Are we right to fear falling house prices... Or would some of us do well from a decline?
It is a truth almost universally acknowledged... that property prices are falling.
Despite debate about the extent to which house values will drop -- will we see a `crash', a `correction' or just a small `dip'? -- most experts now agree prices go down, rather than up in 2008.
Statistics seem to confirm that market has started sliding. Earlier this month, The Fool's editor, Ed Bowsher, reported that the price of the average home fell by 2.4% in May alone.
It was the biggest monthly drop in 15 years.
Worries
Figures like these strike fear into the hearts of many homeowners. And their worries may be justified.
Statistics released earlier this month from the Council Of Mortgage Lenders suggest that more than 23,000 homeowners across Britain could already be in negative equity.
Winners
On the other hand, there are bound to be winners from a decline in property values.
According to new research from Abbey, around two million homeowners are hoping to take advantage of falls.
So, who stands to profit from the current `problems' in the property market?
First-Time Buyers
As long as they're in possession of a deposit, first-time buyers stand to profit from decreasing prices.
After all, price falls mean they may be able to afford a more expensive property than they originally set their sights on.
Alternatively, they may be get the home they originally wanted -- but for less. This could save them tens of thousands of pounds over the lifetime of a typical mortgage.
Potential profits:
According to the UK National House Price Index from Halifax, the average price of a home in the UK stood at £184,111 in May 2008.
A 10% drop in house prices would reduce this to £165,589.
So the buyer of the average property would then save £18,411. That means, if they were planning to put down a 10% deposit, they would need to put down £1,852 less cash upfront.
And remember, because they are borrowing less, they will pay less interest to the mortgage lender.
In fact, if prices fall by 10%, the average property buyer would save £35,112 in mortgage payments over the term of a typical 25-year mortgage.*
And if house prices fell by 20%, the average buyer would save even more: £70,035 on the typical mortgage over 25 years. They would also save £3,682 immediately on the deposit. Happy days!
Upsizers
According to Abbey, 1.2 million homeowners are looking to upsize at `bargain' rates, thanks to the continuing decline in property prices.
As the value of homes will fall proportionately, the most expensive homes will drop furthest in `cash' terms. Consequently, upsizers will have to borrow less in order to move up the property ladder.
Potential profits:
As we've seen, a 10% drop in house prices would knock £18,411 off the value of an `average' home. However, a home worth £280,000 would decline in price by a far heftier £28,000.
In this case, buyers with a 10% deposit looking to upsize from the average home would need to borrow £25,200 less.
This means that, over the life of a typical 25-year mortgage,* an upsizer could save as much as £53,430 if prices fell 10%.
If, however, prices fell 20%, the upsizer to a property currently worth £280,000 would save an amazing £106,863 on the typical mortgage over 25 years. They would also save £5,600 immediately on the deposit.
Renting Converts
According to Abbey, over 800,000 homeowners are currently planning to sell their homes and move into rented accommodation. When house prices reach their nadir, they'll purchase new properties.
If everything works out the way they plan, renting converts will have sold in a better market than they buy in. This could yield a tidy cash profit -- plus the opportunity to buy a far `better' home than they could have otherwise afforded.
Potential profits:
The amount that converts to renting could make is hard to estimate. It all depends on how much their original property sells for -- and how far the market falls.
Some people are convinced that this strategy might make them many thousands of pounds -- and they could be right.
On the other hand, they could be wrong.
Correctly predicting what will happen to house prices over the next few years is not exactly easy (or we'd all be rich). If the renting converts get it wrong, they will not only lose the roof over their heads, they will lose thousands of pounds -- especially when you take into account the cost of renting.
Investors, Buy-To-Let Landlords & Cash Buyers
Investors and buy-to-let landlords could also profit from falling prices -- especially as it looks likely that many people will rent, rather than buy, their homes in 2008.
Cash buyers, whether investors or owner-occupiers, are also potentially big winners in these difficult times, as they are not tied to a mortgage lender's purse strings.
With no need to find a cheap mortgage deal, the ability to complete a sale quickly and therefore great leverage for negotiation, anyone who can afford to buy a home outright could soon be laughing all the way to the bank.
Potential profits:
Rents have increased by 13.8% in the past year, according to the National Landlords Association. If this trend continues, potential profits from buy-to-let investments -- bought at bargain prices -- could be significant indeed.
Gazunderers
Gazunderers have already made headlines this year. Some sellers have been shocked to find themselves stung by bolshy buyers, demanding a discount on their property.
However, if prices continue to fall, the market might be even riper for tactics like these.
According to a Fool.co.uk survey, 29% of people said they would consider gazundering if a property fell in price between their offer and the exchange, and more than a third said that if they were gazundered they would pass the problem up the home-buying chain.
Potential profits:
The profit gazunderers could make depends upon individual house prices, the reasons for the gazunder and just how far a buyer is prepared to push their luck.
A friend of mine who recently bought a home in south London gazundered his seller, as the property had decreased in value since he made his original offer. In the end, he saved 10% on the agreed price -- equivalent to around £25,000.
Many Fools see gazundering as underhanded and unethical. But it is not illegal and, in a rapidly falling market, it is coming back into fashion.
Mind you, it's worth remembering that 24% of respondents to The Fool's survey said they'd refuse to sell to a gazunderer, even if he or she backed down and re-offered the original offer.
So if you've found the property of your dreams, be careful: gazundering could see you lose out rather than profit.
The Waiting Game
With so many `ifs' and `buts' surrounding the question of who'll profit most from house price falls , perhaps it's unsurprising that many of us are still sitting on the fence.
Research by Abbey shows 3.9 million people want to wait and see what happens to house prices before they make their next move.
Of course, there are those who won't want to watch idly -- and they'll act now, hoping to make money from house price falls.
Hopefully, for some of them, the risk will pay off.
Finding out who, however, is definitely a case of playing the waiting game.
*Assuming the interest rate on the mortgage is 7% throughout the 25-year term.
More:The Time To Buy Property Is Now |Capitalise On House Price Falls | The Property Collapse Is Well Underway