ferrarri
Tuesday, February 16th, 2010
Over the last year, it has became very clear to me that people can’t half talk a lot of rubbish about subjects they don’t know much about.
My favourite subject at the moment is the Housing Market crash. Everyone, from teenagers to pensioners, street sweepers to millionaires has something to say on the matter. Many are full of glee, others are horrified. Some want to cash in, others want to sell up and go into renting (the new phenomenon is STR – Sell to Rent).
The area which sees the most hot air is: how far will house prices drop? On Tuesday 2nd September, the UK government announced a set of measures it hopes will stabilize the whole situation – but I can tell you from inside the industry that these will have little effect. On the “bear” side of the argument, Thatcherites may feel that if the market thinks that prices are going down, and then they will go down – a self fulfilling prophecy. Another line I hear constantly is “a house is only worth what someone will pay for it”. If that is the case then there are millions of people in the UK in serious trouble as I can tell you that you could knock off 25% from the asking price of most houses listed on Rightmove.
There is in fact an uncommon piece of knowledge that indicates very accurately where the bottom of the market will be. Let me paint you a picture. I drive a Y Reg Peugeot 106. Not exactly a Ferrarri, granted. If I was to park this car up at a busy junction (as is the hideous fashion in the UK at the moment) and place a “For Sale – £10,000″ sign in the window, I would get no calls whatsoever. If I was to replace that sign with “For Sale – £1″ then I would be flooded with calls. If I wanted to test the elasticity of the price I could raise the asking price little by little until the phone calls dry up. When the phone stops ringing we have found the bottom of the market.
This situation is easily recreated in the world of property. There are thousands of “in the know” investors in the UK that can structure deals so that little or no deposit is required. We refer to it as “No Money Down”, or an “Option Agreement”. The amount of money that an investor will pay for your property has a maximum set by the best current Buy to Let mortgage deal available. At the moment that deal stands at 5.89% with a rental calculation of 125% required. In layman’s terms a shrewd investor will pay you a maximum of 163 x the theoretical single household rent that the property would achieve.
Thereby, in my town, where Surveyors habitually value 3 bedroom homes at £525 pcm, the bottom line for these properties is around £85,000. Homes in this bracket may sell for more but they will always sell at £85k – guaranteed; investors would queue up to take it. Therefore this is the theoretical bottom of the market. Prices may never reach this point but if they were to I would think that it would take about another year from now (September 2008) for a leveling off to occur.
In summary, ignore the hype about house prices, the Mortgage market dictates the whole thing. If the price is right there are thousands of buyers there ready to pounce.
New FREE download available at http://www.uncommonadvice.co.uk
Ross Taylor is the author of “Mortgages, Money and Magic” and “The No B.S. Credit Crunch Ready Guide to Buy to Let in 2008″. Ross is a successful Financial Adviser specialising in First Time Buyers and Buy to Let. He owns over £2million worth of property in the UK and regularly gives lectures on Financial Planning.
