WARNING from Mira Bar-Hillel: The heading above is probably misleading. I am not proposing to write a users’ manual for sellers. What I will attempt to do is explain the dramatic change that has transformed the property market during the past few months and the implications for sellers and buyers in general – and owners of leasehold flats in particular.
As you may have already guessed, it all started with the credit crunch that was the result of the sub prime market in the US. In plain English, what happened was that lenders started lending money to Americans who may not have understood what they were signing up for and it was doubtful they could repay the loans, which were in turn secured against property that was not worth the alleged valuations. One famous example was a single mother, living in a trailer park, who had been “sold” five properties on terms she was guaranteed to default on.
The lenders then packaged their loans in parcels totalling just under $10 million and sold them on to financial institutions and investors who were too complacent to look carefully into purchases of less than $10 million, however many they acquired.
When the entire edifice came tumbling down in the autumn of 2008, its first manifestation on this side of the pond was the Northern Rock fiasco.
The Rock had been selling its UK mortgages aggressively, which would have been fine if it had, like most other lenders, supported its loans with individual savings. It didn’t. To short cut its way to the top of the lending league it instead borrowed the money from other banks. And it might have got away with that as well, were it not for the sub-prime crisis.
Reluctant to lend
What that did was to cause the banks to lose confidence in each other, and became almost overnight reluctant to lend each other money at preferential rates (something known as LIBOR) which had been the tradition for decades. This was even more the case for those who wanted to borrow money to lend against property – hence the collapse of the Rock.
For the UK market this could not have come at a worse time. Prices are now at all-time record high, having virtually trebled since 1996. This is nice for people who managed to get on the ladder several years ago, but for those who have not, affordability is at its worst for nine years. And it has just got a lot worse.
The Bank of England’s 0.25% base rate cut in March was a bit of sticking plaster on a bleeding wound. The damage had already been done by lenders who withdrew generous mortgage products and terms virtually overnight. The good news was the abolition of 125% mortgages, which should never have been allowed in the first place, as they amount to instant negative equity. More troublesome was the abolition of 100% mortgages, a body blow to the already dwindling group of first-time buyers who will now find outright home ownership hopelessly out of reach. Saving up for a 10% deposit for a group of people whose average age is already 34 and rising means finding between £15,000 and £25,000 (at least) at what is already a difficult time.
Moreover, the lenders are increasingly thinking that lending a bit less may actually be more profitable – not to mention safer – than lending more and more. Nationwide actually increased its mortgage rate slightly when the Bank of England reduced the base rate. And many lenders greatly increased the fees charged for those who want to change their loan arrangements in a desperate effort to reduce their monthly outgoings.
Rabbit on the motorway
The overall result of this shambles is that the market is standing frozen, like the proverbial rabbit on the motorway. Sellers are trying to shift property before the inevitable fall in prices, which is bound to follow all of the above. Most are still reluctant to lower their asking prices, however, with the result that homes now stay on the market for months – compared to days as recently as last summer. Sellers who will not accept low offers are sticking or pulling out. Those who need to sell are accepting what they can get, for fear of losing even more to a collapsing market where falls of up to 30% are now being predicted. They will recover in the long term, but the long term was never a big deal in the property market, where next week’s dinner party seems to matter more.
Buyers, on the other hand, are sitting on them. Why buy now, must be the question, when prices will be lower in a few months’ time, not to mention a year or two. It is hardly surprising that the Land Registry has recorded a massive 42% drop in sales year-on-year.
This is not necessarily an entirely bad thing. The market has been over-heated for too long and a cooling down will mitigate the fever. It may even help people begin to consider their homes as just that – instead of a speculation, valued only to the extent that it earns its keep.
Simple answer
But what about flat owners who have a genuine need to sell and must sell now? The simple answer has to be to make your property as attractive as possible to a buyer, who will now be in charge of the process and probably have a bigger choice than ever. The Home Information Pack is one way to do this. Make sure it includes everything it should, including details of the lease and a history of service charges.
If the lease is less than 80 years, consider extending it before selling: a buyer will probably choose to buy a longer lease over a similar flat with a shorter one. If the freehold can be acquired through enfranchisement, consider this too, as “share of the freehold” is a good enough selling point to be used by estate agents.
The final piece of advice is: keep your nerve and be prepared for a longer haul and having to do more work – and accept a lower offer – than in the past. ‘Cos it ain’t gonna get better before it gets worse
Look out for Mira’s article in the July issue of News on the Block.
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