Imagine you are about to exchange contracts on your new home. You’re happy with the survey, you’ve sorted out a mortgage and instructed solicitors. It’s a massive financial and emotional decision, but you’re confident you can afford it and reasonably sure you’re getting the property at the right price.
Then, out of nowhere, comes a global pandemic, turning the economy and society upside down and pulling the rug from all your financial assumptions. What should you do?
Judging by our online Q&A on FT.com last week, plenty of readers are wrestling with this question and are desperate for guidance on what could be the biggest financial decision of their lives.
Just under a month has passed since the government put the UK property market into suspended animation by asking buyers and sellers to delay purchases, barring property viewings and home visits from estate agents, surveyors and valuers to limit the spread of coronavirus.
Postponement is the default option, but this leaves open the question of whether buyers and sellers, frozen in mid-negotiation, can expect to pick up where they left off when the restrictions end — or confront a brutal correction in conditions and prices.
Describing their predicament on FT.com, “London couple” are buying a house in the suburbs of south-west London and had reached the stage of having their offer accepted when coronavirus slammed on the brakes. They had intended to take out a two-year fixed rate mortgage and build an extension to add value, before selling on in a couple of years. But the economic disruption undermined their plans. Further information should be explored through https://www.thepropertybuyingcompany.co.uk/landers/how-much-my-house-worth.
“We are now concerned that the predicted drop in property prices means we may end up losing money. Should we go through with the sale, and how much should we decrease our offer by?” they asked.
Another FT reader was about to exchange on a first home — a vacant property — completing soon but not moving in until the lockdown ends. Having agreed a price last year, he subsequently renegotiated a 3.5 per cent discount but further doubts had set in: “Should I have been more aggressive with my negotiations in hindsight?”
A different buyer in Guildford, who contacted me by email, had managed to chip 5.25 per cent off the price in February but was rattled by the economic outlook — possibly exacerbated by the 83 per cent loan-to-value mortgage he was taking on. “Given that I’m a first-time buyer, and the current market position, I’m wondering if now is really the right time to buy or if I should hold off on exchange/completion . . . or pull out.”
For housing market experts as well as FT readers happy to dispense advice in the online comments section, the difficulty is that any guesses about the long-term impact on house prices are shot through with uncertainty.
In normal circumstances, buyers and sellers themselves determine the range of prices that are deemed acceptable to both sides, depending on the interaction of housing demand, earnings, mortgage availability and their expectations of the market’s direction. Today, any recovery is predicated on decisions made not by market participants, but by epidemiologists and politicians.
Will the lockdown end in relatively short order, allowing the market to pick up in the summer? Or will we see a resurgence of the virus, which forces a longer shutdown or a stop-start approach to restrictions? Chris Whitty, England’s chief medical officer, suggested this week that constraints of one kind or another can be expected until the end of the year at least. A protracted shutdown for public health would risk permanent business closures and wider job losses, with knock-on effects for housing demand.
Estate agents, not known for their pessimism, have estimated that average house prices will fall by anything between 3 and 10 per cent this year, according to different pieces of research. Buying agents, who act for purchasers, remain sceptical of any forecasts that lend a spurious precision to imponderable forces. But that does not mean they think buyers should plough on regardless.
Their clients expect prices to be lower when the market reappears — and they want vendors to acknowledge this in prices today. This could be anything from a gesture of 2-3 per cent to a punchier 10-15 per cent, depending on location and other factors.
There is nothing to stop buyers asking for more aggressive discounts of 20 per cent or more — as a number of readers suggested in our Q&A — but they have to be prepared to see sellers simply walk away from lowball offers, even in these extraordinary economic times.
Knight Frank, the estate agent, says 20 per cent of pre-exchange deals have foundered since the lockdown started. Bear in mind, too, that many vendors will have their own onward purchases to worry about, so may not be as free to slash prices as buyers might like.
Buyers such as “London couple”, with big mortgages and a short-term selling plan, will be most at risk from any sharp drop in prices. Different advice might apply for those intending to put down longer-term roots, having identified a home after an arduous search, and who have already made an approach to the vendors. There may well be room to adjust the price, but would you be prepared to lose your “forever” home by playing hardball?
When the lockdown lifts, any short-term release of pent-up demand is likely to be offset by reticence among buyers, sellers and mortgage lenders as they figure out where the new pricing range lies.
Sellers may think their bricks and mortar asset remains as attractive as it did in February. Buyers will be expecting discounts. Meeting somewhere in the middle will take pragmatism and, for those first out of the traps, a certain measure of courage.