May 7, 2011

With UK property prices falling, is it the right time to buy?

Falling UK property prices

In the past few months we have seen both Halifax and Nationwide reporting that house prices have fallen, but there have also been occasions where they have contradicted each other, where one reports rising prices and other falling prices. The land registry figures also show conflicting evidence. With growing concerns over the economic outlook and public spending cuts weighing heavily on the minds of would-be purchasers, it is no wonder they are confused and unsure on whether they should wait or buy now. So the question is what is happening with house prices and where are they heading?

In my view house prices have been on a downward spiral since the back-end of 2008, although not all the figures and surveys released would agree with this. When the credit crisis erupted and reports began to come out about property prices falling, everyone refused to believe it, how can property prices fall? We have been riding a wave of ecstasy where we believed that property prices would just keep rising. The property prices have been over-inflated for some time now, the incompetent and greedy lending policies of banks and mortgage companies had fuelled the property price growth to a confounding level. People on earnings of 20K a year were obtaining mortgages 8-10 times their salaries, and it was this sort of incredulous behaviour which was creating a bubble waiting to burst. The underlying fact is that everything was being fuelled by greed, estate agents were also grossly over-valuing properties, because we all know the higher the price an agent sells a property at, the higher the commission they earn.

It was not until the credit crisis hit and the banks reigned in their lending policies that people realised that actually I cannot afford to buy a home at these super inflated prices. Many who found themselves out of a job suddenly learnt how difficult it was to repay the exorbitant mortgages they had taken on, which ignited a spate of repossessions. So why do I think prices are coming down and have come down? Well it comes down to affordability, we are taking reductions in our salary, unemployment is high and the banks do not want lend, all these factors point to a fall in house prices. If we want to see the property market moving again then prices will have to come down to a level where first time buyers can afford to buy again and get a mortgage. First time buyer participation is central to any sustained recovery in house prices and the property market as a whole.

Tightened Mortgage Lending

Mortgage lending has become so tight that it is fuelling the decrease in house prices. Since the banks tightened their lending, the common scenario has been: ‘Mike and Julie find a property that they like, the property is on the market at £350K they negotiate the price down so that vendor agrees to a purchase price of £325K, vendor and buyer are agreed and along comes the bank with its mortgage valuation, and it comes in at £300K. Bank says we will lend you 85% on our valuation but not on your agreed price. Mike and Julie need to make up a difference of £25K which they simply don’t have and the purchase falls through.’ I am sure there are many people who can relate to this situation as it has become so common, the mortgage valuations are all being down-valued because the lenders want you to put in as much equity as possible, this is another indication of why prices are and should be coming down. The stark reality for first time buyers is that if you do not have at least 30% to put down on a property, you will find it extremely difficult to get a mortgage.

So why are the lenders not lending? Well they are nervous about the state of the economy and the future direction of house prices, and some say their ability to fund their mortgage lending is constrained by the demands from the regulators to bolster their capital reserves. This means that only the best quality borrowers are being offered loans, and on much tighter criteria. The concern is that we are not clear out of the recession yet and there is a possibility of a double dip recession, it is this fear and uncertainty which is leading the banks to fill their coffers for rainy days. The banks will never be worse off and for some of them to report profits in the last year is absolutely confounding, when a year earlier they were all in trouble writing off billions!!!

Where are UK property prices heading?

Coming back to the direction of house prices, I feel in 2011 prices will continue to fall until we reach the middle of the year and then I expect they will become stagnant for the remainder of the year and not until the beginning of 2012 we will begin to see a rise again. With the Olympics in 2012 there will be an influx in UK tourism, which should help the British economy and generally the feeling will be more optimistic for 2012. You tend to find that when the public and the markets are both optimistic then generally the trend is for things to rise again. For those who want to own their own home, 2011 will be the right time to buy, but I would advise you keep your search on-going because if you find a property that you like then you can negotiate hard and get the price down. Do your research before you buy, speak to estate agents even though you have to take some of what they say with a pinch of salt, I tell you this being in the business myself, unfortunately some agents give the few honest ones a really bad name (after politicians, lawyers and bankers now, estate agents are probably the least trusted).


  • I learned a lot from this article, great help for me, thank you!

  • Hey there! Great blog! Do you know more resources on this topic?

    • Hi Louann yes you should follow the property section in the Guardian which is quite good. Look out for my next blog post which is about agents inflating prices and playing games with buyers and sellers.

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