ESPC Market Review
Since the start of the year there has been an understandably high level of interest in the property market. Whilst there has been a great deal of coverage on what is happening in the UK market as a whole, national price movements do not always reveal what is happening at a local level and leave a lot of unanswered questions.
- How are prices moving in the area you live in, and how does that compare with the market in the area you are looking to buy?
- Is there a difference in the level of demand for certain types of property?
- How do recent market changes affect you depending on your situation – whether you’re a first-time buyer, a homeowner, or an investor in the market?
- Most importantly, what can you do to protect yourself best in the current market climate?
East Central Scotland – 2008 six-month review
So far this year, house prices have varied in line with past seasonal trends, with annual house price inflation in East Central Scotland consistently between 1 and 3%.
Within East Central Scotland, figures for the second quarter reveal that regional growth has been fairly consistent, with improved affordability resulting in marginally higher levels of inflation generally being observed outwith Edinburgh.
The first six months of 2008 have also seen price increases for larger family housing slightly exceed those for smaller flats. In Edinburgh, for example, the average price of a 1-bedroom flat rose by just 1% to £142,066 in the second quarter of 2008, whilst the average price of a 3 or 4-bedroom house rose by 3% to £316,935. This disparity reflects the fact that tightened lending criteria have more seriously impacted those looking to purchase smaller properties – particularly first-time buyers who often lack the upfront capital now required for a deposit.
Whilst house prices have continued to rise slowly, the figures demonstrate that the market has cooled significantly. The clearest evidence of this is seen in sales volumes, with the number of transactions completed well below 2007 levels having declined rapidly since April. Many sellers are not reluctant to accept lower bids, whilst some buyers have adopted a ‘wait and see’ approach leading to the current stand-off. As a result, the average property is also now taking around 10 days longer to sell than at this time last year.
Whilst sales volumes have fallen, the average number of properties being put up for sale has remained fairly consistent with previous years and this in turn has resulted in a large rise in the number of properties available on the market. In June ESPC had around 6,200 properties available for sale, some 50% more than at the same point in 2007. This increased stock of properties has allowed buyers to pay lower premiums to secure their property. The average percentage paid over the asking price for properties marketed at Offers Over is now 5% lower in most areas than it was last year.
We are now seeing more properties marketed at Fixed Price. In Edinburgh around 60% of homes for sale at present are marketed in this fashion. Sales of these properties again reveal that some sellers are becoming more flexible about the price they are expecting.
In the second quarter of 2007, 70% of Fixed Price properties that sold achieved or exceeded the asking price. During the same period in 2008 this figure fell to around 50%. The difference between the asking and selling price is typically only a few percentage points, but this can still represent a significant saving for buyers, and in some cases larger discounts can be negotiated.
What all of this means is that we are now clearly in a buyer’s market. There is a far greater selection of properties available on the market putting buyers in a stronger position to negotiate the lower premiums we are now witnessing.
Arguably, this has been the first time the ball has been firmly in the buyers’ court for some 15 years, with demand having previously outstripped supply by some way during that period. So what does this shift in the market mean for you, and how should you react in the current climate?
First-time buyers
If you’re trying to get on the first rung of the property ladder, your main concern is likely to be availability of credit. All of the major banks have withdrawn their 100% mortgage deals and the cost of servicing debt is higher than in recent years. With that said, there are still a number of deals out there for many first-time buyers, and those who are able to provide a deposit will find there are potential benefits to the current economic climate.
First, there is a far wider selection of property on the market which means you’re in a much stronger position to look around for a home that suits you at a reasonable price. It is important therefore not to rush into an emotional decision to fixate on a property you see early in your search. Many people become focused on a property which they fall in love with, but this could lead to you having to pay over the odds when there may be more suitable properties out there.
You are also likely to be in a much stronger position to negotiate with sellers who will be aware that demand for property is lower than in previous years. Don’t be afraid to test the water with a slightly lower bid and, if you miss out, remember that there are plenty of other options out there.
