Covid-19 and House Prices
What determines house prices? The media routinely blame estate agents for inflating the property market.
But dogmatic vendors often have over-optimistic ideas about what their home is worth. And woe betide any estate agent who dares to contradict a prospective customer with an insultingly honest valuation.
Then again, estate agents are under enormous competitive pressure to persuade homeowners to put their homes on the market with them as ‘sole agents’, and the easiest way to win this battle is to ‘go in high’ – the thinking being that you can always slash the asking price later once it’s safely on your books.
Of course ‘a house is worth what someone’s prepared to pay for it’. Except when it has ‘special value’ to one person – like where a buyer pays over the odds because they hope to get planning permission for a lucrative development. Or rival buyers succumb to ‘auction fever’ and outbid each other. Or perhaps a flat has a special value to someone because their family happen to live next door.
The acid test comes when the mortgage lender appoints a qualified RICS chartered surveyor to research and confirm their opinion of market value. So what effect is Covid-19 having on valuations?
It is accepted in the surveying profession that ‘valuers don’t make the market’ – in other words they don’t engage in crystal ball gazing by trying to predict what may or may not happen in future. A valuation is valid at the date of valuation – the question is what is the current market value of a property?
The biggest change at the moment is that most valuations are having to be carried out on a ‘desktop’ or ‘driveby’ – since internal inspections are in many cases not permitted. These are based on information available online, from specialist websites, past sales, lettings and valuation data, regional house price indices, as well as information from estate agents. Google satellite and street views are also utilised along with EPC registers and Land Registry data etc.
Mortgage lenders have to decide how long a valuation will remain valid in today’s unusual circumstances. Most are reacting to the Coronavirus pandemic by reducing their appetite for risk by cutting loan-to-value ratios, down from as high as 95% to 75% or lower.
Paradoxically this is likely to slow the market even further – because house prices are largely driven by how much money banks are prepared to lend.
One of the primary causes of the property boom that ended with the 2007-08 crash was banks recklessly lending.
Probably the most infamous example was the lender Northern Rock which would lend as much as 125% of a property’s value (their former CEO ‘Lord’ Ridley today dispenses financial advice as a columnist for The Times!).
For mortgage valuation purposes, market values are based on evidence of historic transactions of similar properties completed (or under offer), ideally within the last 6 months in the same postcode area.
But talk to some of the more enlightened estate agents and they will tell you that asking prices are already having to reflect reduced demand due to the effects of Coronavirus. And economists reckon that most of the key indicators are in place for a future property crash – apart from interest rates on mortgages which are at an all time low.
However property is a notoriously ‘illiquid’ asset, which means you can’t just sell it one day and start spending the money the next. This acts as a brake on values dropping quickly. The fact remains there’s a national shortage of housing. And right now most other investments are looking even more precarious.
Nonetheless, if you’re thinking of buying it makes sense to negotiate hard – and the best way to justify a reduced purchase price is by getting a survey – vendors and selling agents can’t argue when you present them with a costed list of defects to deduct from the purchase price (which is normally based on properties being in reasonable shape unless defects are obvious).
Our next blog – coming soon …….
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