_By D.J. Alexander_
Parallel with the recent crisis over Northern Rock have come warnings about the increasingly high debt-to-salary ratio operated by some mortgage lenders.
Critics fear that lending an individual five or six times his or her annual salary is a high-risk strategy that could lead many new borrowers into negative equity and, ultimately, the loss of their homes.
However, there is one “high risk” area of mortgage lending and borrowing that has been going on for some time, which should, perhaps, receive somewhat more comment than it has up to now.
The large and ready market for new-build flats is perfectly understandable. For a start, their pristine condition is an obvious attraction. Internally, new-build flats are designed to appeal to as many buyers as possible and they often come “packaged” with fitted kitchens and appliances, carpets and built-in furniture. In fact, in many cases, flats offer everything necessary for modern living with the exception of a bed, dining room table and chairs, sofa and home entertainment system.
Therefore, it is no wonder they appeal to contemporary young singles or couples, probably holding down high-pressure jobs, who see a new-build flat as the key to a modern, comfortable lifestyle, with a minimum of fuss.
For much the same reason new flats have also become highly popular with people entering the buy to let market. With so much “lifestyle equipment” included in the price, new investors see these properties as offering a convenient route into the letting market and also as being “tenant ready” – i.e. available for occupation and earning money as soon as possible after the purchase has been completed.
Unfortunately, amid all the understandable euphoria that revolves around purchasing a new “designer” flat – either for one’s own occupation or as a letting investment – one vital thing is often forgotten, epecially if the property has been purchased with a 100 per cent – or near 100 pc - mortgage. That German-built cooker, the Italian marble worktops, the American-style fridge/freezer have not been provided by the developer free of charge – they have been built into the purchase price. As have built-in bedroom furniture, carpets and all the other extras that so attracted viewers.
And while the value of the fabric of property itself will appreciate, all those interior facilities, which may account for, say, 10 pc of the purchase price, will not; in fact, like every other commodity (other than houses and gold) they will depreciate in value over time. Therefore, even when house prices are rising generally, the re-sale value of new-build flats may remain static, or actually fall, during their first year or even two.
This is not to say that developers do not provide a good service in providing buyers with the option of flats that are virtually “all inclusive”. If demand was not there then the properties simply would not be packaged in this way.
But these inclusive extras will never be considered part of the property for re-sale valuation purposes. In-built kitchen appliances and other extras are like a new car: just as the car may lose up to 20pc of its value the minute it leaves the showroom, so housing extras become less valuable to a second buyer (even if only a few months old and still in mint condition).
Therefore all buyers of new-build flats, whether as owner occupiers or landlords, should think about how long they intend to say in them: the longer the better, because the “negative” influence of extras on the re-sale price will diminish with time. Indeed, owner occupiers should consider buying a new-build flat in a dependable letting area – because if unforeseen circumstances mean they have to move house within a relatively short period, retaining the property and renting it out will make much more financial sense than selling on.