When looking for a mortgage deal, though, don’t forget to consider potential changes in the market in coming months. Rising inflation has made an increase in interest rates from the Bank of England before the end of the year more likely. Stress test your mortgage to see how you would be affected if your mortgage rate were to rise. Don’t be afraid to take financial advice to make sure you’re getting the best deal for you. Paying a small fee for professional advice today could save you thousands over the term of your mortgage.
Homeowners
For the majority homeowners who are not planning to move in the near future, short-term shifts in house prices are not likely to have any significant impact. For those on a variable rate mortgage, any changes in interest rates will affect the level of repayments though. With rising food and energy prices already putting a squeeze on disposable income, it’s worth considering how you would be impacted if rates were to rise over the coming 12 months.
Those who are looking to move need to consider both the buying and the selling side of the transaction. As a vendor it is likely that you will have to moderate your expectations on the selling price your property will achieve. As a buyer, however, the shoe is on the other foot, and you will probably be able to negotiate a lower price on your new home than you may have expected to pay.
If you are moving up the ladder, this situation is likely to be of benefit to you. An offer that is 5% lower than you had hoped for on your own property will be more than offset if you are able to negotiate a 5% saving on your new, more expensive property at the other side of the transaction.
Conversely, if you are looking to downsize you may have to accept that the additional finance your move will generate may be less than you would have originally anticipated.
Whichever situation you are in it is important to get out and start viewing the sort of homes you wish to purchase. ‘Sell before you buy’ is sound advice for the majority of people at present, but by seeing what’s available on the market you will be able to get a better idea of what you’ll need to pay, and therefore the price you’d need to secure on your own home to fund the move. Once you have agreed the sale of your own home you will be in an even stronger negotiating position and will be ideally placed to take advantage if this and move quickly on the property you want.
Investors
Investors looking for short-term gains through capital appreciation will find it much harder to benefit in today’s market than in recent years. There will still be a small number of opportunities to make money in a short timeframe, but these will be considerably fewer than in previous years.
Typically investors take a longer term approach though, with around 85% putting an average life expectancy on their investment of 5 years or more. For these people the picture is more mixed. Lending criteria are likely to remain constrained particularly over the next 18 months and we may never see cheap credit be as freely available as it was over the last few years. Because of this, growth in house prices is not likely to return to previously high levels of 10-15% witnessed in recent years over the short to medium term.
On the other hand, rental yields are likely to rise, with higher demand for rented property caused by some buyers taking a ‘wait and see’ approach in the short term likely to push average rents up over the next 12 months.
Earlier this year, figures from Citylets revealed that the average rent paid on a one-bedroom flat has increased by 5.8% compared to 2007 levels and now stands at £523. The average rent paid on a two-bedroom property in the Capital is £676 following a similar rise of 6.3%.
The increase in demand in rental properties has also been reflected in a decrease in the time taken to find tenant. The average time to let during the first-quarter was 28 days, four days quicker than during the same period in 2007.
The Future
Regardless of your circumstances, the most important advice for anyone thinking of buying a property or moving home is to arm yourself with as much information as possible. Be aware that as a buyer you are in a much stronger position than in the past, but if you’re also looking to sell you may have to balance this by accepting a lower price than you might have originally anticipated. Don’t be afraid to seek expert advice if you are uncertain about doing your own research. Financial advisers can guide you on the current situation, and solicitors can give you impartial input on how the property market is performing in your area.
While the average price of properties overall has remained relatively static, there is clear evidence that the increased number of properties on the market has led some sellers to accept lower bids for their homes. Over the coming months we are likely to see this happen more frequently as sellers battle to attract buyers to their home, meaning there will be more opportunities to secure properties at lower prices than would have been possible in recent years.
To help in the current climate, ESPC will be producing and publishing regular updates and in depth analysis on the housing market both in The ESPC Paper and online at espc.com. If you wish to receive these reports as soon as they are released, please register free by visiting www.espc.com.