Welcome to BuyAssociation.co.uk

Buying a property in a challenging market

Introduction

The property market in 2008 is going to be a tough place to be as a vendor. This means that many buyers see this as the perfect time to be stepping into the property market, either to be able to upgrade their property for less than would have been the case in the past six months or as a way to increase their investment portfolios by buying from sellers under pressure.

The trick with buying in a falling, or ‘correcting’ market is to be able to predict where the bottom of the trough will come. Even if you do not buy right at the bottom of the curve, where competition for properties suddenly takes off and prices start to rise again, it pays to be aware of where that curve levels and begins to climb again.

Property markets are historically cyclical, to a greater or lesser extent, so most people with experience of the property world are prepared for rises and falls. Recessions are generally a fact of economic life, and the ebbs and flows of worldwide economies mean that when one market is on the way up another is one the downward side of a curve.

It is also worth remembering that the last time the property market had a slump in the 1990s, there were problems with negative equity at the more extreme end of the market. However, figures show that the actual drop in prices that occurred was not as drastic as was portrayed. When the market does pick up again, the habit is for the rise to be steeper than the fall. The issue for property owners at the moment is that the past few years have seen some of the most unprecedented growth in property prices in memory, and any kind of fall will take some adjustment.

Finance

With the collapse of Northern Rock in the autumn of 2007, the UK saw the first manifestation of the credit crisis that has made the property industry in the US suffer one of the biggest drops in history. In turn, this caused the US Federal Reserve to introduce drastic cuts in the interest rates in order to encourage the housing market and promote spending.

Since then, stock market uncertainty, continued credit issues, and the fact that most banks are only now becoming aware of their full exposure to the credit crunch have led to banks tightening their lending criteria. Added to them is the fact that an estimated 1.4 million borrowers are this year coming to the end of their two-year fixed-rate mortgage deals. A number of lenders have decided to pull many of their fixed-rate mortgage products as they seek to minimize extending their exposure in the mortgage markets. Some have also taken to raising their mortgage rates despite the fact that the Bank of England has been gradually dropping interest rates. This tactic by lenders is to make sure that the mortgages they approve are cut in number and increased in quality. If the banks continue to go after only the ‘super-prime’ customers, as they are known, the only people who will be able to afford credit will be the people who need it least.

Making sure your finance is in place is one of the most important things when buying in a market that is declining. Buyers need to be aware of the market conditions, because if they leave themselves over-exposed to changes in mortgage rates and further dips in the market, the spectre of negative equity could loom large.

Take your time

The prospect of a true buyer’s market in UK property means that you will have a much larger range of properties to choose from, and many of them will be eager not only to please potential buyers, but will also be prepared to offer incentives to make sure that buyers take notice of their property.

The change in the property markets in recent months has turned the politics of buying on its head. Instead of competing with other buyers to get your hands on the property you want at a price you can afford, any buyer in the current climate will have a choice of properties in their style and price range, and will be able to make the best decision with less compromise than in a rising market.

Think about making up a wish list of things that you would like to have from your property. Be realistic about the feature that you want to have in the property, and keep in mind the budget that you have, but should you want to have a large dining room for entertaining, a conservatory, or and en-suite bathroom ahead of a seventies-style serving hatch from the kitchen, write it down and make sure you look for it on your viewings.

You are also open to take a little more time to make your offers and consider how you want to respond if your first offer is rejected. In this challenging market atmosphere, there is less pressure on the buyer to rush and fear that they will lose out on the sale. Moreover, leaving a little more time to consider will promote the feeling in the vendor that you are prepared to carry on looking instead of buying immediately, which can work in your favour.

It is worth remembering though that a great property is always going to attract the attention of buyers, so even in market conditions that are testing for sellers you may find that you are competing for the property you want to buy. If there is a property that ticks your boxes, there is no harm in making an offer quickly to register your interest. Showing a seller that you are serious, can be trusted and are not trying to play games has advantages in the rest of the dealings you will have in concluding the sale, and ultimately make the whole process more pleasant.

Don't overstretch

As property prices in the UK continue to fall, buyers are seeing properties that they previously believed to be out of their reach are coming into their price bracket, and are beginning to wonder at the possibilities of future price drops. The temptation in this is that you will end up buying something that is not only stretching your budget beyond what is sensible, but that is unmanageable and not ideal for your needs.

If anything, the current economic conditions should serve as a pointer to how the market could go in the future. Should you be tempted into buying a property that is bigger than you need or are ready for, you may find that the running costs (heating, lighting, council tax, etc) are more than your monthly budget can cope with on top of your mortgage repayments.

Further, the credit crisis in the US and the state of interest rates in the UK — where lenders are not passing on cuts in the base rate of interest — are a real indication of the uncertainty that is plaguing the money markets at the moment. If anything, buyers should be using the drops in property prices as a way of getting their property for less than they had planned to pay, leaving themselves a cushion for the future should the economic downturn continue.

This is particularly important if property prices continue to fall. Should you end up in a situation of negative equity, having some leeway in your finances should at least allow you a little flexibility.

Be fair

Challenging economic conditions mean that we are already seeing reports emerging of an increased level of aggression in buyers, which is leading to the re-introduction of some of the more dubious practices of the past. Some buying websites are telling buyers to take up gazundering, which is the idea of putting in an offer on a property which is accepted, and then demanding a significant discount just before completion. This, combined with the threat of pulling out of the deal, leads to some buyers getting up to 20 per cent off the agreed price of the property.

Although getting a 20 per cent discount will be too much to resist for some buyers, this is something that leaves sellers in a tricky situation, and possibly quite distressed. The implications for the seller are that they let a whole chain collapse, or they take a hit on what they make from their own property.

Most people will feel strongly one way or the other about this kind of behaviour, but buyers should remember that this could affect them as well. Not only is there the possibility that you will end up on the receiving end of a gazunderer in the future (without wanting to get too far into the realms of karma), but most people who are buying a property will also be part of a chain. By taking part in gazundering, you may be ruining the property deals of a large number of people just to get a discount for yourself.

Auctions

While it is unfortunate to be the person who profits from the misfortunes of others, auctions can be a way of getting your property for less. As the credit crunch begins to squeeze, all of the predictions in the market are that the number of repossessions in the UK are set to rocket, and banks and mortgage lender will dispose of a proportion of these properties by auction.

If buying at auction, make sure you know what you are agreeing to by bidding, set yourself a limit, and take along a strong-willed friend who will stop you bidding if your own self-control fails on the day in the heat of the bidding process. Many people feel guilt at the idea of buying a property that has been that cause of someone else losing their home, but by the time a property is auctioned off, the damage has already been done and there is nothing you as a buyer can do to change that.

For more details of how auctions operate, how to spot a bargain, and how to make sure you don’t bid more than you have, read our guide to buying at auction.

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