Chapter 7: Why Buy in a Falling Market?

This is an extract from the ebook How to Really Buy a Property.

While most buyers feel their feet turning cold there are actually very valid reasons to buy in a falling market. This does not necessarily mean prices nationally are reducing because, as we have seen in earlier chapters, local markets fall and rise all the time in a way that can be out of sync with country wide trends.

Why 'First Time Buyers' buy

While most of the population is obsessed about buying in a rising market there is a large section that simply want a place to live. They will be thinking about a home for the next 25 years and know that they could wait two years, but that would be two years of their life that they could be in a place of their own.

The emotional drive to have their own four walls is much stronger than playing the waiting game for a crash or for the bottom of a crash.

Why 'Second Time Buyers' buy

Many home-owners who are looking to go up the property ladder benefit greatly from a drop in the market. They may, for example, have an apartment worth £250,000 and the type of house they want is worth £500,000. If the market drops by 10% their property is worth £25,000 less but they place they want to buy has gone down by £50,000.

By choosing to buy in a falling market they have saved £25,000. A substantial sum of money. This difference is known as the "trading gap" and the more prices fall, the more a buyer will save when up-sizing.

Why People Trade Down

Second time buyers benefit from the trading gap but there are also people moving the other direction, often those who have retired or where children have grown up and flown the nest, permanently!

Many belong to a sector where time is more important than profit (as with the first time buyers mentioned above).

Those that have retired are a good example. After years working in a major town or city a move to a rural location is popular. The mortgage is paid off and the price of out of town property is significantly lower. Now it would be prudent, if the property market was falling, to hold off until prices recover and so walk away with the maximum amount possible.

But time is of the essence and sitting around for a few of their twilight years to maximise a profit is not on the agenda. What may seem like utter madness to someone in their twenties, makes perfect sense to someone in their sixties.

Why Speculators or Developers Buy

Even the most educated property professional will admit they do not know when the bottom of the market will occur. Experts have failed to predict it time and time again so how can they?

Furthermore by the time the media is reporting a rise in prices the market is already well under way and they will be competing with the stampede of a herd who were also waiting for the same message.

So at some point they will feel values have dropped, values may drop further, but they will eventually rise. They also know that they will be in a good bargaining position to have an offer below the asking price accepted. Many see property as a ten year investment so even a 10% loss in the short term will not make a major difference to their purchase.

Why Buy to Let Investors Buy

As far as purchase prices go their motivation is very much the same as speculators and developers (see above). But as an added bonus they know many perspective buyers have withdrawn from the market and a great deal of these will be looking to rent.

While values are moving down the rent that can be achieved is often substantially higher than in a rising market and so for the buy to let investor there are good profits to be made.

Summary

Despite the somewhat grave and panic stricken picture painted by the media when property prices start falling, there are actually large numbers of people for whom it is good news.

There is also a substantial body of buyers who are not moving for investment reasons, they are simply moving home and their motivations are driven by factors which they see as far more important than profit.