have had to put down just a few months ago. Scarborough Building Society and Mortgages Plc have similarly lowered the amount they are prepared to lend on new builds.
And you can forget offers to pay your Stamp Duty etc. Most lenders will simply view this as a drop in purchase price of the flat price, and will still ask you to put down a larger deposit.
Even the purchase price may not be low enough for many lenders. According to Ashdown Lyons surveyors, lenders are increasingly asking surveyors to tell them the `second-hand price' (effectively, what the property would be worth second-hand, discounting the new build premium).
This means that the price you have agreed to pay may be too high for the lender, and your mortgage application may be rejected, again putting pressure on the developer to drop the price with bigger and bigger discounts.
Of course, there will inevitably be some new build properties which are good buys and will hold their value well. But in today's uncertain housing market, buying a new build flat seems riskier to me than buying an older, more established property. And for that reason, it is not a decision that I'd contemplate right now -- no matter how beautiful the view of the river, the taps in the bathroom or the eco-friendly lighting.
More: Top Tips For Homebuyers
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