Want to trade up? Now could be the best time to do it. The more house prices fall, the less money you need to find to buy a bigger home or relocate somewhere more salubrious.
If you believe the headlines, it’s not a good time to be a homeowner. The average house is predicted to lose £11,000 in value in the course of this year – more than £200 a week – according to a study released last week by the Centre for Economics and Business Research (CEBR). And that is if the market falls by a relatively modest 2.5%. Other commentators, such as Capital Economics, expect prices will go down by twice that in what is broadly seen as the weakest and most vulnerable market in more than a decade.
It is not all doom and gloom, however. The slowdown could be good news not just for first-time buyers (those who have saved up a decent deposit, that is), but for people who already own a property and would like to trade up. For some, especially those who found themselves outbid last year, 2008 could be the ideal year to move and get that extra bedroom, a garden or a bigger house in the country.
The theory is simple: as everything goes down in price, so the amount of money you need to swap that two-bedroom flat for a three-bedroom house or a three-bedroom house for a four-bedroom one becomes smaller. Put another way, the rungs on the housing ladder move closer together.
“It is more advantageous to move up the ladder in a slowing market,” says Ed Stansfield, property economist at Capital Economics. “Say your flat is on the market for £250,000 and you are trading up to a £400,000 house, and that prices in your area have fallen by 10%. You take the £25,000 hit on the flat, but you are paying proportionally less for the bigger house, so have a net gain of £15,000.”
Of course, it can be rather more complicated than that in practice. Although the Land Registry reported that prices in England and Wales dropped by an average of 0.4% in December – the first such fall since August 2005 – this masked considerable regional differences. Prices in the East Midlands fell by 3.3%, those in Wales by 2.1% and those in the southeast by 1.3%.
Hometrack, the property-data company, had a slightly different take on things, although it too picked up considerable regional differences: average values dropped by 0.3% in January, the fourth such monthly fall in a row, giving the lowest rate of growth since June 2006. It found the biggest drop, 0.4%, in Greater London and the southwest.
Nor do things vary only from area to area. Even within the same town, properties in one price bracket can perform differently from those in another – which has implications for the ease with which people can trade up.
If you want to move up the ladder, good preparation is ideal. With mortgage lenders tightening their criteria in the aftermath of the credit crunch, you should also make sure you can raise the extra finance you will need. “You must be flexible and be ready to pounce,” says Lucian Cook, head of research at Savills estate agency. “Many buyers are moving into rented accommodation to be at the front of the queue. The tip is to be well researched and haggle hard.”
So, is now the best time for you to trade up, or should you be sitting tight? These hypothetical examples should give you a clue:
The second-time buyer
In your late twenties or early thirties, you’re one half of a professional couple lucky enough to have bought a two-bedroom flat in north London three years ago. It has increased nicely in value, to £350,000, but you need more space – especially since you’re thinking of starting a family. Ideally, you would like to stay in the capital and buy a three-bedroom semi or terrace .
The verdict: “We’ve seen an increase in the number of potential sellers looking to do just this,” says Anne Currell, director of Currell Residential, which has five offices in north and east London. “In a slowing market, trade up, and trade up as much as you possibly can. But don’t hold out for the price you could have sold your flat for last June.”
And be warned: good-quality family housing is likely to be in greater demand than your flat, so you will still face competition. “There is a bigger gap between first and second houses,” Currell says. “So, look to slightly less favourable areas in the capital to drag up the most profit. Otherwise, be prepared for a potentially bumpy ride.”
Suburban dweller
In your mid- to late thirties, you have a three-bedroom house in the suburbs, but with one child, and another on the way, you need more space and a bigger garden, preferably in the same area.
The verdict: Think medium-term. You are likely to get less for your property than you would have done six months ago, but there will be less competition for the one you have your eye on.
“Buyers are starting to make cheeky offers to try to bag a bargain,” says Alasdair Gibson, manager of Wink-worth’s office in Tunbridge Wells, Kent. “As vendors are becoming more realistic, it isn’t a bad time to move up. We’ve seen a complete turnaround since November – there are now fewer buyers and more properties, so you can bid harder.”
As you know the area, you should be able to tell quickly if you are getting a good deal. You will need to do more research if you are planning to trade up to a different area.
City dweller dreaming of the country
In your forties, you have a comfortable family house in southwest London, the value of which has more than doubled since you bought it a decade ago. But you are fed up with the stress of city living and want to bring up the children somewhere quiet. A rectory in Berkshire would be nice, but you are prepared to move anywhere within commuting distance of the capital.
The verdict: “During the last dip, in 2003, the best houses and the best streets got off scot-free,” says Lindsay Cuthill, head of southwest London at Savills. “Houses in blue-chip areas will always sell well.”
Finding the dream house may be trickier, because the number of good properties coming on the market is still slow. “It’s fair to say that you can probably knock 5% off the price – and, if the owner needs to sell, even more,” says Henry Holland Hibbert, head of country houses at Strutt & Parker. “The middle market, from £750,000 to £3m, has been hit hardest. But there are no hard-and-fast rules on where to look for bargains.”
If you can’t find the property you want – or are convinced prices will keep going down – then it might be worth selling your home and renting for a few months – which is exactly what Nigel Short, 42, and his girlfriend, Grace Davidson, 30, have done. The couple sold their three-bedroom cottage in Bray, Berkshire, for £650,000 in August and, since then, have been living with their nine-month-old daughter, Ella May, in a “shoe box” in nearby Windsor. They hope to use this year’s slowdown to trade up the local ladder as far as they can afford to go.
“Six months ago, we had not considered upgrading, but now we are looking for four bedrooms and a house we can stay in for at least 10 years,” says Short, choral director of the Tenebrae Choir. “Prices are coming down, and in another six months, it might look even better. We plan to rent for the foresee-able future and see what we can get. This is a chance for us.”
How it works
Imagine your flat is on the market for £250,000 and you want to trade up to a £400,000 house: If prices fall by 2½%, then you will get £6,250 less for the flat, but the price of the house will drop by £10,000 – meaning that you will have to find £146,250, rather than £150,000, to trade up
Net gain: £3,750
If the market goes down by 10%, your flat will be worth £25,000 less, but the price of the house will fall by £40,000 – meaning you will need only another £135,000 to buy the house
Net gain: £15,000
Tips for the top
Sell up Be prepared to move into rented accommodation and wait for the market to fall further
Homework Study recent sales in the area and talk to local agents. Find out how desperate the vendors are
Pole position You need to be as flexible as possible. Get your finances in place so you are ready to pounce
Haggle It's a buyers’ market – take advantage of it to beat down the seller. You could easily knock 10% or more off the price
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