Buying The Right Property During A Boom

[Jonnybegood]

People harp on about the price of housing and now is not the right time to buy (for the last 5 years) and the crash is around the corner.

Maybe some places have gone off the scale (London , South Coast) but if you look around and compare prices to those on the property price websites from the last 8 years you can till insulate yourself from any major correction.

An example:-

A friend at work bought his first home back in 1995 and then bought again in 2002 a 3 bed semi in a very nice area.

He tells me he paid £150k for the property back then and having checked with LR data found he was telling the truth.

Same type property where he lives can now fetch up to £240k which is about the limit for the area and property type, he had a double extension fitted to the back of the house last year adding an extra bedroom with en suite, extended lounge and kitchen at a cost of £50k which brings his total for the property up to £200k.

There is currently on the market a property 10 doors down a property selling for £235k which already has 4 bedrooms (Attic conversion) and single storey extension to the rear extending the kitchen and lounge.

Looking at the interior photos the property has been finished to a high standard, real wood flooring , slate in the kitchen , oak doors , 2 year old Bosch boiler , complete fairly new PVC guttering and windows.

If I was to purchase this property for £225k-£230k then having bought in 2002 he would only be £25k-£30k better off than myself buying 6 years later

£25k is £25k but when you take inflation into account and all the rest of it the increase in value does not seem that bad.

I was then thinking, a property sold in the same street 2 years ago without the extension and extra bedroom for £218k, so if prices were to fall 20-30% a property without the extra bedroom and extended lounge , kitchen could fall from £218k to £152k (30% fall).

I buy for £152k and decide to add an extension and extra bedroom and end up paying out another £50k taking me up just over £200k.

I would still be better off by £25k, but that would mean a fall of 30% needed, a higher IR, a more difficult to get mortgage with bigger deposit, the mess of all the building work and forking out rent in the meantime.

This type of property may not be for everyone, but it seems because prices have risen so high that extensions , attic conversions have not been taken fully into account and their true value not reflected in the prices of the property, but when a fall in house prices happens things like these will add all the more value to a property as carrying the work yourself after purchasing a property can be a large percentage of the original purchase price.

Example

An area post crash and a property has fallen to £100k without being extended or another for sale for £120k having been extended and you know its gonna cost £30-£50k to extend what are you most likely to go for?

Have a look around, building work is not cheap and even after a price crash materials if anything will increase in value as it seems everything else is going up and up at the moment.

[Guest happy?]

People harp on about the price of housing and now is not the right time to buy (for the last 5 years) and the crash is around the corner.

Maybe some places have gone off the scale (London , South Coast) but if you look around and compare prices to those on the property price websites from the last 8 years you can till insulate yourself from any major correction....

General maintenance work (repairing tiles, maintaining guttering) in a stable housing market is always worth doing. Extensions/conversions/etc. generally cost far more than they return - so if you can pick-up a property where this type of work has already been done grab it with both hands. It's a truism that most people underestimate the cost of building works - in a rising market this cost is disguised, in a falling market it will be amplified.

[gregja]

I too am wondering about this, I know we are due a correction in house prices but I came across this place recently and can't help but think its a good buy, being an electrician and having all relevant contacts in the building trade I could turn it into a lovely house for my family, but what do I do? Wait three years for it to drop to a potential £98000 or do I bite the bullet seems as it would be a family home. I just know it won't be on the market long, it does need a complete renovation though!

Here it is!!

[bugged bunny]

What's so great about this area where your friend bought? Where I live, prices nearly doubled between 2002 and 2004. That's for an equivalent property with no extension, etc.

You need to provide a more coherent argument as to why adding an extension now would add more value to a property than it did during 2002-present.

It may just be that there's simply too little demand for larger properties where your friend bought, due to location, demographics etc.

Edited April 11, 2008 by bugged bunny

[Moo]

A friend at work bought his first home back in 1995...

No offence meant, but the rest of the post wasn't needed. Unless he's borrowed massively against the place he traded up to, he's probably has sufficient equity to not end up negative and a small enough mortgage (ultimately, this is all that matters) to sail through the crash, thereby rendering the other values irrelevant.

[Guest happy?]

