Sell, rent and buy later

There has been some evidence recently that the housing market is nearing its peak, as the average price of a house countrywide went up by only £500 or 0.3% in May.

Now, some homeowners, believing the market to be at its peak, are beginning to sell their properties to maximise their profits from the boom in house prices. After selling they plan to rent, watch prices fall, and buy back into the market when prices are lower.

This is an interesting movement and “selling to rent” seems to be gaining strength on London and surrounding areas. Here, some house prices have risen by around 50% in the last twelve months.

There are growing feelings that the house price boom is finally running out of steam, and that rises in the latter part of 2006 and the early part of 2007 cannot continue. This has happened despite experts’ predictions that it could not continue for his long. Annual house price inflation is still over 10% despite gloomy forecasts for the year. The average price for a house is now £196,893.

The latest figures from the UK’s biggest lender, the Halifax, suggest that May’s prices were up only slightly, and less buyers registered interest at estate agents for the fifth month in a row. These appear to be signs that four interest rate rises in the last ten months, and with inflation at 2.8%, well above the government’s target, house buyers are finally taking note.

With shares, the advice is to sell high and buy low, and people are trying to emulate that with their own property.

There are wide differences across the country. London and Northern Ireland have topped the charts for the biggest price rises this year, whereas some areas, such as Yorkshire, Humberside and the north-west, have actually seen prices fall. Some areas are unmoving.

It is interesting that, despite the continuing upward trend in London, this is where people are looking to sell and rent. Nevertheless, this is the trend and they have been called “in-betweeners” as they aim to take time out to rent in between properties. They would like to buy a bigger property, which is too expensive right now, but with anticipated decreases, may be with their financial compass in another 6-12 months.

The strategy is seen as risky by experts. With all the costs involved, it is suggested that house prices need to fall by about 4% to make it financially worthwhile.

Let’s assume you make £500,000 in equity from the sale of your house, and wish to buy or rent a house worth £1m. It will actually cost you £36,100 more to rent over a year, than to buy it. To buy you’d need a £500,000 interest-only mortgage, let’s assume at 5.75%, weekly rent of £865 and the equity invested in a savings account at 5.95%. To make up the £36,100 you would need the £1m property price to fall to £963,900 – a fall of 3.6%.

With the recent evidence of a slowdown in house prices, forecasts for further brakes on prices are not difficult to make, but most experts do not expect to see a crash. The crash of the early 1990s is not expected to be repeated, but house price growth is forecast to slow to 0% in 2008.

The underlying financial climate is still robust. Economic conditions are still fairly strong and high employment continues to bolster the housing market. Consumers have had their money squeezed in the last years or so with rate rises taking a toll on their mortgage repayments, and inflation creeping over 3% earlier in the year.

UK house prices are also firmly supported by the laws of supply and demand, as the need for housing is still outstripping new builds. There is a general rise in the number of buyers, what with the increase in smaller family units and the influx of foreign workers continuing to bump up the numbers.

However, a report issued last week warned of the continuing rise in the cost of a house compared to salary. Currently on average in the UK you need to spend seven times your salary to buy a typical home. By 2026 this ration is expected to be ten times. The situation is not new, but is a worsening trend. Ten years ago houses cost only four times as much as earnings. As ever, regional variations exist: in the south east of England and London, the bottom end of the market has seen its affordability stretched to over eight times income. In the north it is currently five times.

Buying to rent and re-buy in a year is seen as a very risky strategy. If the housing market were to remain buoyant “in-betweeners” could find themselves stuck in rented accommodation and unable to find a way back on the property ladder at the rung they’d like to be on.