In This Guide
Apply for a mortgage
Buying at auction
Buying in Scotland
Conveyancing
Find and view
Negotiate
Plan your purchase
Success and failure
Surveys and valuations
To buy or not to buy
1. It begs the question
2. The financial arguments
3. Economic factors
4. Stay where you are!
5. With your partner
6. With your friends
To buy or not to buy
Economic factors
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Whether you realise it or not, economic factors influence many of the things that go on around us. A trade embargo on a major exporter of kiwi fruit could put a few pence extra on the price of that particular fruit in our supermarkets; a weak currency could be a major factor in a region securing inward investment from businesses in other countries, leading to jobs and eventual prosperity; an overambitious estimate of the demand for housing in a locality could lead to a new development being abandoned and left derelict. Our tiny lives play a minute role in shaping the economics of our day and we struggle to understand how it all fits together. In spite of this, it is possible to see the bigger picture, and how the mechanics of it all work. Trying to think this way can help you decide when and where to buy a house.
When considering the factors that are outlined below, ask yourself three questions that are in themselves, closely linked:
- Will this make it easier to sell my house in the future?
- Will it affect the price I am likely to get for my property when I decide to sell?
- Is this likely to change in the near future?
The housing market, like all economic markets, is in a constant
state of flux as it searches for perfect balance between supply
and demand. Knowledge of which way the market is going can have
a profound influence on the timing of your purchase. The trick
is to buy when the market is low and sell when prices are high,
maximising your profit. Getting it right is not easy and some
analysts get paid very large sums of money to predict the upturns
and downturns of the market.
There are some signs you can watch out for if you know where to look. Fast sale times usually mean that demand is high and prices are on the up, rising interest rates often lead to a lower demand that stifles prices, while heavy bouts of recruitment from estate agents could mean that they are preparing for rapid growth in the market. Remember that any pointers you use are only an indication of the near future. Even when everything tells you that the market is rising, you may still pay one price for the house you want and find you could have bought it more cheaply if you had waited a few months. Read the signs, but don't rely on them too heavily.
The overall stock of new housing, or supply, has a direct affect
on the aggregate level of prices. When there is too much new development,
prices lower to stimulate demand and when there is not enough
new housing, prices rise as the sellers are able to get a better
price due to the high demand. This can happen on a aggregate scale
across the whole country, as well as in a particular region, area
or even street. The supply of new housing is just one factor that
affects demand for property, but it is not a relationship that
exists in isolation. Here are some more factors that can influence
the demand and therefore the price.
The interest rate is one of the most commonly used tools for controlling
the economy. One of the main reasons that interest rates are raised
is to stifle demand by making it more expensive to borrow money.
This can mean that periods of high interest rates can be a good
time to buy property. Demand may be lower, with correspondingly
lower prices. It's probably wiser to go for a discounted
rather than a fixed
rate mortgage though - you don't want to be stuck paying a
high rate if and when the overall interest rate starts to fall.
The higher initial payments that you incur when rates are high puts many people off, especially first time buyers. But a higher rate at the outset means that you will find it easier to cope with lower payments when rates fall - if you buy when rates are low and then they rise, you may find you are overstretched.
If there is a glut of properties on the market that are similar
to the one you are looking for, your may find it easier to negotiate
on price. Conversely, if you are trying to buy a rare type of
house in a sought after area, then you will have to be prepared
to pay a premium for this.
Certain types of property can become fashionable and trendy, as can areas that may have been run down a few years earlier. This is hard to predict. Be cautious when considering buying in an area that is currently en vogue or a property type that has suddenly become popular. You may be paying an inflated price for something that goes out of fashion in a few years and becomes difficult to sell. Buying tomorrow's trend is no easier, but if you can pull it off you are on to a winner.
Large differences in prosperity across different regions exist
in the UK. Whilst house prices have risen in most areas in the
year to June 2000, around 10% of areas suffered a dip in property
value. Major events such as the opening of a new factory that
brings jobs to an area can have an impact on property prices.
If you become aware of a high level of inward investment in an
area, it may be a good time to buy there, as prices could well
rise in the future. Zones of urban redevelopment are a good example
of this. Local councils, major developers and the EU are funding
redevelopment work in cities all around the country and pre-empting
the completion of developments can be a pathway to profit.
High birth rates, low death rates, increasing life spans, immigration,
emigration and population migration all affect the overall level
of demand for property. As the population grows, so does the demand
for housing. This is very much a factor that affects your purchase
decision in the long rather than the short-term.
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