Buying a new home in a recession

New Home sales board

Builder’s Redundancies

Buy to Let investors    

Get a fixed completion date

Shared Ownership

Buying a brand new home in a recession or market downturn can be a good time to bag a bargain.  Housebuilders are desparate to maintain volumes and often offer very good deals and incentives.  However, you could end up with a poor quality home, find yourself living on a buildiing site for a very long time  and may even be affected by 'buy-to-let' homes.

Lack of Mortgage availability

Sales Gimmicks

Part Exchange

Think before buying

Does quality suffer

The tradesmen building your new home work on a price; they only get paid for the work they complete. During a recession, the rates they receive come under pressure and many individual tradesmen find their income falls as rates are cut. Often, the only way they can maintain a living wage is to complete their work ever faster, taking shortcuts that inevitably lead to a reduced quality of work and an increase in the likelihood of snags being found after occupation. For example, it is easy for a painter to apply two coats instead of three to gain a 30% time saving. People having to work harder for less in return is not conducive to improvement in quality.

During the difficult housing market, many of the major house builders use their market position to persuade their sub contractors to cut prices not only on new developments but also further build releases on their existing contracts.  In January 2009, George Wimpey Bristol, a Taylor Wimpey subsidiary, was in the news for demanding its sub contractors cut previously agreed price rates on existing orders by 20%.  Commercial director Jason Wren wrote  to them warning "It is with you that we would like to continue trading but that can only be after careful consideration."   Words such as these are unlikely to encourage sub contractors to care about the quality of work they do for Taylor Wimpey.

Builder's staff reductions

During recessionary times it is inevitable that site staffing levels will be trimmed. Whereas in normal times a site will have a site manager, an assistant site manager and a visiting Contracts Manager, one or more of these roles could be trimmed as production is slowed or even halted. It makes economic sense to keep the least-costly staff which often results in sites being "managed" by inexperienced assistants or even labourers under the instruction of a visiting contracts manager.

The staff that do keep their jobs may have been subjected to an interview as part of the redundancy selection consultation process and also have had their pay frozen, with bonuses reduced or cancelled altogether.  This is unlikely to leave them motivated to build a high quality new home for you.

Buy to let investors

During poor markets, house builders are eager to sell to buy to let investors who have finances in place. Sometimes "investors" negotiate a deal to buy four or more homes in one transaction to get an additional discount, often timing their offer to coincide with house builders end of financial year reporting.  Be careful you do not end up being the only owner-occupier in a block of rented apartments. You will have paid a higher price than the buy to let investor and should he then fall into financial difficulties this could have the potential to adversely effect the value of your flat when you come to sell.

Get a fixed completion date

During a recession, most of the larger plc house builders will reduce the rate of production that homes are built, delay the release of new phases on their existing sites and postpone starting new developments. When buying a new home during a recession, you will need to be especially aware that you are given a firm or fixed date when your new home will be fully constructed, more so if work has yet to be started. Many off-plan home buyers have been caught in the trap with their newly completed homes worth up to 30% less than they were at the time contracts were exchanged. Nursing huge losses they then find they are unable to obtain sufficient mortgage funds due to falling loan to value ratios and reduced lending throughout the market.

All too often, phases are rearranged and other areas of the development brought forward which may result in your home becoming a low priority.   During the present recession, many national house builders are prioritising the Social Housing quota on their developments as these are all Sold and at a previously agreed, now favourable, price.  

In addition, both the tradesmen on site and the house builder’s staff may be aware that they could be working themselves towards unemployment once the development is finished and not build as time-efficiently as they perhaps could!

Lack of mortgage availability

Most lenders are requiring ever increasing deposits. To secure the better deals you will need a 25 to 30% deposit and could also have to pay high arrangement fees of £500 to £1800 to get a specific mortgage offer in some cases.  For more see new home mortgages.  The lack of affordable mortgage deals restrict the number of first time buyers able to enter the market and this in turn can stagnate the whole housing market.