I too am wondering about this, I know we are due a correction in house prices but I came across this place recently and can't help but think its a good buy, being an electrician and having all relevant contacts in the building trade I could turn it into a lovely house for my family, but what do I do? Wait three years for it to drop to a potential £98000 or do I bite the bullet seems as it would be a family home. I just know it won't be on the market long, it does need a complete renovation though!

Here it is!!

I don't think it'll take 3 years - wait three months. I think the correction will sudden, sharp, and decisive. There is money in the building societies to lend at sensible income multiples and prices will then stabilise at this level to good risks on worthwhile properties.

[Jonnybegood]

No offence meant, but the rest of the post wasn't needed. Unless he's borrowed massively against the place he traded up to, he's probably has sufficient equity to not end up negative and a small enough mortgage (ultimately, this is all that matters) to sail through the crash, thereby rendering the other values irrelevant.

The point I was making is that even though he bought a property back 6 years ago (2002) now that he has extended the difference between myself buying a similar already extended property now in the same area is down to £25k compared to his overall outgoings, the reason because certain areas due to local employment, choice of housing etc have a cap on what they can sell for.

Around here £240k at the moment is about it and with mortgages tightening I have no doubt this will lower even further, but the houses already extended do not carry a very big premium over those not already extended, maybe 8-10% in this case £15-25k.

However the cost of extending can range from £30k-£50k for your typical extension, loft conversion if done professionally to building regs.

Plus you get the hassle and mess to go with it, many would prefer to just move in rather than undertake major construction work.

So if you wait for prices to fall and then buy with the intention of extending later you may not be that better off than buying a fully extended property now.

[bugged bunny]

The point I was making is that even though he bought a property back 6 years ago (2002) now that he has extended the difference between myself buying a similar already extended property now in the same area is down to £25k compared to his overall outgoings, the reason because certain areas due to local employment, choice of housing etc have a cap on what they can sell for.

Around here £240k at the moment is about it and with mortgages tightening I have no doubt this will lower even further, but the houses already extended do not carry a very big premium over those not already extended, maybe 8-10% in this case £15-25k.

However the cost of extending can range from £30k-£50k for your typical extension, loft conversion if done professionally to building regs.

Plus you get the hassle and mess to go with it, many would prefer to just move in rather than undertake major construction work.

So if you wait for prices to fall and then buy with the intention of extending later you may not be that better off than buying a fully extended property now.

If I was interested in buying a fully extended property, in order to test your hypothesis, I would watch and wait for at least 6 months to find out if were true.

I feel that in the current economic climate, buyers will only borrow more for extra space if they feel it's absolutely essential. If they can make do with fewer rooms they will - buying a less expensive house with the potential to extend in the future requires less financial commitment - it's playing safer, and maintenance costs will be lower. And thereby their options are kept open to extend the home eventually, should they be able to afford it further down the line.

Thus, I believe that larger extended properties will fall faster in value, generally speaking. The two/three bed houses seem to be holding their value best at the moment - there will always be some demand from downsizers and people with plenty of equity making sideways moves, no matter how parlous the state of the market in general. The lower middle ground seems the most robust. But I'm sure there will be a lot of variation by area, and some notable exceptions. Fully extended properties should perform better in areas with a low LTV ratio.

I think your valid points about better value for money indicate that prices of fully extended properties are likely to rise faster than average when the next upturn in the market cycle happens. They might bottom out earlier than those of other property types too.

IMO, the tightening of credit and current sentiment about the economy simply cannot accommodate enough buyers chasing or achieving that 'better value for money', because that 'better value for money' is more akin to a ball and chain in the medium term.

[Jonnybegood]

If I was interested in buying a fully extended property, in order to test your hypothesis, I would watch and wait for at least 6 months to find out if were true.

I feel that in the current economic climate, buyers will only borrow more for extra space if they feel it's absolutely essential. If they can make do with fewer rooms they will - buying a less expensive house with the potential to extend in the future requires less financial commitment - it's playing safer, and maintenance costs will be lower. And thereby their options are kept open to extend the home eventually, should they be able to afford it further down the line.

Thus, I believe that larger extended properties will fall faster in value, generally speaking. The two/three bed houses seem to be holding their value best at the moment - there will always be some demand from downsizers and people with plenty of equity making sideways moves, no matter how parlous the state of the market in general. The lower middle ground seems the most robust. But I'm sure there will be a lot of variation by area, and some notable exceptions. Fully extended properties should perform better in areas with a low LTV ratio.

