| Archive for 'House Pricing' |
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| How far will house market prices drop? |
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 Posted on Thursday, December 06, 2007 |
As we all read the latest round of house price headlines it is no wonder people look for a quick house sale. With headlines like 'house prices drop fastest for 12 years' it is not surprising that people are left fearing that the value of their house is dropping fast and ask the question of 'how to sell my house fast'. We had the Northern Rock shock, which is still limping to closure, but this has been compounded by other bad news e.g. Paragon, which is turning sentiment negative towards house values in 2008.
However, when you dig under the covers and look at the property pricing information available, a more balanced story prevails.
Trying to understand the worst likely outcome is a starting point, so let's look to the US residential market. Their housing situation is described as being in 'meltdown' where prices will have declined by 5% in 2007, with an estimated further decrease of 10% in 2008, giving a total fall of 15%. This will be fine for people with less than 80% Loan to Value, but potentially a negative equity trap for people with higher levels of Loan to Value. For an average property in the UK valued at approximately £195k, this would represent a loss of just over £1,200 per month for every month the property is held during this period (if you assume a linear price decrease over the period). This is the good news! The bad news is that price decreases of this nature are not uniform across either geography or type of house. In the US for example, prices in Cleveland where they have a high proportion of sub-prime mortgages prices have already fallen by 30% in one year, an equivalent loss on a £195k house over £4,800 per month. In such circumstances selling to a quick home sale company can be very profitable. New homes are also having their prices dropped by up to 30% so as to sell them. This is because new house sales normally have 30-40% margin built in and hence the developers can afford to sell houses at such a discount to get them off their books. If you own a 1-2 year new build this is bad news as if means newer properties than yours are on the market for 30% less than you will have paid for yours. If you own an older house, this is not such bad news as new build price decreases do not imply older resale properties will drop the equivalent amount.
This all goes to prove there is still life in the adage, when looking for property that the 3 most important items to consider are 'location, location, location'.
Luckily for us in the UK, life is not predicted to be as bad as it is in the US. Recent estimates for 2008 predict between a 2% increase and a 5% decrease in property values. Halifax reported that prices dropped by 1.1% in November which is the third successive month of a price drop, So I think we are likely in 2008 to have a slight decrease in pricing, but one which varies by region. For example in the latest quarterly regional review by Halifax, UK prices overall were up 0.1% in the quarter, whilst prices in The North decreased by 2.1% in the quarter at the same time as prices in The South East increased up 1.8%. However, there are factors which indicate the market drops will not be anywhere severe as the US. Firstly, the UK has a demand/supply in-balance because of having too few homes which will help keep prices higher and also, with the introduction of HIPs, the government has slowed the flow of houses on to the market - also helping to keep prices up.
The conclusion we derive from this is that we are likely to see a slight drop in house values in the UK on average in 2008, but this will hide a divide between 'winners' - those people whose house price remains level, and 'losers' - those people who see a larger than average decrease in their house values (anywhere up to 10-20%). The 'losers' are likely to be in areas where house values are under £100,000 or in areas where there is a large volume of historic 'heavy' sub-prime borrowing. Also, we are likely to see an increase in the average time to sell a property, as people hold off a while from buying, whilst they wait for clearer signs of which way the market is going. |
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