Part Exchange

During a recession it can be very difficult to find a buyer for your existing home. Even if you do find a buyer the chain could be delayed or even fall through.  The lack of first-time buyers entering the market can also make selling your existing home, within a reasonable time frame and at a fair market price both difficult and stressful.

Increasingly, many house builders are offering their new home buyers a Part Exchange on their existing home.  This is where the house builder buys your current home, saving you the expense of selling through an estate agent and the worry that the sale may fall through due to complicated chains, poor surveys or other unforeseen glitches.  

Normally the house builder arranges for two independent valuations. Your existing home will need to meet the house builder’s criteria to qualify for the part-exchange and any offer will be subject to a homebuyer’s survey and all searches.

You will also be expected to allow viewings at convenient times, perhaps even be expected to show people around your existing home during the time you are still living there.

In addition, be aware that some house builders restrict Part Exchange to selected plots only, being subject to availability and could require the use of their nominated independent mortgage advisor and/or solicitor.  Depending on the time of year and whether the new home is finished, you may also be expected to legally complete within 28 days. In any event you will be required to exchange contracts within 28 days.

All Part Exchange deals also come with Terms and Conditions such as: the home being traded being no more than 70% of the selling price of the new home; a maximum part exchange value of £250,000; and cannot be used in conjunction with any other offer on the new home.

If your home is already on the market with an estate agent you should also check that you will not still be liable to pay agreed commission to him on the Part Exchange sale.

Getting a good deal – beware of the sales gimmicks

During a market downturn, no one should pay the price on the house builder’s price list. Don’t be fooled by the "Sold" signs.  They may be the social housing plots or phantom sales to give the impression there is a demand on the development despite the market.  It should be possible to get a 10% discount of the stated price with very little difficulty.  If you are in a position to proceed, having already sold your existing home or being a cash purchaser or first time buyer with an agreed mortgage you could even get 15% or more off the asking price. In addition, you should insist on any Optional extras  be included in the price.

Sales Gimmicks

Remember Stamp Duty Paid means nothing to first time buyers buying a new home under £250,000 before 25 March 2012. It also only gives a saving of £1,680 on the average property price (July 2010).  In addition valuation fees, removal costs and solicitor’s fees paid are also fairly limited value, see the cost of moving and most offers have a maximum limit applied.

Due to the lack of available mortgages, some house builders have been offering to pay the deposit, or offer an interest free loan (15%) as a deposit for a period of time (up to 10 years) to help buyers, particularly those with little or no deposit get on the property ladder. Mortgage payment subsidies for the first two years and even mortgage protection insurance and Council Tax can be being paid for by the ever desperate house builder.

Shared Ownership

Many developers offer shared ownership deals where the home buyer only buys a percentage of the new home. Typically the house builder retains (or loans) up to 15% of the property for example ten years.  If the property is sold or the loan repaid during the period of the deal, the builder is due that proportion of the home’s value. If the price of the property rises so does the amount owed to the builder. Correspondingly, if the price falls the home buyer will owe less. At the end of the deal period the home buyer will be required to pay back the loan or buy the remaining equity which will be based on the value of the home at that time.  

These deals can be very complex with potentially onerous conditions and it is essential to take legal advice before signing any contract.  House buyers should understand the full implications when the developer’s loan becomes repayable and how the amount outstanding is calculated.

Alternative shared ownership deals are offered by Housing Associations. With these rent is paid on the percentage not owned.  The rent charged is normally low and can even be fixed. However, there is often less choice available and re sale values may be adversely affected by the 100% rented social homes on the estate.

Take your time

Whatever your circumstances, it is important to look at the deal objectively as a whole and not to get taken in by the incentives being offered.  You should be paying the right price for the right home, not the one with the "free extras."

Finally, before getting carried away you should ask yourself if this really is the right time for you to be buying a new home?  Is your employment secure?  Can you afford the costs if the worst happens?  Remember most incentive schemes will come to an end at some point, will you still be able to afford the new home then?

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