Beware if you have funded your lifestyle from your property

NEGATIVITY about house prices reared up again this week. Yesterday figures from the UK’s largest mortgage lender, Halifax, showed that prices fell in Scotland in the last three months of 2004. But does it matter?

If you are in a secure job, can comfortably afford your mortgage repayments and are not planning on moving any time soon then probably not.

But how many of us can comfortably answer "yes" to all three of the above?

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Just this week research from insurance giant Prudential showed that two million Brits could not survive for a week financially if they lost their job.

Those who can answer "yes" to all three can take solace in the fact that a paper figure is relatively meaningless if you are not planning on translating it into hard cash in the near future.

Even those planning to move shouldn’t necessarily panic at talk of 20 per cent or more falls - after all, that will only take us back to the prices of 2002. And remember, too, that if the price of your property is slipping, then so too, most likely, are all prices in your area, so in real terms your buying power is more or less the same.

Falling prices do matter, though, if you have been planning to use the equity in your house to fund something. And the group most likely to be hit here are pensioners. Take a pensioner living in the average 100,000 property in Scotland. Mortgage paid off. That 20 per cent fall predicted by economists Capital Economics over the next couple of years, would wipe 20,000 off the value of their property.

Or to put it another way, an amount equivalent to 18 months’ worth of income for the average UK pensioner.

Other potential casualties are so called "property lifestyles": those who have been using paper profit built up in their homes to fund a lifestyle that would otherwise have been way beyond their means.

Debt Free Direct, the independent company which provides free impartial and professional advice to people with debt problems, this week warned that the billions of pounds worth of equity that people have released from their homes in the past year may lead to a negative equity problem as house prices fall.

In 2003 alone, some 53 billion of equity was withdrawn from UK property. In 2004, DFD’s own figures show that some 172,000 people released 50,000 from their property while a further 49,000 withdrew a staggering 100,000 - less than one quarter of which was used to repay existing debts. The rest, according to DFD, went on holidays, cars and other things that the property owners would not have been able to fund out of their pay packets.

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Indeed, according to Prudential, as a nation we waste 80bn a year on unnecessary treats. And by treats, they mean everything from a slice of cake to the latest hi-tech gadgets.

Andrew Redmond, Prudential’s chief executive, said: "Property prices have increased dramatically which has resulted in millions of homeowners feeling wealthier than they actually are. This has resulted in many releasing equity from their homes to maintain or obtain a standard of living that is beyond their means."

Redmond is seriously concerned that over 2.5 million people are using more than half of their take home pay to service their debts.

OF COURSE, falling house prices are potentially good news for one group of people - first-time buyers. Those who have been forced to sit on the sidelines and watch for the last few years while property owning friends have accrued "paper fortunes" may be tempted to crack a wry smile with prices now reportedly heading south.

First-time buyers numbers may start to creep back up from the doldrums if house prices fall back and property becomes more affordable.

Falling house prices also mean smaller stamp duty bills - a major bug bear of first-time buyers. One in four first-time buyers said the extra cost of stamp duty was preventing them getting on the property ladder in research carried out by the Alliance & Leicester.

In Scotland falling prices - or the threat of them - has had another welcome effect for first-time buyers. The number of properties marketed at fixed price instead of "offers over" has rocketed.

For years, first-time buyers in Scotland have bemoaned the resource-depleting aspect of our "offers over" system which has left many severely out of pocket after bills for surveys and legal fees for properties they were subsequently out-bid on. A pattern repeated for some unfortunate buyers many times over. A problem which fixed prices should reduce, leaving them potentially better off.