Use property forecasts to help decide to buy, sell, invest, renovate

publication date: Jan 15, 2014
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

Property forecasts will never be accurate, but they are a good guide as to whether you should buy and sell a property and what the implications might be from a financial perspective.

Question one: which forecasts are worth considering?
There are lots of different companies which have been producing forecasts for years. This is helpful as we can track to see how well they have done in the past!

So, on average prices increased in 2013 by 6-8% and on Moneysupermarket, these pundits predicted:-

  • London & Country predicted a flat market
  • Savills Private Finance suggested a small rise in prices
  • Halifax expected the market to be the same at the end of the year as the start
  • Anderson Harris mortgage brokers expected a flat market 
  • Henry Pryor suggested a 2% rise 
  • Nationwide suggested a 1% fall 
  • Ray Boulger from Charcoal suggested a 2% rise

All in all not a great performance, but to be fair to them, no-one expected the Help to Buy scheme which is really what’s driven the rises in 2013.

The companies who I like to follow though are property economists who to me do their homework and know the markets well. Download forecasts for 2014 and for the next 5 years, by company, by region here

Savills estimate their increase by region and these vary from 4.5% in Scotland to 7% in London
RICs estimate their increases by region too and these vary from 4% in Northern Ireland to 11% in London

In addition, the CEBR are pretty good at their economic forecasts, so it’s worth considering their forecasts too and for 2014, they are predicting around 3.9%

Question two: how do you use the forecasts to make your decisions?
On average for 2014, the forecasters are suggesting prices will rise at a similar level to 2013. The likelihood is  some property prices won’t rise at all and some will go up far more than the forecasts. But, as a starting point, they do help in decision making.

What are the pros and cons of renting versus buying?
In today’s market, the only reason to buy versus renting is typically because property prices rise. In a flat market, generally, you are likely to be paying LESS to rent than it would cost you in dead money to buy. read our article on renting vs buying for more information.

So here’s what to consider, if you are renting a property today and are thinking of buying, but can only afford a 5% deposit, here are some examples of the rent versus buying calculations:-

Rental payments per month:                      £750
Cost to buy the property you want:         £150,000

Costs to purchase
You would need a 5% deposit                    £7,500 (or £3,250 between two people)
Pay 1% stamp duty                                          £1,500
Cost around 1% of value to buy                 £1,500 (mortgage, legal, survey fees)
Total:                                                                    £10,500

Bear in mind you will incur on average £500 to £1,000 maintenance costs a year on your property and have to pay for other ‘major costs’ such as roof repairs, leaks etc.

So if you paid rent of £750 x 12 months = £9,000, you could potentially save more money to put down a bigger deposit and get a cheaper mortgage as it’s a lower ‘loan to value’.

But if you bought, you’d pay out £10,500 to buy the property. If your mortgage rate is 5% (that’s the current average) that would be repayments of £842 per month (of which £593.75 would be in interest only). That’s a cost of £10,104 per year and you would have to pay out for any service or maintenance charges.

At the end of the year though, the property, if prices do go up by 6%, would be worth £159,000. So for your £10,500 ‘investment’ in buying and owning, you’d be worth an extra £9,000 minus selling costs of around £3,200, so £5,800. This could easily be eaten up though by a boiler problem, new carpets, curtains or fixing roof leaks.

If you then held on for the year and bought when prices were 6% higher @ £159,000, it would cost you as follows:-

Costs to purchase
You would need a 5% deposit                    £7,950 which is nearly £500 more deposit
Pay 1% stamp duty                                          £1,590, just £90 more in stamp duty
Cost around 1% of value to buy                 £1,590 (mortgage, legal, survey fees), just £90 more
Total:                                                                    £11,130

Overall it would cost you an extra £630 to buy and you would pay an extra £50 a month in mortgage payments if you bought with a 95% mortgage deal.

However, if you could save thousands more during the year and buy with a 10% deposit, then you may get a better deal on the mortgage and actually end up paying less!

If you are buying
The forecasts are suggesting prices will rise through the year, ending up 6% higher than at the start. The best times typically to buy are therefore early on in the year (Jan/Feb) or towards the end of the (Nov/Dec). This is when less people are looking, so as you are less likely to compete for the limited stock we have available.

If you are selling
In a rising market, if you are selling and buying, then it’s better to do so sooner rather than later. This is because the price of the more expensive property will rise in cash terms faster than the price of your own property. For example, if you are selling a property for £150,000 which rises by 6% during the year, it will be worth £159,000 by the end of the year. If the property you want to buy is worth £300,000 now, in a year after a 6% rise, it will be worth £318,000.

If you are trading down
Then ideally you want a rising market as you’ll get more for your higher priced property than the lower one. However, most people who trade down own their home outright and it’s more important to find the right home for you to move to long term.

If you are investing
In this case, there is a danger of relying too much on property forecasts to make money. And when property prices are predicted to rise, this is because demand is higher than supply. This means getting the ‘bargain’ you need to make money is more difficult.

The danger is you get caught up in the ‘hype’ of investing and making money from ‘natural house price growth’ ie by accident rather than by design.

So, my recommendation to investors is to ignore the property price forecasts as they give you false hope. Make sure you analyse your property deal based on prices NOT increasing – then any natural house price rise is a bonus, not a ‘must have’.

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