Is it a really bad idea to buy a house right now?

[kissenger]

Long story, short... my partner and I want to buy a house in the near future, she's super enthusiastic, I'm worried about this supposed imminent 16–20% house price drop. I don't want to be in negative equity in a couple of years time. What should I do?

I'm in two minds over this:

On the one hand... we both want to buy a house, we've found a house we like, we have the deposit and we've spoken to a mortgage broker who has given us the green light. It's also the right time for us to move, with our boy coming up on 2 years old and hopefully another on the way soon. My OH dreads the thought of having another baby and maternity leave in the tiny house we're currently in. This is a big factor.

On the other hand... virtually every bit of news I've seen has said there is going to be a house price fall in the region of 16–30% in the near future due to Covid. When the furlough scheme and other support ends, supposedly millions are going to be out of work, which equates to 1000s of homeowners needing to sell-up, which will crash the market.

If we buy, and that happens, we're going to be in negative equity in the near term, and judging from the last crash in 2008 it will take the best part of a decade to recover. In which time we might be forced to sell or (more likely) remortgage, and we'll be in a crap position.

If it was just me, I would wait another year to see what happens. But delaying that long has costs for my family, so I'd rather not if I can help it. Plus, it does seem like the government is intent on doing everything it can to prop up the housing market. It obviously doesn't want a crash. Hence the stamp duty holiday and super low interest rates. So maybe there won't even be a big crash? Although I'm not stupid enough to think I know better than seemingly every top economist.

The other thought I had is, you can potentially 'crash-proof' yourself if you buy a property you can extend and add value to (the one we're looking at has a lot of potential to do that). So if the market drops by, say, 10%, but you've added £100k to a £200k house (after spending around £50k), then you're still up, especially when you also consider the money saved on rent.

Anyway, as you can tell I just can't decide, so hopefully OCUK sages can offer some advice?

 

[kissenger]

Basically whatever Psycho says.... do the opposite. Not a chance house prices will drop 30%.

This is my thinking too. There are far fewer homeowners on the brink than before the last crash because of stricter mortgage lending rules, and interest rates are low, so mortgage payments are more affordable. But then another part of me thinks, "these experts can't all be wrong!" Or maybe it's just safer for them to predict a crash: fail to predict a crash that does happen and you lose all credibility, predict a crash and it doesn't happen, everyone is pleasantly surprised!

We've wanted to move for a couple of years now, and the house we're looking at is our dream home. My OH wanted to put an offer in before we even viewed it! It's an estate we like, near the school we want. It's big enough, but also has room to extend, so we can add value to it hopefully. Main thing though is moving before baby two comes (next summer). I don't want to miss out and look back in a couple of years after a crash that didn't happen and regret it.

I also wonder whether whatever house price changes there are will affect different types of houses differently. Yeah, a £300k flat in a city centre might lose 30% temporarily, but a lot of people are going to want to move out of cities to places with more room and a garden. The place we're looking at is definitely the former: it's in the suburbs with a big, flat garden. Maybe that counts in our favour?

 

[kissenger]

The banks wouldn't pull 90+ ltvs if they didn't forsee a decline

I agree up to a point, but they are still lending at 90% LTV, which partly contradicts what you're saying (yes, they're harder to get, with higher interest rates, but still).

I think we'll know a lot more after furlough ends (this/next month?). Whatever damage has been done will be evident then, so at least the uncertainty will be mostly over.

 

[kissenger]

Good point, mid_gen.

Can I run what seems like a likely scenario past you guys though, to see if it checks out:

Let's say we buy now at £220 with a £22k deposit (we're FTBs). In five years we remortgage, but the house has lost 5%/£11k of its value. But we've also paid off £25k of the principal. That means we owe our first mortgage provider £173k (£198k minus the £25k). In which case, if we were to remortgage we would have about £36k in equity in the house, which equates to us asking for a 17% LTV mortgage. Does that sound right?

In other words, although the house fell in value, we are still quite a bit better off financially than if we had stayed renting? If so, this does sound like the best option, even in a falling market. Especially if we can add some value to the house with an extension (the property has space at the rear and side for extensions, and the listing even mentions the possibility of extending, which others in the same street have done).

 

[kissenger]

I think this thread has swayed me a bit in the direction of buying. It’s just the doom and gloom that gives you a niggling doubt. And the thought that if we buy at the bottom of the market instead of the top we could in theory have much more equity in five years. But it’s a very big ‘if’... There might be no drop, or I could be waiting years for it and paying rent somewhere we don’t like in the meantime.

We’ve tried to do our homework and pick a good spot: it’s in a nice suburban location, good schools, nice parks nearby, not on a flood plain, etc. So hopefully if it happens it will work out okay.

 

[kissenger]

We've decided to put an offer in on the house. What's a sensible offer on a property listed at OIRO £225k?

My thinking is to go in at £215k. I think if the seller sticks with £225k we'll just wait to see what happens in the market.

 

[kissenger]

FWIW, I met the seller at the house today and it's obvious she wants to move quickly. She even told us she has a property lined up she wants to buy, but has a deadline of 8 October to formally agree. We're FTBs and we've got our mortgage and deposit ready to go, so hopefully we can get it at a good price as 'good buyers' so to speak.

 

[kissenger]

I’ve mentioned it a few times. We offered £255 on offers over £215k. We were 6th best offer.
We then offered £262 on offers over £209. We were 5th best offer and it went for over £300k. My advice? Figure out what you can afford, what you’re happy to pay and offer that. As we say up here “go balls out”.

It’s a sellers market, there’s no chance to negotiate.

You might be right. We'll see. It could also vary a lot based on which part of the country you're in as well though.

 

[kissenger]

So we did put a final offer in of 213k (exactly 5% below asking). Unfortunately we didn't get it. They had two other offers and one of them was higher than ours. It's disappointing, but I think the smart move financially was to not get in a bidding war.