Why You Should NOT Drop Your House Selling Price

Saturday, 4 October 2008

[Graphic of half price house]THE British are obsessed with two things: the weather and house prices.

The great many TV shows relating to property is a clue to how important this is to us; there’s something about “bricks and mortar” we love to invest in. In this post I shall try to explain why dropping the price of your property is a bad idea, and that everyone should act like a proper investor and wait for the tide to turn!

Banks were reckless, lending money on easy terms to almost anyone, and this got us all into trouble when the tipping point was reached last year, and enough people defaulted on their repayments.

[Picture of Kellog's Fake 'Credit Crunch' Cereal]There is a slower or lower growth rate, and possibly even a recession.  A recession is the opposite of growth.  An economy may recede back to some previous level — last month’s, last year’s, or the level of a few years ago.  I suppose a “depression” is when an economy falls to levels of many years ago. So a recession in itself is not the end of the world as we know it, it all depends on how far the economy recedes.

Growth is all about more.  More consumers buying more consumables. Ultimately growth is about confidence; if you think you are secure for a few years ahead, you may feel OK about taking on a bigger mortgage or buying more things on credit.  Buying more things means more things are needed to be made — and this means more employment.

The opposite is clearly true.  Recession is about a lack of confidence.  You don’t feel it’s a good idea to risk a loan or have a big credit card debt.  You tighten your belt to play safe, but this means the shops are full of things no-one is buying, so orders dry up, people are laid off and companies go bust.

Banks that were reckless when they were confident, become cautious and stop extending credit to everyone — just in case their customers lose their jobs and cannot repay the loans.

People who have a house on a mortgage cannot move to a bigger house or a better neighbourhood  — they can only move to a house of the same value — a “sideways” move, a relocation.  This is because they cannot obtain a new mortgage or top-up — and that’s about it for the property market just now!

Even people who own a house outright (who have paid off their mortgage, for example), are stuck — they cannot downsize because they need people to buy their properties to access the equity tied up in them. Executries are the same — selling a dead person’s house requires buyers.

First time buyers (FTBs) cannot get a mortgage or a loan for the deposit.

The result is that the property market is in the doldrums.

So what to do?

Some people suggest that dropping the asking price for a property would stimulate the market — but how is that going to work when there are no loans on offer?  It might stimulate the relocation market, but not by very much; ultimately a loan will be required somewhere in the chain of events.

In fact dropping the price of your home is the worst thing you can do at this time.

[Picture of girl holding a bag of cash]Just like recession,  the value of the property is that it grows — property is an investment.  If the growth slows or stops, the investment is bad.  The value can drop back to last month’s, last year’s or worse.

The investment may be “bad” if you’ve had a property for many years — but that begs to be compared with alternative investments over the same term.  In present day terms, not much has been a good investment. But then again, investments like this are usually considered medium to long term, so investors will just wait for the markets to resume growing again in a few years.

However, if you’ve only had the property for a year or three, then the devaluation could knock you into negative equity — which is worse than a bad investment; it’s an actual LOSS if you sell now. You will sell for less that you bought it for — potentially for less than you need to pay off the mortgage!

Obviously that is crazy — no-one would just sell for less — there would have to be very compelling reasons to give away their house and money like that!

However, there is a section of the market between what I’ve just described.  This section is people who have owned a property for a few years, and who might be persuaded to drop their price on the grounds that what they lose they will gain in the buying of their next property.  They are told that it balances out because all properties are dropping — not just theirs!

They can be even be persuaded to drop their price because they can take the hit, they can accept a loss of profit margin, they can abrorb the loss because it allows them to sell and move on to a new house — lots of people just want to move for all sorts of reasons, including getting fed up where they are!

Now here’s the thing…

If enough people get persuaded to drop their asking prices, the market starts to die.  This is because property is an investment.  Who wants to buy a house that doesn’t go up in value?  Who wants to buy a house that might drop further — and create immediate negative equity?

[Picture of a For Rent Sign]Consider this example:

Imagine two houses side by side.  Both are available, one is for sale and would cost you £500 per month in mortgage repayments.  The other would cost you £500 in rent.  Same house, same outlay.

Now, in good times, if you paid the rent, you’d be chucking away £500 a month — but the £500 mortgage is being offset by the increase in equity.  After a number of years, the rent would still be £500 or more, but the mortgage would effectively be £300 a month (realised on sale, of course). Another way to look at this would be to say that they are equal, but when the house is sold, you get a lump sum to add to the mortgage for buying the next property — allowing you to climb the property ladder to bigger or better houses.

However, in bad times, the opposite is true.  The rent looks like the best option.  It’s £500 a month — and if you lose your job in the recession, then state benefits will cover it straightaway.  But the £500 mortgage is scary — you do not get state benefits to pay for it for the first six months — that’s three grand deeper right there. You cannot sell unless you HAVE to, so you drop the price to to cut your losses.  You have to give away the property or have it “repossessed”, and negative equity means you will still have debt — but if you act quickly it might be better than the three grand in arrears!

Which would YOU choose at THIS time — the rented house or the one for sale?

The best advice to homeowners is to stay put. DO NOT DROP YOUR PRICE.  Act like a real investor and wait it out! If push comes to shove, and you absolutely need to move, then rent out your house and move into rented accommodation yourself.

Things will soon improve.

I say this because markets ultimately are driven by demand.  There is a need for housing, be it rented or bought. There are simply not enough houses to meet the demand for renting — or investing.

[Picture of Children's character Bob the Builder]Once confidence returns with loans, FTBs will buy cheaper properties again, allowing people to move on up the ladder to new builds and so forth.

Confidence will only return once the “bottom” has been reached, and only when the statistics and measures have stabilised. Only then is growth inevitable.

Everything will have been cleaned out, there will be winners and losers.  It will be out with the old and in with the new.  Shares and stocks will stop falling, enough people will have lost their jobs.  The new and young will flex and begin building it all up once more.

People will decide that they have been careful and thrifty for long enough — they will want some risk, they will want a reward for the hard times

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