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CountingTheDays

Extensions: impact on house price indices?

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I'm sure this must have been covered over the years on HPC but I couldn't find anything, so here goes...

Where I live (south coast), I've noticed a significant jump in the number of people extending their properties. Not surprising, really; as house prices rise, people are inevitably either trying to rake in more cash by extending and selling on, or can't afford to move to a bigger place so build an extension ('cos it's cheaper, innit? :P).

This set me wondering: do the house price indices take this into account when mix-adjusting? Obviously, if they don't and enough people extend and sell on, the impression will be of a steady increase in prices over time. In areas where there are few sales but a lot of building work, this could skew local prices quite considerably. And I'm sure this is increasingly the case, given the points I raised above. As to the extent of the increase: who knows? Perhaps it's too small to worry about, though over a decade or so, perhaps not...

So... does anyone know either way? And if the indices don't adjust for this, has there been any attempt to quantify the effect?

Ta.

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I assume the Nationwide and Halifax get a floor area number from the survey and it would make sense for them to include it - floor area is a great predictor.  I doubt the ONS index can account for it because they use VOA data for their hedonic regression.  There are (were?) plans to use EPC data but I don't know what came of that.  I agree that it's probably a pretty big effect over time, if the mix adjusting is done on number of bedrooms then they're going to miss it entirely.

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I do wonder how well these extended houses will sell once prices start to go down. I have friends who are about to break ground on an extension in the new year. They purchased a 2-bed/1-bath semi with garage in the South East for about 225k in 2012. (This was including a 70k deposit from their parents since their salaries were too low to get a bigger mortgage). The house is quite small. Just one reception room which isn't very big and must hold the dining table as well as their sofa since the kitchen isn't large enough to fit a table.

Their plan is to extend the kitchen to create a kitchen diner which will eat into their already small garden. They will also add a loft extension that has a third bedroom but the only place for the stairs is through one of the existing bedrooms, which will either make it a very large landing or a single bedroom rather than a double. They are of course using the equity due to HPI to pay for this.

Up until now the thought process has been "I'll just extend it and someone will buy it. Doesn't matter if it has a tiny garden or is really 2.5 bedrooms rather than 3. Buyers are desperate for anything they can afford". But we've already seen people becoming more picky lately. It will be interesting to see the reaction if these homes with ill-thought out extensions don't end up being quite so desirable and the owners suddenly have an even higher mortgage than what they started with.

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I've made this point numerous times, when confronted with the FACT that new build underperform resale property. HPI is not investment adjusted to my knowledge. My street is in the process of massive gentrification (bungalows to HofHaus) which will skew the indices

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It's an interesting question. Certainly, anecdotally, extensions seem more common than they were - I guess simply due to the huge costs of moving now (stamp duty on obscene house prices might cost as much as an extension). No doubt some extensions are poorly thought out, but round my way a lot of bungalows on decent plots are getting the full loft treatment and maybe a bit of permitted development at the back, which is doubling the internal area and undoubtedly adding value.

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Around here (SW London) just about  every other house where it's possible to do so, has been extended, into the loft or the garden or side return, or more than one of these. 

The cost of moving from say a 3 bed to a 4, is usually way more than the cost of extending. 

So sold prices may well be misleading if you weren't aware of before and after. 

I do sometimes wonder whether council tax is automatically whacked up, or does someone who's turned a 3 bed one bath into a 4 bed 2 bath end up paying the same as a neighbour with no extension, at least for a while?

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I believe it would affect the price as long as the buyer believes it has enhanced the property.  If you had a choice of two identical semi's and 1 had central heating the other did not would you pay more for the one with?  I believe anyone would as they don't have to get that job done and you can add it to the mortgage and pay for it over time, however if you thought i can get that done cheap or it was obviously shoddy work then you would not, but there would be a price point that you would not pay more for it.  The extension is even more accute as the owners may have changed things in the house over time and as planning laws change all the time.  so what they have achieved to change may now not be possible so you might now pay a premium for that extension so if a loft conversion adds a nice bedroom and en-suite to the property and costs 40,000 to do, but you cant now get it done via planning would you pay 30k extra? 40k extra or even 50k extra.  however if i was an 80 year old that cant climb stairs it useless to me, so worth nothing.

 

Mrs Bear, the council tax is not whacked up until the owner moves out as at that point it can then be revalued by the council as you are buying it as a different property with extra bedrooms that would have changed the price  when the council valued the home to asses council tax.

 

 

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1 hour ago, Mrs Bear said:

I do sometimes wonder whether council tax is automatically whacked up, or does someone who's turned a 3 bed one bath into a 4 bed 2 bath end up paying the same as a neighbour with no extension, at least for a while?

I think the process is that they are supposed to bump up the council tax band when the house is next sold.

I bought a dump on a big plot (rated Band E) and improved it so it would probably be Band G now.  I still only pay band E, saving me around £500 per year or £20K assuming I stay there for my final 40 years and they don't change the rules.

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2 hours ago, Blooman said:

I believe it would affect the price as long as the buyer believes it has enhanced the property. 

 

 

True but but the problem is that the indices would be over inflated as they would not be comparing the same building as was bought by the vendor a few years ago to the one they sold.

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Here's a paper comparing indices

http://www.ifs.org.uk/bns/bn146.pdf

Just a quick look seems to suggest that Halifax don't take extensions into account. Nationwide and ONS aim to track the price of a typical house (I think this means if you buy a 3 bed house, add a bedroom, then sell, Nationwide/ONS compare it to the price of 4 bed houses previously, rather than the price you originally paid). But I don't see how this could reflect the net value added, unless they knew how much the extension cost.

 

If they can't capture the extensions then this clearly is overstating the increase in house prices.

Another impact might be as many small/medium houses are turned into large houses there are too many large houses and not enough small/medium houses. Not many people can afford these large houses and even if they could eventually there is likely to be over-supply here, so the relative price is likely to fall. Increasing numbers of people can only afford the small houses, so these continue to get more expensive.

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