Two weeks ago a small building in Wincanton went to auction. It cost its buyer £186,000 ten years ago. At the peak of the bubble, several agents valued it at £300,000 plus.
It had been on the market for two years. Offers had been made at prices ranging from £200,000 to £250,000. All had been accepted. None had made it to exchange: none of the would-be buyers had managed to actually come up with the cash.
At auction it fetched £190,000 – and only after a very significant effort from the auctioneer to get it to its reserve. That’s a peak-to-sale-price drop of 37%.
I popped this nugget of information up on Twitter (I’m @merrynsw) to show those who think that house prices have dropped 10% or so at most and have now stabilised, that they did not and have not.
One of the Twitter replies said that this is not the case. He would, he said, “hang his hat” on the sale I mention having been something to do with either mortgage fraud or a repossession. It wasn’t. And not only was it not, but nor were many of the others there.
The fact is that what is really happening in the lower part of the market is being covered up by the low volumes and high quality of conventional sales. Pick an area of the country and follow the sales in it on PrimeLocation.com or some such for a while. You will see that the occasional perfect house comes up. If it is on at a reasonable price it sells fast. Anything else does not – most sellers aren’t desperate enough to cut their prices to levels where ordinary buyers will buy.
So the only place that you are seeing clearing prices is at auction – where desperate sellers meet savvy cashed-up bargain hunters. And there, if the price you get is 40% below the price you might have got in 2007, you go away thinking you got pretty lucky.
That’s a house price crash – so much so it may even be that whoever bought the Wincanton flats has got himself a bargain.
However, the key point for the rest of us to take from this is that the wider market very often follows auction prices down. That’s something that ‘generation rent’ might want to bear in mind when they are told that they should buy as soon as possible, given that, in most UK cities, buying is now “cheaper than renting” – according to Zoopla, that’s the case in 45 out of 50 cities in the UK.
Capital Economics have had a good look at this and I think pretty much debunked the idea that buying is a better idea than renting for would-be first-time buyers (FTBs) at the moment. They’ve used the example of someone with a 20% deposit looking at a £140,000 house, and assumed buying costs of £2,450. So the upfront capital needed is £30,450 (£28,000 of that is the deposit).
They assume a typical FTB mortgage of 3.29%, rising to 4.99% in two years’ time, making the monthly payments first £548, and then £647. The maintenance and insurance costs of owning are estimated at £65 a month rising at 2.5% a year.
Capital then compare that to renting a similar house at a rent of £595 a month (based on the current consensus rental yield of 5.1%). Under these assumptions, it is the case that over a five-year period, it costs around £3,000 less to rent than to buy. But this is “not the whole story”.
Let’s say house prices stay stable. By repaying some principle along the way, our buyer will have amassed equity of £13,943 to add to the initial deposit of £28,000. If he sells he’ll pay fees. So he’ll probably end up with a gain of £9,000 or so in hand, for a total of £39,493.
On to our renter. He’s kept the near-£30,000 deposit he could have used to buy a house in the bank, on a fixed rate of 4% (3.4% post tax). So he has interest of £5,092. He pays the difference between rent and a mortgage into the account too, getting an interest rate of 2.4%. That gets him another £3,224. So he ends up with £38,719. He is worse off – by £729.
However given the tiny margin here, if house prices don’t stay stable – if they fall a few percent or even 5-10% – it won’t be the tenant that will be worst off in five years, it will be the buyer. By a long way.
Is that a risk most first-time buyers should be taking?