Is it a good time to buy a house?

Ned Browne

According to The Halifax, the average price of a home in the United Kingdom has hit £250,000 for the first time ever. Much of the growth has been fuelled by the surge in demand for properties in the suburbs. Prices in the inner cities seem to have stagnated

Why are prices rising?

It is somewhat counterintuitive that, in the midst of a global pandemic, property prices would rise but there are some fundamentals at play.  

Firstly, money has never been cheaper. Borrowers with a chunky deposit or equity are currently snapping up five-year fixed-rate mortgage deals for less than 1.5%. This is pushing up demand for properties.  

The current stamp duty holiday is also increasing the demand; announced on 8th July 2020, this tax cut means all properties bought for £500,000 or under are exempt from stamp duty. This provision is due to end on 31st March 2021, but some observers suspect it will be extended.

 

Safe as houses

Low interest rates have also made saving less appealing. This may have encouraged some people to enter the market, including landlords who have, of late, been hesitant in light of Brexit uncertainty. And, like gold, properties are seen as a safe-haven for money in uncertain times. As the saying goes: “safe as houses”.

 

Is buying cheaper than renting?

Long term, buying has always made more financial sense than renting, especially over the course of a 25-year mortgage. But, often, owners have had less spare cash in the short term due to running costs. However, now owning is cheaper in the short term too.  

Mortgage interest payments are currently far cheaper than the cost of renting. The issue, of course, is the size of deposit that the banks require. And that is something worth examining.

 

Stricter lending criteria

Since the 2008 financial crisis, lending criteria have been repeatedly toughened. This increased regulation has meant that it’s never been harder to get a mortgage. The paperwork alone is enough to make a grown man cry. And, since the onset of the pandemic, most lenders have raised their minimum-deposit requirements. Banks do this when they’re concerned about future property prices.

 

Negative equity

If property prices do fall, and the loan amount ends up being more than the value of the property, borrowers will find themselves in negative equity. And, while negative equity is terrible for homeowners, it’s also every bank’s nightmare.  

Hundreds of thousands of people falling into negative equity in 2008 is what caused the subprime mortgage crisis in the USA which, in turn, pre-empted the global financial crisis. That’s not to say the banks are always right. Nonetheless, it does give pause for thought.  

We can’t assume property prices will keep on rising. Indeed, most economists think they will fall or flat line in 2021.

 

A home not a house

So, if you are going to buy, make sure it’s somewhere that you could live in the long term. And, remember, working from home may not last for everyone—so, if you have to commute again, could you? Property, as always, is a long-term game.

Read more: Everything you need to know about home staging

Read more: How covid will change the housing market


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