Reality doesn't bite yet - 12 May 2008

Posted by Paul Collins 1 comment

Apparently, the housing market is in turmoil. Well, nobody seems to have told the developers and agents where I live, because they are still trying to sell properties at prices that seem to be totally unrealistic in the current market conditions. The scary thing is they might just succeed…

Confession time – I do live in an area that has some serious disposable income, and where the average salary is likely to be several times that of a humble property journalist. Even so, with mortgage approvals at a level so low as to make IFAs nervous, realism is just what the market needs to have at the moment.

My despair comes from the fact that I went to see some new apartments nearby last week in a renovation of an old art-deco style building. The finish is undoubtedly good, and it is clear that the properties are being targeted as much at buy-to-let investors as private buyers, given the fact that they sales agent had the projected rentals of all of the apartments on hand.

Now many people will tell you that it is almost impossible to buy a property in London today for less than £200,000. Well, in this development you can get an apartment for £185,000. However, it is a small studio apartment on the ground floor and there is no parking space, and the development is on a main road. Worse, the sales agent proudly pointed to the figures she had been given, stating that their calculations showed the apartment could be rented out for £700 per month. I pointed out that it would be very difficult to rent out any apartment in that location without parking, but to no avail. The smile remained fixed.

And she might be right to be smiling. Listening to an expert in buy-to-let this morning, it seems that when it comes to professional investors, those who are equity-led will be on the lookout for bargain properties this year to rent out to the increasing numbers of people who are unable to buy, or worse, are forced to sell their homes because of rising costs and the restrictions on the mortgage market. These investors are the ones who buy with their own money for the most part, and tend on average to need only 36 per cent finance on the property purchase.

In many ways, this is great for the property market – it keeps transactions ticking over at a time when many are too nervous to get into the market. But this may also be counter-productive. If developers and agents are able to continue selling their properties at the prices they want to (or somewhere close), then it will take longer for prices to drop to a level at which confidence returns to the main body of the market, and the longer people will be forced to rent.

This is not to criticize the buy-to-let entrepreneurs – for many professional investors this is their main or only source of income. And the correction in prices will happen eventually as the collected masses of private buyers will not be replaced by equity-rich investors, but the delay in prices reaching their realistic level will cause further financial woes for those who can least afford it.

For me, this means waiting and renting for a while longer before I can consider buying and apartment – and maybe selling my car…

Keep blogs friendly, read our posting policy for guidelines.

Found an offensive/inappropriate comment? Please report it.

© Copyright Buy Associates Ltd

All circumstances vary. BuyAssociation provides general advice for guidance purposes only. It is strongly recommended that you seek professional advice before making any purchase.