Waiting for cheaper homes a fool's game

THE banks may be responsible for the housing market slump – but so is The Man In The Street.

By delaying making a purchase, the thinking being that prices still have some way to fall before they start to rise again, would-be buyers are contributing to the problem.

On the face of it, such an attitude seems sensible – why buy a property today for 200,000 when it might be available for 15,000 less six months from now?

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As a financial strategy, however, that caution could be fraught with danger. Just as few people anticipated the credit crunch, no-one has much idea how much further the market will fall, and how much longer it will take to turn round.

This means that anyone presuming to be able to play the market in this way is taking a very big gamble indeed.

Let us take the hypothetical situation of a young man in a well-paid, secure public-sector job who ticks all the mortgage company boxes. Currently living in rented accommodation, he feels confident that prices have further to fall and so signs up for another six months as a tenant when his lease comes up for renewal.

However, the history of previous slumps has shown that when the market turns, it recovers more quickly than anyone had anticipated.

So our buyer may very well find he's been too clever by half – because by the time he is relieved of his tenancy obligations, prices have shot ahead of him, while the choice of property previously available at an acceptable price will have contracted.

He would have been better off if, six months earlier, he had decided not to renew the rental lease and bought a property instead.

Look at the arithmetic. Suppose our example is about to complete the lease on a flat for which he is paying 800 a month in rent, when he comes across a desirable flat priced at 215,000, which he negotiates down to 200,000. With 20,000 in savings for a deposit, he is given a loan of 180,000 over 25 years, which at just under 5 per cent (typical for a high loan-to-value ratio of 90per cent) works out at 1,063 a month.

Therefore over the next two years his outlay will be 6,312 more, because of the 263 a month difference between rent and mortgage.

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However, even allowing for lost interest of around 300 on the 20,000 he will still be ahead, having reduced his mortgage by 7,560. Most important of all, the mortgage will have only 23 years left to run compared to the 25 years for someone who delayed making a purchase and is now just starting out on owner-occupation.

In these circumstances, is it really worthwhile waiting for prices to fall further, especially as he could be trapped half way through a tenancy agreement when the market bottoms out and prices start to rise again?

Yes, there are additional capital costs associated with buying a home, such as insurance and furnishings. But anyone aspiring to home ownership will eventually have to bite that bullet.

Successful betting on the housing market relies more on good luck than good judgment. For every winner who has managed to buy a house while the market is at rock bottom, there are probably ten others who miscalculated and who, by the time they started looking, discovered the market had turned and that prices were rapidly going up and the choice of housing going down.

• Sandy Burnett is a partner in Murray Beith Murray WS in Edinburgh

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