Cheaper homes lose the most in sliding market

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A slide in house prices has been sharpest at the bottom of the market, on flats and houses, and expected falls over the next 18 months could mean first-time investors will get the best deals in 2010.

That is the claim of the latest market analysis from Capital Economics, the consultancy which has been most bearish on house prices since 2005.

It argues prices of the cheapest properties moved furthest out of line with income during the boom, partly because of the dash by investors to grow buy-to-let portfolios in the days of cheap-and-easy credit with high loan-to-value (LTV) limits on mortgages.

Now the supply of credit has gone sharply into reverse, LTV limits have plunged and there has been a drastic cut in the supply of buy-to-let mortgages.

"Given that the mortgage credit squeeze has had the greatest impact on first-time buyer and buy-to-let demand, it is little surprise that prices of flats and terraced homes have fell the most," says the Capital Economics analysis.

"Similarly, it seems plausible that prices paid by first-time buyers have fallen further than prices paid by existing homeowners."

Figures from Halifax indicate terraced houses have fallen by an average 35 per cent since the second quarter of 2007, down from £209,000 (Dh1.2 million) to £138,000.

Flats in the same period are down 34 per cent from £215,000 to £142,000.

By contrast, detached homes are down by 27 per cent from £360,000 to £263,000 - and semi-detached homes by 29 per cent from £217,000 to £155,000.

Although Capital Economics do not put a figure on further price falls, its predictions for the rest of 2009 and 2010 suggest falls of around 10 per cent.

However, an earlier return of investors - who are evidently buying more homes to create assured short-hold tenancies in the auction room - could limit future falls, particularly on older property.

Capital Economics does confirm that it expects new-build prices to be hit harder than secondhand home prices.

It also says that all homeowners will drastically reappraise their need for living space and move down to smaller homes if possible. Previously, they bought more space than they needed, simply to maximise profits in a boom market.

Meanwhile, if house prices are somewhere near the bottom, the next few months will see the emergence of 'vulture' funds trying to build a portfolio of residential properties on the cheap.

They target 'distress' sales by developers forced to sell to ease cashflow problems, and homes being sold by private owners unable to afford them any longer - usually with funds from private investors seeking an element of bricks and mortar within a wider fund, like a personal pension, when other investments like cash and shares are doing so badly.

If others accept the hassle of acquisition and ongoing management, these investors are ready to invest four and five-figure sums.

When investments are held within personal pension plans, or even Individual Savings Accounts, they may be fully or partly protected against capital gains tax. But investors must realise it could be years before they secure any gains.

On paper, at least, these vulture funds should do well - seeing both substantial capital growth, as the market recovers, plus regular income from rental payments, which do not seem so far to be falling too fast outside London.

Residential Property Asset Management plans to build a £25 million war chest to buy cut-price homes in the Midlands and the North of England at £80,000 to 100,000 each.

"We see an unprecedented opportunity at a low point in the cycle to acquire a diversified portfolio," executive director Barney Buik says.

"We will ensure only the best investments are sourced, and our property team will ensure professional and efficient rental property management."

The parent company, Residential Property Group, based in Market Harborough, Leicestershire, has managed a portfolio for a private company of around 70 homes, worth £8.5 million, since 2001.

Its new Residential Property Recovery Fund is aimed at retail investors, who lock in a minimum £25,000 for at least five years, possibly seven. During that time, there is no income and if they want to get out before maturity, they can only do so if fellow investors agree to buy their stake.

Any capital gain comes entirely at the end, when the portfolio is broken up and sold off.

"If we secure the full funding planned of £25 million - that's £10m from investors, the other £15m borrowed from banks - we will build a portfolio of 250-300 homes," Buik says.

"We are not afraid of flats, but there will be two and three-bedroom houses, terraced and new-build, in the Midlands and the North."

© Emirates Business 24/7 2009