What if house prices fall

Article from Self Build Homes Club

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Property prices falling slightly, if it ever happened, would not be as harmful to you as not becoming involved in property. In this article I want to look at why it is extremely unlikely that over any period property prices will fall, and how the system as such, just about guarantees prices will follow the same course as they always have in an upward direction.

Should prices fall it would make no real difference to the majority of people, they would just not move for a period, and as long as they don't need to sell or use the equity of their homes for something else, then it has no impact on them. Anyone who has had a home for more than a few months is unlikely to have the house fall below the price they bought it at in any event.

Like councils that talk about cuts when they have more money, but not as much as they would like, you may hear of prices being said to be falling, when people are just not getting the extra large rise they had hoped for above everyone else in the same locality. So prices may not actually be falling at all, just people not getting all of the price they had hoped to get, or prices failing to rise as fast as before. 

Statistics may also be misleading in that they compare all properties in a classification, and not necessarily of equal value. As fewer well off people will upgrade when times are less certain, there may be a lower number of high priced houses being sold which shows in the statistics as the average price of houses sold as a lower figure. A small shift in the style of property selling can distort the statistics a lot. This can mean that if you have a line of identical houses, as they come up for sale, each may sell for a larger sum, while the statistics can record a fall or no increase, because other higher priced homes in the are are not being sold at this time.

As many years back as I can remember, some people have been predicting house prices will fall, and yes, just occasionally, they are right for a short period, however over this time span generally house prices have been going in one direction only and the first house I bought for under £3,000 would cost you approaching £200,000 today. I arranged an option to buy a 38 room Georgian mansion for £30,000 in the south of England at one point, and I would love to find the same deal again, but would be amazed if I did.

Over time, property has constantly gone up. Just ask yourself, is a person who bought an equivalent of the house above for £3,000, and now its worth £200,000 better off or worse off through being involved in property ownership. The answer is so obvious that it may seem a silly question to ask, but then again some people did not buy at the time, because prices might fall, and have still not bought. The next question, is it likely that prices could ever fall back to the point where they could be worse off. Of course not. So over time prices always go up to a far higher and reach a point where it is unlikely that any property price fall, could ever leave them worse off.  What we cannot say, and no one can, is how fast property prices will go up in the future and therefore how long you will need to own a property bought at full market value, before you can be confident that come what ever, it cannot fall back below the price you bought it at. Now if you could buy a property at a large discount, as in self build, you will realize that while you may not make as much as you dream of, if you come to sell, its just about impossible to loose money.

Lets for a moment discount the advantages of self build and the savings available to you and look at what we can learn from history, what we expect to happen and why property prices go up, and always will over the longer term.

There was once a period when prices did fall back a little, and this was caused by interest rates going to a stupidly high level. At that level some people could not afford to pay their mortgages. 

Later this year, 2004, we expect another point where prices may stand still or fall very slightly, however this is predicted to be short lived. So why towards the end of 2004 are we expecting to see a hiccup. The reasons for this is a slight upward movement in the interest rates, to cool the market, colliding with a period 10 years from the start of a deal where buy to let owners, pay less or no tax, on appreciating values over the first 10 years of the ownership of a house. This in effect meant that all homes owned prior to the point the scheme started were viewed as starting at the same date. Some buy to let owners may therefore take the view that selling their houses later in 2004 and buying replacements could reduce the tax they end up paying, and some who hold large numbers of houses have already said that they intend to do exactly this. This will increase the number of houses on the market at a time when demand has been reduced. Once this bubble has passed the number being sold will be far more constant. The only real risk is if through the ignorance of the causes of this, too many people are frightened away from buying for a period or too scared to take the plunge and buy, just in case prices fall.

So why do we get all the constant false predictions of house prices falling. Well perhaps we should look at where they are coming from. We find generally the source of these is those who want you to invest in other items, stocks and shares and insurance products being the top offenders. 

Politicians play it both ways, many own a number of houses, and having chosen that form of investment you can be fairly confident that they will not be too hard on those who have chosen to do the same, and it is in their own interest for property prices to rise. Having said this, civil servants and public employees have to live somewhere and in order to keep down demands for increased wages to pay for it, they have to make the right noises. Often however it is just noises, with the occasional projects that have no impact at all. Added to this they have schemes that allow government employees and some public service employees to join in a split funded scheme where the government owns a part of their home, and its the government that owns the increased value of that part when they move, or  change jobs and have to sell. Its therefore beneficial for the government if prices go on up, people will not be able to move to another job and the government gains all the equity increase on its many property shares. 

So why you may ask do prices keep going up. The answer here, like everything else in a market economy, is supply and demand. There are not enough houses to house all the families and everyone who would like a home. Given the growth of population, more people living longer, increase in the number of single parent families and those who just choose to be single, and you see there is a large constant increase in the need for housing. Not only is the number being built way below the increased need, but there is absolutely no way that the need can be met. A shortage is therefore guaranteed.

So why do we have a shortage of housing. Well as you will come to discover when we start looking for a build site for you, there are plots but the amount of land being given planning approval is well below what many would like to see. At any time there are about 10,000 sites available to self builders, but between 15,000 and 20,000 self build homes get built each year. Given that many sites that are available are not suitable or not liked by people, the nice ones that do come up are quickly snapped up, and the ones we find out about often don't become available to the general market. 

