Dip in house values is worth smiling about

THE last 18 months have seen almost daily news reports of low house sales, falling property prices and the number of new properties being built grinding to a near standstill. Against this backdrop you might think finding good news in the property sector would be a thankless task; however, the reality is somewhat different.

Property prices in Edinburgh fell in 2008 for the first time on record. You're probably aware of this already and, as we all know, property prices falling is bad news, right?

Actually, this couldn't be further from the truth. The reality is that, just as with house price rises, the recent drop in property prices will come as good news for some and bad news for others. This is not to downplay the difficulties facing some homeowners today, but it is worth taking a step back at times to gain perspective.

Rapid house price inflation in recent years had left many first-time buyers on the outside looking in as they were priced out of the market. The recent drop has presented an opportunity for many first-time buyers to find a way on to the property ladder which may not have seemed achievable a year ago.

For example, during the last three months of 2007 only 13 per cent of properties sold in the Capital went for under 125,000. During the same three months in 2008, 25 per cent of properties sold for less than 125,000. Property is becoming more affordable, allowing new entrants a way on to the ladder. For the long-term stability of the market this is essential. If the evidence of the recent ESPC first-time buyer event is anything to go by, people are seeing the opportunity they have in the current market and many are in a position to take advantage of it.

The current market even offers benefits for those of us who are not first-time buyers as property prices are relative for the vast majority of us. When property prices rise it does not mean we have all become wealthier as ultimately we all need somewhere to live and the price of any new home is likely to have risen by a comparable amount. Similarly if the value of your own house drops, the price you will have to pay for your new home will come down also.

Typically when prices have dropped those looking to move up the property ladder actually stand to benefit. A 5 per cent drop in the value of a 300,000 property is greater in monetary terms than a 5 per cent drop on the value of a 200,000 home. To give a 'real world example', at the end of 2007 the average price of a two-bedroom flat was 185,183, whilst the average price of a three-bedroom flat was 255,715 meaning you would need an additional 70,531 to make that move up the ladder. During the last three months of 2008 the difference in value had fallen to 66,816 meaning you would need around 3600 less to finance your move today than one year ago, even before you consider the savings on interest payments.

Recent cuts in interest rates have also benefited homeowners with tracker mortgages, even if they are not considering moving in the near future. Whilst cuts have not always been passed on in full by the banks, the cost of finance has come down offering many families more disposable income when it is needed.

Finally, even for those who are in a position where they have to sell soon, it is worth bearing in mind that Scotland has not seen the same level of falls as those witnessed in other areas of the UK, largely because property in Scotland is generally more affordable than that south of the Border. There is no question that buyers are in a position of strength just now and you will be faced with a difficult market, but if you are realistic about the price you will achieve and prepared to negotiate with buyers then it will pay off. Sales volumes are down, but that is not to say no houses are selling. The bottom line is that, as with most things, how house price shifts affect you depends very much on your personal situation.

The vast majority of people do not need to be unduly concerned with short-term shifts in the value of their home. If you can afford the repayments on your mortgage then what happens to prices in the next six or 12 months is unlikely to impact you. First-time buyers can look to take advantage of the market and negotiate lower prices with sellers to secure an affordable route on to the ladder.

Over the longer term lending criteria will ease and, though they will not be relaxed to levels witnessed before 2007, a middle ground will be found that allows modest but sustainable house price growth. In the meantime, remember that the picture is not as bleak as it seems, and bear in mind that the level of national interest in house prices does not equate to how much they will actually impact you.

Ron Smith is ESPC chief executive