I think your valid points about better value for money indicate that prices of fully extended properties are likely to rise faster than average when the next upturn in the market cycle happens. They might bottom out earlier than those of other property types too.

IMO, the tightening of credit and current sentiment about the economy simply cannot accommodate enough buyers chasing or achieving that 'better value for money', because that 'better value for money' is more akin to a ball and chain in the medium term.

All I am saying is that because of booming house prices and the easiness of credit very few have taken on board the actual cost of extending.

When you can mew and extend why would you, within 3-4 years of living in a property you can extend solely on the equity.

However when HPI slows or goes in reverse and credit is not so freely available then the true cost of extending becomes a reality, with cheaper houses the cost of extending may total a 3rd of the cost of the actual property. (£50k to extend a £150k property).

At the moment the cost difference between an extended property and non extended is around 10% from what I have seen, this I think will increase as property falls, I don't think building materials and labour will be falling in the foreseeable future.

[ParticleMan]

At the moment the cost difference between an extended property and non extended is around 10% from what I have seen, this I think will increase as property falls, I don't think building materials and labour will be falling in the foreseeable future.

Are you for real? Building trades have oh-so-clearly overbaked themselves into a classic commodity boom (when press reports of white collar workers retraining as brickie's labourers surface, it's overbaked). And when the magical mystical money tap turns off at the top end (largescale newbuild development) the desire to keep bellies full will create a buyer's market for unskilled labour and the desire (by lenders) to retire commercial loans in the sector will create a corresponding buyer's market for building materials.

This is why recessions are bumpy rides. Because construction hoovers up unskilled labour on the way up, and shuns it all the way back down.

Edited April 12, 2008 by ParticleMan

[Little Professor]

This is why recessions are bumpy rides. Because construction hoovers up unskilled labour on the way up, and shuns it all the way back down.

So true. Expect to see a lot of unemployed brickies, and lots of Poles heading home for a better life.

[Jonnybegood]

Are you for real? Building trades have oh-so-clearly overbaked themselves into a classic commodity boom (when press reports of white collar workers retraining as brickie's labourers surface, it's overbaked). And when the magical mystical money tap turns off at the top end (largescale newbuild development) the desire to keep bellies full will create a buyer's market for unskilled labour and the desire (by lenders) to retire commercial loans in the sector will create a corresponding buyer's market for building materials.

This is why recessions are bumpy rides. Because construction hoovers up unskilled labour on the way up, and shuns it all the way back down.

You said it, unskilled labour.

In any boom the skill levels drop, houses poorly constructed (Wait 10 years and you will see what I mean) as demand for labour outstrips supply and those with the easy money prepared to buy whatever they can when the following year they make a profit.

However when the turn comes and only the quality people are the ones getting work then you will see prices rocket because unless a job is done to a high standard it does not sell.

So expect the poles to go and those johnny come lately head for the door back to what they know best.

IF you think the price of materials is going to fall you will be disappointed, with oil on the up and inflation here on the up eventually this will affect everything, with demand on building materials dropping off expect many of these less established builders merchants to disappear.

Construction work will be more expensive, I have seen the cost of a new build increase 4% in the last 6 months down to the electrics and the cost increase of copper.

[Method Man]

The point I was making is that even though he bought a property back 6 years ago (2002) now that he has extended the difference between myself buying a similar already extended property now in the same area is down to £25k compared to his overall outgoings, the reason because certain areas due to local employment, choice of housing etc have a cap on what they can sell

I get waht your saying. it is often the case. to be charitable one would say hes fallen into the trap of having the

'best house' in the road. To get make the same percentage profit on his outlay that he would have without the extension requires somone to pay over the natural 'cap' of that road. To be less charitable he has 'polished a turd'

[Jonnybegood]

I get waht your saying. it is often the case. to be charitable one would say hes fallen into the trap of having the

'best house' in the road. To get make the same percentage profit on his outlay that he would have without the extension requires somone to pay over the natural 'cap' of that road. To be less charitable he has 'polished a turd'

In a nutshell that pretty much sums it up.

Still though buying an already extended property (If this is where you want to live) can make sense as doing it yourself a year down the road on top of the non extended purchase price would be far more than buying an already extended from the start.

Its a matter of weighing up the little extra that you would need to buy an extended property from the start against paying less now but more later.