Its not that we are short of land in Britain, drive around the country and you will see, growing towns and cities, but many areas that have open fields as far as you can see in all directions. In fact retaining land is not a priority of the governments and they have announced many of the countries sea defenses are being abandoned so great areas of countryside will be abandoned to the sea at various points around our coastline. You may hear rubbish about rising sea levels and how these areas are required to be flooded so that cities are not threatened, however if you compare these areas to the 70+ percent of the globe that is already covered by water,  you will see it will make no appreciable difference to water levels whatever happens. Its just money, they have chosen to spend it on other things than sea defenses, and after all the number of farmers who lose out and the votes to be lost will not effect them.

There is some problems in freeing up a lot of land for building, in that extra infrastructure, roads, sewers, schools, hospitals etc are required, and so most development is restricted to the edges of existing settlements rather than looking at developing new villages and towns. But let us suppose that instead of giving up an area of land to the sea and abandoning the sea defenses the area was bought off the farmers at agricultural rates, and then used for building a new town, with land now worth very many times more and you can see that the increase in land value would easily cover all infrastructure costs including sea defenses. Done in a number of locations and allowing other sites such as unused military sites and airfields to be redeveloped as new villages, and you could move towards equaling up demand and  supply a bit. As this has not been done, we have to assume that there is no desire to increase housing supply drastically.

Many years back the value of everything was based on metal values.  The original bank notes promising to pay the bearer one pound, actually meant a pound weight of silver, today of course they no longer would give you a pound of silver for your pound coin. In a similar way the asset value that backed a currency used to be piles of gold, however there are no longer piles of gold backing the currency. Instead they work out the theoretical value of assets in the country, everything including roads, factories, hospitals, land and buildings, including houses, and the housing stock in the UK is now a very large part of this calculation. The theory being to balance the books between the theoretical value of assets and the currency that bought it. As values go up, there is a need for more currency within the system, not only for it to work but for the calculations to balance. Governments overcome this problem by in effect just printing more money and can do this, in theory, right up to the asset value of the country, before the currency starts to be devalued. So as you will see, in theory, every time your home goes up in value by a pound, the government can give itself permission to print another pound, not surprisingly no government has ever been keen on stopping prices of property going up. 

The second limiting factor on housing is the number of people able to build homes, in this case I am not referring to self builders, but the tradesmen in the construction industry. The movement has been to increase places in universities and push more people into service economies and the like, the politicians have just not given recruiting and training more people who can become bricklayers, carpenters, electricians,  plumbers and the other necessary trades that much attention, so even if as much land was freed up as needed, there is just not the skilled labor force to build the homes in a hurry. So you might think there would be a  desire by building companies and others to recruit and train people, but no, the movement instead has been towards more factory created sections, flat pack standard homes for carbon copy estates. Cheaper to build in volume, less dependent on the weather and perhaps less quality control needed on site. More recently you may have seen buildings being created as cassettes, these are stackable rooms that have been built in a factory even down to the wiring and plumbing. Generally the movement in new mass housing has been to smaller, lower grade, limited life cheaper construction, but once it has an outer  skin it looks nice, and with a shortage of housing sells well.

Another factor towards increasing prices has been the increase in buy to let, brought about by people realizing that the roller coaster of the share market is as reliable as visiting the bookie as a form of investment. Now they have switched into property, discovered gearing where they can in effect use other peoples money through mortgages, the gains they can make are far larger then anything likely in the stocks and shares markets, but without the risks. Lets look at just £15,000 invested in stocks and shares or a buy to let.

Just think over the last few years,  which one was likely to have doubled in value and which had risk attached and you will see why so many have been so keen to switch. The unpredictability of the stock market and poor performance by pension funds based on it, has been a driving force to encourage more people to look to buy to let as a major part of their financial arrangements. The movement into buy to let can be expected to continue and many people already have considerable holdings. Every property purchased by a buy to let investor, reduces the number of properties on the market further, and helps prices to move up.

Buy to let looks good, but what about if you had invested the £15,000 in a self build at say a 50% saving over normal estate homes. This of course means that your property is guaranteed to double in value on completion and be 4 times the value by the time the estate built home has doubled in value.

Over quite a few years peoples homes have earned a great deal more than they have. Given that if you go and earn money you loose more than half of it in various forms of tax and you don't have any tax on increased value of your property, you can see that every pound earned in property is worth far more than in other ways.

We have of course only used simple figures here to illustrate how things work out, 40% discount is perhaps more realistic although the normal range is 25-60%. However when you speak to a person on their third self build who no longer has a mortgage and gives the appearance of wealth and a greatly improved lifestyle, you will now have some understanding of where they got it all from. Of course neither I, nor you, or anyone else can say what property prices will be at in 10 years time for sure, all we can be sure of is that they will be much higher than they are now.

So what if property prices were to drop

Going back to the topic of this article, what if prices fall, or stand still for a while. Well actually if you could time it just right, then the best time to start on a self build would be when prices were falling or standing still, as at that time fewer builders and others would be buying up plots and therefore the price we can find plots at could be quite a bit lower. However as soon as the price starts to pick up again the plot price would quickly rise, as demand increased and sellers got the confidence that to wait would mean they had no risk of a loss. Those involved in buy to let just about whatever happens have no real risk of prices dropping below the discount that they have, and therefore there is no risk whatever should happen 

One final question to leave you with

Given that as long as you live in each house for a while, all your profit is tax free. Based on our example self build above,  just how much do you feel you would have to get as a salary, allowing for tax, NI and costs etc, to earn as much as your house can earn for you?